Taxation I
PART I
TAXATION IN GENERAL
CHAPTER I: GENERAL PRINCIPLES OF TAXATION
I. TAXATION
1. Definition of Taxation
The power by which the sovereign raises revenue to defray the
necessary expenses of government. A way of apportioning the
cost of government among those who in some measure are
privileged to enjoy its benefits and must bear its burdens.
Two phases:
1. Levying or imposition of taxes – constituted of the
provisions of law which determine or work out the
determination of the person or persons to be taxed, the
sum or sums to be thus raised, rate thereof, and the time
and manner of levying and receiving or collecting taxes.
2. Collection of taxes – constituted of the provisions of law
which prescribe the manner of enforcing the obligation on
the part of those taxed to pay the demand thus created.
Purpose: Provide funds or property with which to promote the
general welfare and protection of its citizens. [71 AmJur 2d
342]
2. Nature of Internal Revenue Laws
Internal revenue laws are not political in nature. They
continue in force even during the period of enemy occupation.
It is a legal maxim that excepting that of a political nature, ‘Law
once established continues until changed by some competent
legislative power. It is not changed merely by change of
sovereignty.’ [Hilado v. Collector of Internal Revenue]
Hilado v. Collector
Emilio Hilado filed his income tax return in 1951, and deducted
PhP 12,837.65 which was a portion of his war damage claim
which had been approved but not yet paid. Hilado claimed that
he validly deducted the
amount as a “business asset.” The Court held that since the
deduction depended on the magnanimity of the U.S.
government, it could not be claimed as a valid business asset.
Further, the Secretary of Finance issued a Circular clarifying
that deductions due to property losses must be claimed during
the year that the loss was sustained. Hilado claims he could not
have made that deduction since the last year of the Japanese
occupation was not a “taxable year.” The Court disagreed,
holding that since revenue laws are not political in nature, they
subsist despite a change in sovereignty.
3. Scope of Taxation
ART. VI, SECTION 28. 1987 Constitution
(1) The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
(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.
(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.
(4) No law granting any tax exemption shall be passed without
the concurrence of a majority of all the Members of the
Congress.
Power to Tax, Generally
In the absence of constitutional restrictions, and subject to the
will of the legislative bodies and the discretion of the
authorities which exercise it, the power of taxation is regarded
as unlimited, plenary, and supreme. Nevertheless, such
exercise must rest on justice. While the taxing power has been
said to inhere in the obligation of a sovereign state to protect
its citizens, it is not dependent upon the consent of individual
taxpayers, nor upon the enjoyment of any special funds raised.
Further, personal property belonging to a foreign sovereign
and temporarily located in a particular county is not subject to
state taxation in that county [71 AmJur 2d 394-395]
Taxation: Inherent in Sovereignty
The power of taxation is inherent in sovereignty as an
incident or attribute thereof. Thus, a sovereign state has
inherent power to determine the subjects of taxation for
general or particular purposes and may make appropriate
changes in the selections and classifications of the properties
made subject to or exempted from taxation. The right to tax
exists apart from constitutions, and without being expressly
conferred by the people resides in the government as a part of
itself. [Id., 397-398]
Sison v. Ancheta
The Petitioner questioned the constitutionality of BP 135
which amended tax rates on certain incomes. He claimed that
he was unduly discriminated against due to the higher tax on
his income as a professional as opposed to those with fixed
incomes. The Court denied the petition and upheld the law. The
Court upheld the view expressed by Justice Frankfurter, who in
turn cited Justice Holmes in Panhandle Oil Co. v. Mississippi
where he wrote that “the power to tax is not the power to
destroy while this court sits” effectively reversing C.J.
Marshall’s dictum in McCullough v. Maryland where he wrote
that the power to tax involves the power the destroy.
Reyes v. Almanzor
The petitioners (including the great JBL Reyes) assailed the
constitutionality of reassessments on the tax due on their
property. Income on the said property was limited by rent
control laws. When the City of Manila revised its tax rates, they
used the “sales” method, which did not take into consideration
the limited income derived from the Reyes property, forcing
the Reyeses to pay taxes based on the market value of
comparable properties even if the income they received was
less than the taxes due.
The Court held in the favor of the petitioners, ruling that while
the power to tax was the strongest of all government powers,
But for all its plenitude, the power to tax is not unconfined
as there are restrictions – the due process and equal
protection clauses. Thus the imposition of a sales method
unduly discriminated against the petitioners.
Sarasola v. Trinidad
Gregorio Sarasola sought an injunction against the collection of
taxes by the Collector of Internal Revenue on income derived
as a Commission Merchant. Sarasola claimed that he was not, in
fact, a Commission Merchant.
The Court held against Sarasola. In upholding the validity of the
collection the Court ruled that Public policy decrees that, since
upon the prompt collection of revenue depends the very
existence of government itself, whatever determination shall
be arrived at by the legislature should not be interfered
with, unless there be a clear violation of some
constitutional inhibition.
4. Underlying Theory and Basis
Taxes proceed upon the theory that the existence of
government is a necessity; that it cannot continue without
means to pay its expenses and that for those means it has
the right to compel all citizens and property within its
limits to contribute. The state demands and receive taxes so
that it may be enabled to carry out its mandates into effect and
perform the functions of government. The general levy of taxes
is understood to exact contributions in return for the general
benefits of government, and it promises nothing to the person
taxed beyond what may be anticipated from an administration
of the laws for individual protection and the general public
good. [71 AmJur 2d 346]
Taxes are paid for the civilization of society. Without it, gov’t
would be paralyzed for lack of motive power to operate it.
Every person who is able must then contribute his share in the
running of the government. On the other hand, government
must respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their
moral and material values. This symbiotic relationship is the
rationale of taxation. [CIR v. Algue]
CIR v. Algue
Algue was assessed an delinquency income tax because of its
deduction of P75,000 from its total income of P126,000, which
it earned by serving as agent of PSEDC. The CIR claims that the
deduction should be disallowed because it was not an ordinary
reasonable or necessary business expense. Algue, for its part,
claimed it to be so, since it served as payment for actual
services rendered by individuals in its employ who worked for
the incorporation of Vegetable Oil Investment Corp. which
would eventually buy the properties of PSEDC. The Court held
that the deduction was valid.
5. Principles of a Sound Tax System
Fiscal Adequacy
Administrative Feasibility
Theoretical Justice
Fiscal adequacy, which is one of the characteristics of a sound
tax system, requires that sources of revenues must be adequate
to meet government expenditures and their variations. [Chavez
v. Ongpin]
Chavez v. Ongpin
Petitioner Chavez questioned the constitutionality of EO 73,
which mandated that real property values as of 1984 be used
to assess real taxes beginning in 1987. Chavez claimed that the
EO accelerated the general revision of taxes leading to a
marked increase in rates amounting to a confiscation of
property without due process.
The Court disagreed, holding that the due process requirement
limits the power to tax. EO 73 imposes no new taxes, nor does
it increase taxes. The Court also noted that without EO 73 the
government will be constrained to use 1978 property values,
negatively affecting its power to collect revenues which meet
government expenditures.
Administrative Feasibility; the tax system should be capable of
being properly and efficiently administered by the government
and enforced with the least inconvenience to the taxpayer
Theoretical Justice; the tax system should be fair to the average
taxpayer and based upon the ability to pay
6. Taxation; Compared with Police Power and Eminent
Domain
Taxation and Police Power
Taxing power is exercised for the purpose of raising revenue
and is subject to certain designated constitutional limitations,
while police power is exercised for the promotion of the public
welfare by means of the regulation of dangerous or potentially
dangerous businesses, occupations, or activities and is not
subject to the constitutional restrictions applicable to the
taxing power. If the primary purpose is to raise revenue it
represents an exercise of taxing power, while if the
primary purpose is the regulation of some particular
occupation, calling, or activity, it is an exercise of police
power even if it incidentally produces revenue. [71 AmJur
2d 396]
Gerochi v. Department of Energy
The petitioners questioned the IRR of the EPIRA, which
imposed a universal charge on the electric bills of all users.
They claim that this constituted an undue delegation of the
power to tax, which belongs exclusively to the legislature. The
Court disagreed, and made a distinction between the exercise
of the power of taxation and that of police power. They held
that the universal charge was actually a regulatory fee
because its primary purpose (enumerated under Sec. 34)
does not involve generating revenue for public purposes, it
involves ensuring the viability of the electric power industry to
the end that public welfare is promoted.
Matalin Coconut v. Municipal Council of Malabang
The Municipal Council of Malabang imposed a “police
inspection fee” on the shipment of sacks of cassava starch.
Matalin Coconut questioned the validity of the ordinance
imposing the fee. The Court ruled that the fee was actually a
tax despite its denomination since its purpose was not to
regulate but merely to raise revenue. Further, the tax was
unreasonable since the police services provided were merely
for the purpose of verifying whether there was payment of the
fee. The fee was also confiscatory since it ate into the already
slim margin of profit of Matalin, endangering the economy of
the municipality.
Lutz v. Araneta
The petitioner, in his capacity as the administrator of the estate
of Antonio Ledesma assailed the Sugar Adjustment Act, which
increased taxes on the manufacture of sugar in order to
stabilize the industry in preparation for the possible effects of
the Tydings-McDuffie Act. Lutz argues that since the purpose of
the tax is to stabilize the sugar industry alone, it does not serve
a public purpose and is therefore invalid.
The Court held against Lutz. Taxation may be made in the
implement of the State’s police power – as in this case which
involves an important industry, vital to the country’s economy.
NTC v. CA
PLDT was sent various assessments by the NTC computed at a
rate based on the market value of outstanding capital stock,
purportedly for permit and regulatory fees. PLDT claimed that
the assessments were not intended to reimburse regulatory
expenses, but were in fact meant to raise revenue.
The Court clarified that the fees were imposed by Congress and
not the NTC, thus the distinction between police power and the
power to tax, which could be significant if the exercising
authority were mere political subdivisions (since delegation by
it to such political subdivisions of one power does not
necessarily include the other), would not be of any moment
when, as in the case under consideration, Congress itself
exercises the power.
Nevertheless, the NTC’s insistence on using the market value of
outstanding capital stock as the basis of computing the fees is
also wrong, since it deviated from the law which required that
the fees be paid based on the capital stock subscribed or paid.
Taxation and Eminent Domain
The requirements of just compensation for private property
taken for a public use applies only to eminent domain and not
to taxation. [71 AmJur 2d 397]
II. TAXES
1. Definition
A tax is a burden, charge, exaction, imposition, or
contribution assessed in accordance with some reasonable
rule of apportionment by authority of a sovereign state upon
the persons or property within its jurisdiction to provide
public revenue for the support of government, the
administration of the law, or the payment of public expenses.
[71 AmJur 2d 343-344]
A tax refers to a financial obligation imposed by a state on
persons, whether natural or juridical, within its jurisdiction, for
property owned, income earned, business or profession
engaged in, or any such activity analogous in character for
raising the necessary revenues to take care of the
responsibilities of government. Taxes are the enforced
proportional contributions from persons and property levied
by the state by virtue of its sovereignty for the support of
government and for all public needs." As distinguished from
other pecuniary burdens, the differentiating factor is that the
purpose to be subserved is the raising of revenue. A tax then is
neither a penalty that must be satisfied nor a liability arising
from contract. [Republic v. Phil. Rabbit Lines]
Republic v. Phil. Rabbit Lines
The Plaintiff Republic seeks the invalidation of the payment by
defendant Philippine Rabbit for the registration fees of its
motor vehicles in the form of negotiable backpay certificates of
indebtedness. The lower court held that the payment was valid.
The SC reversed the lower court and held that the Back Pay
Law restricted the privilege to the satisfaction of a tax. The
registration fees in the instant case being a liability for fees
under the police power, the provision in the Back Pay Law is
inapplicable.
2. Essential Characteristics of Taxes
A public purpose is necessary to justify the exercise of taxing
power. Taxation involves, and a tax constitutes, a charge or
burden imposed to provide revenue for public purposes of a
general nature. It ceases to be taxation and becomes plunder
when it is prostituted to objects in no way connected with
public interest or welfare.
A tax is also usually understood to be a pecuniary burden.
Unless qualified in context, the term taxes is used in the sense
of money, however it has also been held that the term may
include an enforced contribution of property or services
exacted by the state. [71 AmJur 2d 345]
It is an enforced contribution for its imposition is in no way
dependent upon the will or assent of the person taxed
It is proportionate in character or is laid by some rule of
apportionment which is usually based on ability to pay.
It is levied on persons, property, rights, acts, privileges, or
transactions.
It is levied by the State which has jurisdiction or control over
the subject to be taxed. In particular, it is legislative in
character, but it may be delegated to local governments
subject to limitations.
a. Debts
A tax does not establish the relation of debtor and creditor
between the taxpayer and the state, it does not bear interest
when past due unless the statute provides, it is not liable to
setoff and it is not enforceable by personal action against the
taxpayer absent statutory authority.
Caltex v. COA
Caltex filed a complaint questioning COA’s authority to declare
certain disallowances in its claims for reimbursement in
relation to the OPSF. The court mostly affirmed COA’s ruling
and held that Caltex could not offset the remittances it claimed
with the reimbursement it sought, since the relationship
between Caltex and the Government is not a creditor-debtor
relationship. A taxpayer may not offset taxes due from the
claims that he may have against the government. Taxes cannot
be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other,
and a claim for taxes is not such a debt, demand, contract, or
judgment as is allowed to be setoff.
Francia v. IAC

Francia was the owner of a property in Pasay which was
expropriated and then later sold at public action after he failed
to pay real estate taxes. Francia sought the annulment of the
auction, claiming that since the government owed him
compensation for the expropriation of his property, the
amount should have been set-off his taxes. The Court held that
there can be no offsetting of taxes against the claims that the
taxpayer may have against the government. A person cannot
refuse to pay a tax on the ground that the government owes
him an amount equal to or greater than the tax being collected.
The collection of a tax cannot await the results of a lawsuit
against the government. Internal revenue taxes cannot be the
subject of compensation. The Government and the taxpayer are
not mutually creditors and debtors of each other under Article
1278 of the Civil Code and a claim of taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off.
Philex Mining v. CIR
The BIR sent a demand letter to Philex to pay its excise tax
liabilities. Philex refused payment, alleging that it was entitled
to VAT credit/refund, hence, their credit may off-set their debt.
The SC ruled that legal
compensation is not possible as the government and the tax
payer are not mutual creditors and debtors of each other. Tax
cannot be the subject for compensation for simple reason that
the government and the tax payer are not mutual creditors and
debtors of each other. Debts are due in the government in its’
corporate capacity while taxes are due to the government in its’
sovereign capacity. A tax payer cannot refuse to pay his taxes
when they fall due simply because he has a claim against the
government that the collection of the tax is contingent on the
result of the law suit it filed against the government.
b. License Fees
License fees or license tax implies an imposition or exaction
on the right to use or dispose of property, to pursue a
business, occupation or calling, or to exercise a privilege.
Such charges may be imposed either under the police power
for purposes of regulation or under the taxing power for
purposes of revenue. A regulatory fee imposed under police
power is not a tax and is not subject to any of the constitutional
limitations which apply to taxing powers as such. [71 AmJur 2d
353]
Progressive Development Corp. v. Quezon City
The petitioner, the owner and operator of a market, questioned
the imposition of a supervision fee as mandated by Quezon
City’s Market Code. The petitioners claim that the fee, which is
based on gross receipts is a tax on income, which a local
government could not impose.
The Court disagreed, holding that the fee was imposed mainly
for regulation and not to raise revenues.
PAL v. Edu
Philippine Airlines was exempted from paying taxes under its
legislative franchise. Commissioner Edu started charging PAL
with motor vehicle registration fees for its fleet. PAL paid
under protest arguing that the fees were in fact taxes. The
Court ruled that the fees were in fact taxes. Fees may be
regarded as taxes even though they also serve as an instrument
of regulation. If the purpose is primarily revenue, or if the
revenue is one of the real and substantial purposes, then the
exaction is properly called a tax. Vehicle registration may have
been originally intended only for regulatory purposes, but as
vehicular traffic exploded in number, Congress found the
registration of vehicles a convenient way of raising the needed
revenues.
ESSO v. CIR
ESSO made a deduction from its gross income pertaining to the
amount it had spent for drilling and exploration of its
petroleum concessions as part of the company’s ordinary and
necessary expenses which was disallowed by the CIR. ESSO
made an amended return where it asked for a refund of certain
amounts as ordinary and necessary expenses but was only
granted a tax credit (disallowing the deduction for the margin
fee). Later the, CIR assessed ESSO a deficiency income tax plus
18% interest. ESSO satisfied the obligation by using the tax
credit granted by CIR plus paying under protest the remaining
amount and eventually asked for a refund of the overpayment
of the income tax and interest which was denied by CIR. On
appeal, CTA denied the refund of the overpaid income tax but
granted the refund of the overpaid interest. The Supreme Court
affirmed CTA’s decision by ruling that the margin fees are
imposed not as a tax but as an exercise of police power (using
margin fees to strengthen our country's international reserves)
and that margin fees are not considered as necessary and
ordinary expenses.
c. Special Assessments
An assessment is confined to local impositions upon property
for the payment of the cost of public improvements in its
immediate vicinity and levied with reference to special benefits
to the property assessed. The differences between a special
assessment and a tax are that (1) a special assessment can be
levied only on land; (2) a special assessment cannot (at least in
most states) be made a personal liability of the person
assessed; (3) a special assessment is based wholly on benefits;
and (4) a special assessment is exceptional both as to time and
locality. The imposition of a charge on all property, real and
personal, in a prescribed area, is a tax and not an assessment,
although the purpose is to make a local improvement on a
street or highway. A charge imposed only on property owners
benefited is a special assessment rather than a tax
notwithstanding the statute calls it a tax. [Apostolic Prefect of
Mt. Province v. Treasurer of Baguio]
Apostolic Prefect of Mt. Province v. Treasurer of Baguio
The City of Baguio passed an ordinance which sought to assess
all properties within city limits. The Apostolic Prefect of
Mountain Province paid an assessment on its properties under
protest, claiming that was exempted from the assessment since
it was a religious institution. The Court clarified the difference
between a special assessment and a tax, and held that the
Apostolic Prefect cannot claim an exemption since what Baguio
passed was a special assessment.
d. Tolls
Taxes are levied for the support of government, their amount is
regulated by its necessities. Tolls are the compensation for the
use of another’s property, or of improvements made by him;
their amount is determined by the cost of the property, or of
the improvements, and a consideration of the return which
such values or expenditures should yield. A tax is a demand of
sovereignty; a toll is a demand of proprietorship. [71 AmJur 2d
351]
City of Ozamis v. Lumapas
The City of Ozamis released Ordinance No. 466 which imposes
parking fees when a motor vehicle is stopped on any portion of
the existing parking areas for the purpose of loading and
unload passengers or cargoes. Thus, the City Treasurer
collected parking fees from all the transportation buses for
passengers and cargoes of operator Lumapas. The latter paid
under protest and filed a complaint for recovery of parking fees
on the ground that the ordinance is null and void for being in
the nature of toll fees, in violation of Section 59(b) of RA 4136
(Land Transportation and Traffic Code), there being no prior
approval by President of the Philippines upon recommendation
of Secretary of Public Works. The Court held that the fees were
not exacted for mere passage thru the street but for stopping in
the designated parking areas to load/unload passengers or
cargoes. Thus, it is a parking fee, which the Municipal Board of
Ozamis City was expressly granted authority by its Charter to
regulate for public welfare and decongestion of traffic.
e. Penalties
Any sanction imposed as a punishment for violation of law or
acts deemed injurious is a penalty. Violation of tax laws may
lead to penalties. They are designed to regulate conduct and is
subject to set off or compensation.
National Development Corporation v. CIR
Petitioner was charged with deficiency taxes with regard to
transactions it had with Japanese shipping companies it
engaged to construct ocean-going vessels for it. The tax was
based on the income-bearing obligations of resident companies
(which petitioner was). The Court ruled that the Japanese
shipbuilders were liable for the tax and the NDC should have
withheld such taxes before remitting such interest payments.
The imposition of the tax on NDC was, in effect, a penalty on it
for its failure to withhold the taxes from the said Japanese
shipbuilders.
f. Taxes and Customs Duties
Customs duties are a type of tax, but their object is limited to
goods imported or exported.
III. CLASSIFICATION OF TAXES
1. As to Subject Matter
a. Capitation or Poll Taxes
A fixed amount upon all the persons or upon all the persons of
a certain class, resident within a specific territory without
regard to their property or occupations in which they may be
engaged. [71 AmJur 2d 357]
Example: Community tax (Cedula)
b. Property Taxes
Assessed on all property or on all property of a certain class
located within a certain territory on a specified date in
proportion to its value, or in accordance with some other
reasonable method of apportionment, the obligation to pay
which is absolute and unavoidable and is not based upon any
voluntary action of the person assessed. [71 AmJur 2d 358]
Example: Real estate taxes
c. Excise or License Taxes
Any tax which does not fall within the classification of a poll tax
or a property tax, and which embraces every form of burden
not laid directly upon persons or property. It is a charge
imposed upon the performance of an act, the enjoyment of a
privilege, or the engaging in an occupation. It is synonymous
with a “privilege tax.” [71 AmJur 2d 361]
Example: VAT, income tax
NB: Not limited to the Excise tax in our NIRC
2. As to Incidence or Burden
a. Direct Taxes
Taxes which are demanded from persons also shoulder them;
taxes for which the taxpayer is directly or primarily liable or
which he cannot shift to another
Example: Income taxes
b. Indirect Taxes
Taxes which are demanded from one person in the expectation
and intention that he shall indemnify himself at the expense of
another, falling finally upon the ultimate purchaser or
consumer; taxes levied upon transactions or activities before
the articles subject matter thereof reach the consumers who
ultimately pays for them not as taxes but as part of the
purchase price. Thus, the person who absorbs or bears the
burden of the tax is other than the one on whom it is imposed
and required by law to pay the tax. Practically all business
taxes are indirect.
Example: VAT, percentage tax
Maceda v. Macaraig
NAPOCOR enjoyed a general tax exemption from all taxes,
direct or indirect. In 1976 this exemption was stated in general
terms. The question brought before the Court was whether
NAPOCOR continued to enjoy tax exemption from indirect
taxes. The Court ruled in the negative, holding that a review of
the chronology of issuances reveal that it has always been the
intention to exempt NAPOCOR from the payment of both direct
and indirect taxes.
3. As to Determination of Amount
SECTION 129., NIRC
Goods Subject to Excise Taxes. - Excise taxes apply to goods
manufactured or produced in the Philippines for domestic sale
or consumption or for any other disposition and to things
imported. The excise tax imposed herein shall be in addition to
the value-added tax imposed under Title IV.
"For purposes of this Title, excise taxes herein imposed and
based on weight or volume capacity or any other physical unit
of measurement shall be referred to as 'specific tax' and an
excise tax herein imposed and based on selling price or other
specified value of the good shall be referred to as 'ad valorem
tax.'
a. Specific Taxes
A tax of a fixed amount imposed by the head or number or by
some other standard of weight or measurement. It requires no
assessment (valuation) other than the listing or classification of
the objects to be taxed.
Example: Taxes on distilled spirits, wines, and fermented
liquors
b. Ad Valorem Taxes
Literally “according to the value.” It is a tax of a fixed
proportion of the value of the property with respect to which
the tax is assessed, and requires the intervention of assessors
or appraisers to estimate the value of such property before the
amount due from each taxpayer can be determined.
Example: Real estate taxes
4. As to Purpose
a. General or Fiscal
The government renders no return of special benefit to any
property, but only secures to the citizen the general benefit
which results from protection to his person and property and
the promotion of various schemes which have for their object,
the welfare of all [71 AmJur 2d 356]
Example: Income tax, VAT
b. Special, Regulatory, Sumptuary
General rule: Tax laws are prospective in operation. Reason:
Nature and amount of the tax could not be foreseen and
understood by the taxpayer at the time the transaction.
Exception: Tax laws may be applied retroactively provided it is
expressly declared or clearly the legislative intent. (e.g increase
taxes on income already earned)
Hydro Resources v. CA
Hydro Resources and the NIA entered into an agreement for
the construction of a dam in August 1978 wherein the former
was allowed to import construction materials, the payment of
which shall be financed by the latter. The materials shall be
owned by NIA and its ownership shall be transferred to Hydro
only upon the repayment of the costs to NIA. Upon Hydro’s full
repayment, NIA executed deeds of sale in 1982 and 1983.
However, with the enactment of EO 806 in 1982, Hydro was
made to pay a 3% ad valorem duty upon the importation. It
paid under protest. Acting favorably on Hydro’s petition, the
Collector of Customs ordered the refund of the amount, but his
decision was reversed by the Deputy Minister of Finance. CTA
affirmed the latter’s ruling. The Supreme Court held that laws
shall have no retroactive effect, unless the contrary is provided.
Thus, EO 806 can’t be applied to the importations made in
1978.

Levied for a special purpose to achieve some social or 2. Imprescriptability of Taxes

economic objective
Unless otherwise provided by the tax itself, taxes are
Example: Protective tariffs or customs duties. imprescriptible.

5. As to Scope CIR v. Ayala Securities Corp

a. National The CIR assessed Ayala Securities Corp. 25% surtax on its
unreasonable income surplus in 1961 pertaining to the fiscal
Taxes imposed by the National Government year of 1955. Ayala Securities raised the defense of
Example: National internal revenue taxes, customs duties prescription, invoking Sec. 331 of the NIRC which provided a 5-
year time limit. The CTA and CA held that the assessment was
b. Local made beyond the prescriptive period, hence not binding. The
SC reversed since there is no express provision of law limiting
Imposed by municipal corporations or local governments. the CIR’s right to assess and collect the 25% tax on
Example: Real estate taxes, business taxes unreasonably accumulated surplus, thus, the right is
imprescriptible. Secs. 331 and 332 relied upon by respondents
6. As to Gradation or Rate are not applicable because they pertain to assessments which
require the filing of returns. Sec. 25 (basis of surtax), on the
a. Progressive other hand, does not require a return.

The rate of tax increases as the tax base or bracket increases 3. Double Taxation

b. Regressive Definition and Nature

Taxing twice the same taxpayer for the same tax period upon
The rate of tax decreases as the tax base increases (Note: a the same thing or activity, when it should be taxed but once, for
system where there are more indirect taxes than direct has the same purpose and with the same kind of character of tax.
also been called regressive)
Strict sense (Direct Duplicate Taxation)
c. Mixed or Degressive
• The same property must be taxed twice when it should be
d. Proportionate taxed once;
• Both taxes must be imposed:
Based on a fixed percentage of the amount of the property i. On the same property or subject matter;
receipts or other basis to be taxed ii. For the same purpose;
iii. By the same State, Government, or taxing
IV. DOCTRINES IN TAXATION authority;
iv. Within the same jurisdiction or taxing district;
1. Prospectivity of Tax Laws v. During the same taxing period; and
vi. They must be the same kind or character of tax
[Villanueva v. City of Iloilo]
Broad Sense (Indirect Duplicate Taxation)
If any of the elements for direct duplicate taxation is absent.
Extends to all cases in which there is a burden of two or more
pecuniary impositions. For example, a tax upon the same
property imposed by two different states.
Constitutionality of Double Taxation
There is no constitutional prohibition against double taxation
in the Philippines. It is something not favored, but is
permissible, provided some other constitutional requirement is
not thereby violated. [Villanueva v. City of Iloilo]
There is no double taxation in the following cases:
Real estate tax and license tax collected on the same real
property
Villanueva v. City of Iloilo
The Municipal Board of Iloilo City enacted Ordinance 11, s. of
1960 imposing license tax fees upon tenement houses under
the authority of the Local Autonomy Act. The validity of the
ordinance was challenged by petitioners, owners of tenement
houses, for being another form of real estate tax, amounting to
double taxation. The SC ruled that the levy in question is a
license tax on the operation of tenement houses, which is a
form of business or calling. It differs from a real estate tax
which is a direct tax on the ownership of land and buildings,
payable whether the property is used or not. A real estate tax
and the tenement tax imposed by the ordinance, although
imposed by the same taxing authority, are not of the same kind
or character.
Real estate tax and income tax collected on the same real
property leased for earning purposes
Sanchez v. CIR
Sanchez was the owner of a two-storey, four-door “accessoria”
building. She lives in one of them and is renting the rest to
other persons. The CIR assessed her for “real estate dealer tax”
for the years 1946 to 1950. She paid under protest alleging that
she was not a real estate dealer and that she was already
paying real estate taxes on her property as well as income tax
on the income derived therefrom. The SC looked into the
definition in the law and found that she was as it includes “all
persons xxx engaged xxx in leasing real estate.” Citing People v.
Mendaros, the Court ruled that license tax may be levied upon a
business or occupation although the land or property used
therein is subject to property tax. The State may collect an ad
valorem tax on property used in a calling and at the same time
impose a license tax on the pursuit of that calling, the
imposition of the latter kind of tax being in no sense a double
tax.
Tax imposed by the State and the local government upon the
same occupation, calling, or activity
Punsalan v. Municipal Board of Manila
Petitioners, consisting of professionals, wanted to annul
Ordinance No. 3398 of the City of Manila which imposed a
municipal occupation tax on persons exercising various
professions in the city. They argued that they were already
paying occupation tax under the NIRC so it amounted to double
taxation. The SC ruled that the Ordinance must be upheld
because there is nothing inherently obnoxious in the
requirement that license fees or taxes be exacted with respect
to the same occupation, calling, or activity by both the state and
the political subdivisions thereof.
CIR v. Citytrust Investment Phils.
Citytrust and Asianbank both claim refunds from the CIR
because they included the 20% final withholding tax (FWT) in
their computation of 5% gross receipts tax (GRT). The SC held
that in computing the 5% GRT, the 20% FWT is included
because “gross receipts” means without any deduction, to do
otherwise would change gross receipts to net receipts. There is
no double taxation in taxing the amount of the 20% FWT in the
5% GRT because these are two different kinds of taxes. The
GRT is a percentage tax not subject to withholding and the
FWT is imposed on the net or the gross income realized in a
taxable year and is subject to withholding.
4. Methods of Avoiding the Occurrence of Double Taxation
a. Tax Treaty
Tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject
matter and for identical periods. The apparent rationale for
doing away with double taxation is of encourage the free flow
of goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in
creating robust and dynamic economies. [CIR v. SC Johnson and
Son, Inc.]
Most favored nation clause
The purpose of the clause in a tax treaty is to grant to the other
Contracting State a tax treatment that is no less favorable than
that which is granted to the “most favored” among other
countries.
It means each party to the treaty pledges that any tax
concession given to any other treaty country will also be
extended to the other party to the treaty; that is, it will not
grant more favorable terms to other treaty countries without
granting the same.
CIR v. SC Johnson and Son, Inc.
S.C. Johnson and Son paid a 25% tax on royalties paid to SC
Johnson and Son, USA. They later sought a refund, claiming that
the 10% rate in the RP-West Germany Tax Treaty should be
applied in view of the most favored nation clause of the RP-US
Tax Treaty. Under that clause, the tax imposed should not
exceed the lowest rate that may be imposed on royalties of the
same kind paid under similar circumstances to a resident of a
third State (which in this case is West Germany). The Court
ruled against S.C. Johnson and Son, holding that while the
subject of the tax may be the same (royalties) may be the same,
the circumstances under which these taxes are paid are
different. In particular, the West German treaty grants a
matching tax credit of 20%; a feature absent in the RP-US
treaty. The Court held that in view of the underlying intent of
the most favored nation clause to establish equality of
international treatment, the West German tax rate cannot be
applied since the circumstances surrounding the method of
payment and the corresponding tax burdens are different.
b. Tax Credit – exemptions or allowance of deduction or
tax credit for foreign taxes
The right to deduct from gross income the income taxes he
paid to a foreign government is given only as an alternative or
substitute to his right to claim a tax credit for such foreign
income taxes. Such alternative to deduct may only be availed of
if he is entitled to tax credit. An alien resident is not entitled to
tax credit for the foreign income taxes he paid, if his income is
derived wholly from sources within the Philippines. Hence, he
may not deduct from gross income the income taxes he paid to
his home country for the taxable year. [CIR v. Lednicky]
CIR v. Lednicky
Respondents, American citizens living in the Philippines, claim
deductions from their gross income because they already paid
the U.S. government on the said income. The SC disallowed said
deductions because they were not entitled to tax credit, their
income being derived wholly from sources within the
Philippines. It is only when they are entitled to tax credit that
they may choose the alternative of having their income tax
deducted.
Double taxation becomes obnoxious only where the taxpayer is
taxed twice for the benefit of the same governmental entity.
Here, although the taxpayer would have to pay 2 taxes on the
same income. the Philippine government only receives the
proceeds of one tax. Any relief from the alleged double taxation
should come from the US, not the Philippines, since the
former’s right to burden the taxpayer is solely predicated on
his citizenship, without contributing to the production of the
wealth that is being taxed.
 CHAPTER II: LIMITATION UPON THE POWER OF TAXATION
I. INHERENT LIMITATIONS
1. Public Purpose
The proceeds of the tax must be used (a) for the support of the
State or (b) for some recognized objects of government or
directly to promote the welfare of the community.
Test: Whether the statute is designed to promote the public
interest, as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals might
incidentally serve the public [Pascual v. Sec of Public Works]
Legislature is not required to adopt a policy of “all or none” for
the Congress has the power to select the object of taxation
Lutz v. Araneta
The petitioner, in his capacity as the administrator of the estate
of Antonio Ledesma assailed the Sugar Adjustment Act, which
increased taxes on the manufacture of sugar in order to
stabilize the industry in preparation for the possible effects of
the Tydings-McDuffie Act. Lutz argues that since the purpose of
the tax is to stabilize the sugar industry alone, it does not serve
a public purpose and is therefore invalid.
The Court held against Lutz. Taxation may be made in the
implement of the State’s police power – as in this case which
involves an important industry, vital to the country’s economy.
Public purpose must exist at the time of its enactment
Pascual v. Secretary of Public Works
Zulueta is the owner of several parcels of residential land in
Pasig, Rizal (the Antonio Subdivision), certain portions of
which had been reserved for feeder roads to public highways.
He still owned the said portions when RA 920, appropriating
P85,000.00 for the "construction, reconstruction, repair,
extension and improvement" of said roads, was passed by
Congress. Pascual, as provincial governor of Rizal, filed an
action for declaratory relief as the appropriation would have
the effect of relieving Zulueta of the burden of constructing his
subdivision streets or roads at his own expense. The CFI agreed
that the appropriation was clearly for a private, not a public
purpose but dismissed the case because it held that Pascual did
not sustain direct injury. The SC reversed the lower court and
held that Pascual had the personality to sue as a taxpayer. It
also held that Zulueta’s subsequent donation of the land to the
government did not cure the defect that it was private property
at the time the law was passed.
Tio v Videogram Regulatory Board, et al.
Petitioner assailed the constitutionality of PD No. 1987 (An Act
Creating the Videogram Regulatory Board). He alleged that Sec.
10 of the Decree, imposing a 30% tax on the gross receipts of
every sale, lease, or disposition of videograms, payable to the
local government, was harsh and oppressive. The SC dismissed
the petition upon a finding that the levy was not only
regulatory but also a revenue measure similar to amusement
tax paid by the movie industry. Also, the levy was for a public
purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the
rampant film piracy, the flagrant violation of intellectual
property rights, and the proliferation of pornographic video
tapes.
2. Taxing Power is inherently legislative
a. General Rule
Delegata potestas non potest delegari – power of taxation is
exclusively vested in the legislative body and may not be re-
delegated.
This contemplates the power to determine the nature (kind),
object (purpose), extent (rate), amount, coverage (subjects),
and situs (place) of tax. It must be distinguished from power to
assess and collect.
b. Exceptions
i. Local Government Units
It is in line with the principle that the power to create
municipal corporations for purposes of local self-government
carries with it, by necessary implication, the power to confer
the power to tax on such local governments.
Art. 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.
The important legal effect of Section 5 is thus to reverse the
principle that doubts are resolved against municipal
corporations. Henceforth, in interpreting statutory provisions
on municipal fiscal powers, doubts will be resolved in favor of
municipal corporations. [Bernas]
Pepsi-Cola v. Municipality of Tanauan
Pepsi-Cola filed a complaint to declare the Local Autonomy Act
unconstitutional as an undue delegation of taxing authority and
certain municipal ordinances void. The ordinances in question
imposed “municipal production taxes” on the number of
bottles/gallons of soft drinks produced. The Court upheld the
validity of the delegation as local government is granted
autonomous authority to create their own sources of revenue
and to levy taxes. Due process is usually violated where the tax
imposed is for a private as distinguished from a public purpose.
Municipalities are empowered to impose, not only municipal
license taxes upon persons engaged in any business or
occupation but also to levy for public purposes, just and
uniform taxes.
The public purpose of a tax may legally exist even if the motive
which impelled the legislature to impose the tax was to favor
one industry over another
Quezon City, et al. v. Bayantel
Under its franchise law, properties used by Bayantel for their
operations are exempt from taxation. Soon after, the LGC was
enacted hence, giving the LGUs power to levy taxes. A few
months after, the franchise law of Bayantel was amended and
with this amendatory law, the exemption from taxes was still
granted. The problem arose when QC LGU sent tax declarations
to Bayantel. Bayantel argued that their properties were exempt
from taxes. The SC held that the properties were exempt
because even if the LGUs had the power to levy taxes, this does
not mean that it can override tax exemptions made by the
Legislature. It is important to note that the tax exemption given
by Congress to Bayantel was reiterated in the amendatory law,
with the LGC already enacted. In other words, when the
congress stipulated on the tax exemption, they were fully
aware of the capacity of the LGU to tax the properties.
ii. Delegation to President
Certain aspects of the taxing process that are not legislative in
character may be vested to him.
• to enter into Executive agreements, and
• to ratify treaties which grant tax exemption subject to
Senate concurrence.
Art. VI, Section 28. xxx (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.
iii. Administrative Rate Fixing
The delegation of legislative power may be sustained only upon
the ground that some standard for its exercise is provided and
that the legislature in making the delegation has prescribed the
manner of the exercise of the delegated power.
In case of a delegation of rate-fixing power, the only standard
which the legislature is required to prescribe for the guidance
of the administrative authority is that the rate be reasonable
and just.
PHILCOMSAT v. Alcuaz
Philcomsat filed an application with the NTC for a certificate of
public convenience to continue operating its satellite. The NTC
obliged with the condition that Philcomsat reduce the rates it
was charging for the use of its facilities. The petition against the
rate-fixing was denied by the Supreme Court, holding that that
there was a valid delegation of legislative power upon the NTC
to prescribe the rates to be charged.
However, the questioned order violated procedural due
process for having been issued without prior notice and
hearing and the rate reduction it imposes is unjust,
unreasonable and confiscatory.
Smith Bell & Co. v. CIR
Petitioner questions the constitutionality of Section 134 of the
Tax Code, imposing specific tax on wine, as it gives the
Commissioner blanket authority to determine what is and is
not to be taxed as “sparkling wine.” According to petitioner, the
provision violates the established doctrine, delegata potestas
non potest delegare with respect to the power to tax. The Court
upheld the constitutionality of the provision, since the
Commissioner is only left with the administrative function to
determine the class of wine, but the power to tax wine remains
with the legislative.
3. Territoriality or Situs Taxation
a. Meaning and scope of limitation
Rule: A state may not tax property lying outside its borders or
lay an excise or privilege tax upon the exercise or enjoyment of
a right or privilege derived from the laws of another state and
therein exercise and enjoyed. [51 Am.Jur. 87-88]
The power to tax is limited to the territorial jurisdiction of the
taxing state.
EXCEPT where privity of relationship exists, the State can
exercise its taxing powers over its citizen outside its territory.
b. Situs of Taxation
i. Meaning
Situs of taxation literally means the place of taxation. The basic
rule is that the state where the subject to be taxed has a situs
may rightfully levy and collect the tax; and the situs is
necessarily in the state which has jurisdiction or which
exercises dominion over the subject in question. Within the
territorial jurisdiction, the taxing authority may determine the
situs.
ii. Determination of Situs (Factors)
• Nature of the tax;
• Subject matter of the tax (person, property, act or
activity);
• Possible protection and benefit that may accrue both
to the government and the taxpayer;
• Citizenship of the taxpayer;
• Residence of the taxpayer;
• Source of income.
iii. Situs of subjects of taxation:
a. Persons
-Individuals
-Juridical persons
b. Community Tax (Individuals & Corporate)
Sec. 157-158, Local Government Code
Section 156. Community Tax. - Cities or municipalities may
levy a community tax in accordance with the provisions of
this Article.
Section 157. Individuals Liable to Community Tax. - Every
inhabitant of the Philippines eighteen (18) years of age or
over who has been regularly employed on a wage or salary
basis for at least thirty (30) consecutive working days
during any calendar year, or who is engaged in business or
occupation, or who owns real property with an aggregate
assessed value of One thousand pesos (P1,000.00) or more,
or who is required by law to file an income tax return shall
pay an annual additional tax of Five pesos (P5.00) and an
annual additional tax of One peso (P1.00) for every One
thousand pesos (P1,000.00) of income regardless of
whether from business, exercise of profession or from
property which in no case shall exceed Five thousand pesos
(P5,000.00).
In the case of husband and wife, the additional tax herein
imposed shall be based upon the total property owned by
them and the total gross receipts or earnings derived by
them.
 Section 158. Juridical Persons Liable to Community Tax. - In the Philippines, the taxes on business, occupation and
Every corporation no matter how created or organized, transaction are the VAT, Percentage Tax and Excise Tax.
whether domestic or resident foreign, engaged in or doing
business in the Philippines shall pay an annual community
tax of Five hundred pesos (P500.00) and an annual Excise Tax
additional tax, which, in no case, shall exceed Ten thousand
pesos (P10,000.00) in accordance with the following KIND OF SITUS
schedule: EXCISE TAX
(1) For every Five thousand pesos (P5,000.00) worth of real Income Source of the income, nationality or
property in the Philippines owned by it during the residence of taxpayer (Sec. 23, NIRC)
preceding year based on the valuation used for the payment Donor’s Tax Location of property; nationality or
of real property tax under existing laws, found in the residence of taxpayer
assessment rolls of the city or municipality where the real Estate Location of property; nationality or
property is situated - Two pesos (P2.00); and residence of taxpayer
(2) For every Five thousand pesos (P5,000.00) of gross
receipts or earnings derived by it from its business in the Business Tax
Philippines during the preceding year - Two pesos (P2.00).
The dividends received by a corporation from another KIND OF BUSINESS SITUS
corporation however shall, for the purpose of the additional TAX
tax, be considered as part of the gross receipts or earnings VAT Where the transaction is made
of said corporation. Sale of real Where the real property is located
property
c. Lexus Situs or Lex Rei Sitae (Real Property) Sale of personal Where the personal property was
property sold
Lex Situs – law of the place where property is situated; the
general rule is that lands and other immovables are governed g. Transfer of property by death or gift
by the law of the state where they are situated
Donor’s Tax - depends on the location of the property, and the
Lex Loci Rei Sitae – law of the place where the thing or subject
nationality and residence of the taxpayer 

matter is situated; the title to realty or question of real estate
law can be affected only by the law of the place where it is
h. Multiple situs of taxation
situated

d. Mobilia Sequuntur Personam (Personal Property) Meralco v. Yatco

Mobilia Squuntur Personam- movable things follow the MERALCO was insured by two foreign insurance companies.
person. Pursuant to Sec. 129, Act No. 2427, the CIR levied a 1% tax on
the premiums paid. MERALCO paid under protest, and filed
Property Tax suit. The Supreme Court clarified that the fact that the contract
was with foreign corporations - or executed outside of the
KIND OF SITUS Philippines - does not take it out of the jurisdiction of the
PROPERTY Philippines. Where the insured is within the Philippines, the
risk insured also within the Philippines and certain incidents of
Real Property Where it is located (lex rei sitae)
the contract are to be attended to in the Philippines, the
Tangible Physical location although the owner
Philippines has the power to impose tax; substantial elements
Personal resides in another jurisdiction
of the contract are situated in the Philippines as to give its
Property
government the power to tax.
Intangible GR: Domicile of the owner. Mobilia
Personal sequntur personam (movables follow the
Property person) Manila Gas v. Collector

X: (1) When property has acquired a Manila Gas paid dividends and interest on bonds & other
business situs in another jurisdiction; or indebtedness to Island Gas and Electric Co. and General
(2) When the law provides for the situs of Finance Company upon which withholding income taxes were
the subject of tax paid to the CIR. Manila Gas filed a complaint asking for the
return of the collected taxes since the company believed that it
e. Income is a violation of the constitutional provision of non-impairment
of contracts (company and government have a franchise
TAXPAYER SOURCE OF INCOME agreement) and that the interest on bonds and other
Citizenship Residency Within Phils. Without Phils. indebtedness were not income from Philippine sources. Trial
Court dismissed the case. SC agreed with the trial court. The
Filipino Resident Taxable Taxable
Court ruled that the CIR was justified in withholding income
Filipino Non-resident Taxable Non-Taxable
taxes on interest on bonds and other indebtedness paid to non-
Alien Resident Taxable Non-Taxable
resident corporations because this income was received from
Alien Non-resident Taxable Non-Taxable sources within the Philippine Islands as authorized by the
Income Tax Law.
f. Business, Occupation, Transaction

GR: power to levy an excise tax depends upon the place where Wells Fargo Bank v. Col
the business is done, or the occupation is engaged in, or the
transaction took place. A woman died, one of her properties left behind were 70,000
shares of stock in Benguet Consolidated Mining Corp,
organized in RP. Petitioner already paid taxes in California, but
the CIR wanted them to pay here too. Court said they have to;
and taxing them here is not a denial of due process; it being an
inherent power of the RP Gov’t to tax.
CIR v. Baier-Nickel
Respondent, a non-resident German citizen, is the President of
JUBANITEX, Inc, a domestic corporation engaged in exporting
and selling embroidered textile products. She was also
appointed as a commission agent of the same company. In
1995, she received approx. P1.7M as sales commission income
from which the corporation withheld 10% withholding tax and
paid the same to the BIR. Respondent is now claiming for
refund of P170k claiming that her sales commission income is
not taxable in the Philippines because it was compensation for
her services rendered in Germany. The CTA denied her claim,
however, the CA reversed the ruling. The Court then affirmed
the CTA. The source of income is not the residence of the payor
or place of payment, but the place where the services were
actually rendered. There is no substantial evidence presented
by the respondent to show that contracts or orders signed
prove that sale occurred in Germany, not in the Philippines. In
fact, she earned commission income, allegedly earned abroad,
in the same months that she was in the Philippines. Therefore,
her sales commission income is taxable here in the Philippines.
CIR v. Marubeni Corporation
Respondent was assessed deficiency taxes in failing to pay for,
among others, contractor’s tax. HELD: Since the services
performed by Marubeni which earned them income were
performed outside the Philippines, they were not subject to
contractor’s tax. A contractor's tax is a tax imposed upon the
privilege of engaging in business. It is generally in the nature of
an excise tax on the exercise of a privilege of selling services or
labor rather than a sale on products and is directly collectible
from the person exercising the privilege. Being an excise tax, it
can be levied by the taxing authority only when the acts,
privileges or business are done or performed within the
jurisdiction of said authority. It cannot be imposed on an
occupation or privilege outside the taxing district.
4. International Comity (in par parem, non habeat imperium –
An equal has no power over an equal)
Comity - respect accorded by nations to each other because
they are sovereign equals. Thus, the property or income of a
foreign state or government may not be the subject of taxation
by another state.
5. Exemption of Government Entities, Agencies, and
Instrumentalities
If the taxing authority is the National Government –
GR: Agencies and instrumentalities of the government are
exempt from tax.
X: When it chooses to tax itself. Nothing can prevent Congress
from decreeing that even instrumentalities or agencies of the
government performing governmental functions may be
subject to tax.
II. CONSTITUTIONAL LIMITATIONS
1. Due process clause
Art. 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.
Substantive Due Process – An act is done under the authority of
a valid law or the Constitution itself.
Procedural Due Process – An act is done after compliance with
fair and reasonable methods or procedure prescribed by law.
Due Process in Taxation requirements:
(1) public purpose
(2) imposed within taxing authority’s territorial jurisdiction
(3) assessment or collection is not arbitrary or oppressive
Com. Of Customs v. CTA & Campos Rueda Co.
Campos Rueda Corp. ordered several articles from the US and
filed the necessary Import Entries. However, the Bureau of
Customs re-appraised the shipments at a higher rate based on
an "Alert Notice" sent by Finance Attaches abroad. The
Company paid the increased taxes but filed Protests claiming a
refund. The Court ruled that administrative proceedings are
not exempt from the operation of due process requirements. In
this case, the "Alert Notices" on which the Customs
Commissioner based its re-appraisal were not disclosed during
the proceedings before the Bureau of Customs nor presented in
evidence before the CTA. The re-appraisal made by the
Commissioner, therefore, can be faulted with arbitrariness in
disregard of the standard of due process.
Phil. Bank of Comm v. CIR
Petitioner reported a net loss in 1986 and thus declared no tax
payable. In 1987, petitioner requested the respondent for a tax
credit representing the overpayment of taxes in the first and
second quarters of 1985. CTA denied the request of petitioner
for a tax refund or credit for 1985 on the ground that it was
filed beyond the two-year reglementary period provided for by
law.
The Court held that the plea of tax refund/credit had already
prescribed. Basic is the principle that “taxes are the lifeblood of
the nation.” Due process of law under the Constitution does not
require judicial proceedings in tax cases. This must necessarily
be so because it is upon taxation that the government chiefly
relies to obtain the means to carry on its operations and it is of
utmost importance that the modes adopted to enforce the
collection of taxes levied should be summary and interfered
with as little as possible.
From the same perspective, claims for refund or tax credit
should be exercised within the time fixed by law because the
BIR being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by
incidental matters.
2. Equal Protection Clause
Art. 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.
All persons subject to legislation shall be treated alike, under
like circumstances and conditions both in privileges conferred
and liabilities imposed.
No violation of equal protection when there is proper
classification made; classification to be valid must:
• Rest on substantial distinctions
• Be germane to the purpose of the law
• Not be limited to existing conditions only; and
• Apply equally to all members of the same class
Ormoc Sugar Co. v. Treasurer of Ormoc City
Municipal Board enacted an ordinance which imposed a tax on
productions of centrifugal sugar specifically milled at the
Ormoc Sugar Company Inc. per export sale to the US and other
foreign countries. Held: ordinance is unconstitutional. Although
it was within the power of the city to impose, the ordinance
violated the equal protection clause because it only imposed
the tax on petitioner and none other. Hence, even if a similar
company is later established, it would not be covered by the
ordinance.
Shell Co. v. Vano
The Municipal Council of Cordova, Cebu adopted Ordinance 10
which imposes an annual tax on occupation or the exercise of
the privilege of "installation manager." Shell Co., a foreign
corporation, filed suit for the refund of the taxes paid by it, on
the ground that the ordinances imposing such taxes are ultra
vires. It alleged that Ordinance 10 is discriminatory and hostile
because there is no other person in the locality who is an
installation manager. The Court held that the fact that there is
no other person in the locality who exercises such a
“designation” or calling does not make the ordinance
discriminatory and hostile, inasmuch as it is and will be
applicable to any person or firm who exercises such calling or
occupation named or designated as “installation manager.”
Tiu v. CA
RA 7227 created the Subic Special Economic Zone (SSEZ) and
was granted special privileges. The petitioners assail the
constitutionality of the EO 97-A claiming that they are excluded
from the benefits provided by RA 7227 without any reasonable
standards and thus violated the equal protection clause of the
Constitution. The Court found that there are real and
substantive distinctions between the circumstances obtaining
inside and those outside the Subic Naval Base, thereby
justifying a valid and reasonable classification.
The constitutional right to equal protection of the law is not
violated by an executive order, issued pursuant to law, granting
tax and duty incentives only to businesses and residents within
the secured area of the Subic Special Economic Zone and
denying them to those who live within the Zone but outside
such fenced-in territory. The Constitution does not require
absolute equality among residents. It is enough that all persons
under like circumstances or conditions are given the same
privileges and required to follow the same obligations. In short,
a classification based on valid and reasonable standards does
not violate the equal protection clause.
3. Rule of Taxation shall be Uniform and Equitable
Art. VI, Section 28. (1) The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive system of
taxation.
Uniform – all taxable articles or properties of the same class
shall be taxed at the same rate
Equity – apportionment must be more or less just in the light of
taxpayer’s ability to shoulder tax burden
The equal protection clause refers more to like treatment in
like circumstances. The uniformity and equity clause refers to
the proper relative treatment for tax purposes of persons in
unlike circumstances.
City of Baguio v. De Leon
De Leon was made to pay a PHP 50 annual fee for the
properties he rents out. He assailed the ordinance allowing the
collection of such annual fee, alleging that it was violative of his
Constitutional rights because it meant double taxation and the
lack of uniformity in the law. The Court upheld the ordinance’s
validity, saying that (1) the imposition of the fee didn’t amount
to double taxation, and (2) the taxing power can make
reasonable classifications for purposes of taxation.
Eastern Theatrical Co. v. Alfonso
The Municipal Board of Manila enacted Ordinance no. 2958
which imposed taxes on the price of admission tickets sold by
cinematographs, theaters, etc. Petitioners filed with the CFI a
complaint assailing the validity of the ordinance, the CFI
dismissed their complaint so they brought the case to the SC.
The SC upheld the validity of the ordinance as it was done
within the authority granted by Sec. 2444(m) of the Revised
Admin Code and the tax on amusement imposed did not violate
the rule on uniformity because petitioners cannot simply point
out that the specified forms of amusement under the tax are
invalidly classified.
British American Tobacco v. Camacho and Parayno
British American Tobacco challenged the validity of Sec. 145 of
the NIRC as amended by R.A. 8420, arguing that the provision
violated the equal protection clause and the rule on the
uniformity of taxation. The provision created a four-tiered tax
rate based on the net retail price of cigarette brands. BAT
introduced a “new brand”, Lucky Strike, which was taxed under
the “current retail price” it was introduced. Old brands would
be taxed based on the retail price before 1996. BAT argued that
the tax was unfair since older brands would benefit from a
“freeze” on the tax rates while newer brands would be taxed
based on current retail prices even if older brands now had the
same current retail price. The Court ruled against BAT, holding
that the tax did not violate the equal protection clause as it
passed the rational basis test, and was in fact uniform in its
application.
4. Non-Impairment of Contracts
Art. III, Section 10. No law impairing the obligation of contracts
shall be passed.
Applies only when government is party to the contract granting
exemption
EXCEPT in case of franchise tax-exemption. The Constitution
provides that franchise is subject to amendment, alteration, or
repeal by Congress.
Art. XII, Section 11. No franchise, certificate, or any other form
of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations
or associations organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except
under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in
public utilities by the general public. The participation of
foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines.
Imus Electric Co. v. CTA and CIR
Imus Electric Co. was granted a franchise by the Municipality of
Imus by virtue of Act No. 667 and through Resolution No. 46. It
provided for a franchise tax of 1% of its gross receipts. Upon
enactment of R.A. No. 39, which amended the Tax Code
provision by increasing the franchise tax to 5%, CIR assessed
the electric company with 5% tax rate. The Company sought
reconsideration and appealed, but lost all the way to the SC,
which held that Congress has the power to amend, alter, or
repeal a franchise grant.
Phil. Rural Electric Cooperatives Association Inc., et al. v. DILG
PD 269 (National Electronic Administration Decree) said that it
is the declared policy of the State to provide the total
electrification of the Philippines because it was vital to the
people and the sound development of the nation. Section 39
thereof provided for tax incentives to electric cooperatives,
including permanent exemption from paying income taxes.
In order to finance the electrification projects, the PH gov’t
entered into 6 loan agreements with the USA for USAID with
electric cooperatives, including petitioners as beneficiaries
which granted similarly worded provisions on the tax
application of a loan. Petitioners filed a class suit contending
that pursuant to the provisions of PD 269 and the loan
agreements, they are exempt from payment of local taxes,
including real property tax. They say this because the Local
Government Code withdrew their exemptions.
The Court held that there was reasonable classification under
the LGC to justify the different tax treatments between electric
cooperatives covered by PD 269 and electric cooperatives under
RA 6938 (Cooperative Code of the Philippines): (1) PD 269 does
not require cooperatives to make equitable contributions to
capital, (2) PD 269 does not adhere to the principal of
subsidiarity, (3) amendments to PD 269 were geared towards
the expansion of the NEA over electric cooperatives, and (4) the
transitory provisions of RA 6938 are indicative of the
recognition of Congress of the fundamental differences between
the two laws.
5. Non-Imprisonment for Non-Payment of Poll Tax
Art. III, Section 20. No person shall be imprisoned for debt or
non-payment of a poll tax.
The taxpayer, however, may be imprisoned for non-payment of
other kinds of taxes where the law so expressly provides.
6. Prohibition Against Taxation of Real Property of
Charitable Institutions, Churches, Parsonages or Convents,
Mosques, and Non-Profit Cemeteries
Art. 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.
The phrase “exclusively used for educational purposes” is “not
limited to property actually indispensable” therefor but
extends to facilities which are incidental to and reasonably
necessary for the accomplishment of said purposes. [CIR v.
Bishop of the Missionary District, as cited in Abra Valley v.
Aquino]
Abra Valley College Inc., v. Aquino
Petitioner filed a complaint to declare void the “Notice of
Seizure” and “Notice of Sale” of its lot and building for non-
payment of real estate taxes amounting to P 5,140.31, which was
sold to defendant Paterno Millare. The issue was whether or not
the lot and building was used exclusively for educational
purposes. The TC said no because the second floor was used for
residential purposes.
The SC found that while the leasing of the second floor for
residential purpose by the Director and his family may find
justification under the concept of incidental use, the lease of the
first floor to the Northern Marketing Corporation cannot be
considered incidental to the purpose of education.
The exemption abovementioned pertains only to real estate
tax.
Test of exemption: actual use of property, not ownership
thereof.
To determine whether an enterprise is a charitable
institution/entity or not, the elements which should be
considered include the statute creating the enterprise, its
corporate purposes, its constitution and by-laws, the methods
of administration, the nature of the actual work performed, the
character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties. The
test W/N an enterprise is charitable is whether it exists to
carry out a purpose reorganized in law as charitable. [Lung
Center v. QC]
Lung Center v. QC
In 1993, both the land on which Lung Center stands on and the
building were assessed for real property taxes in the amount of
P4,554,860. In response, Lung Center filed a Claim for
Exemption, predicating on its claim that it is a charitable
institution, even though it admits paying patients and renders
services to them, leases portions of the land to private parties,
and rents out portions of the hospital to private medical
practitioners. The City Assessor of QC denied this, which was
affirmed by the CBAA.
The Court looked at the Lung Center’s Articles of Incorporation
and said that as a general principle, a charitable institution does
not lose its character as such and its exemption from taxes
simply because it derives income from paying patients so long
as the money is used altogether to the charitable object which it
is intended to achieve. However, the portions of real property
leased to private entities are not exempt from real property
taxes because they are not actually, directly, and exclusively
used for charitable purposes.
7. Prohibition Against Taxation of Non-Stock Non-Profit
Educational Institutions
Art. XIV, Sec. 4(3,4). (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 the dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed of in
the manner provided by law.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for reinvestment.
(4) Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used actually, directly,
and exclusively for educational purposes shall be exempt from
tax.
Section 30(H), NIRC. The following organizations shall not be
taxed under this Title in respect to the income received by them
as such: (H) A nonstock and nonprofit educational institution.
CIR v. CA & YMCA
YMCA, a non-stock, non-profit institution, which conducts
various programs and activities that are beneficial to the
public, especially the young people, pursuant to its religious,
educational and charitable objectives, was assessed deficiency
income tax for its income derived from rentals of real property.
YMCA argued that it is exempt from tax under Article XIV, Sec 4
(3).
The Court held that YMCA is NOT an educational institution
within the purview of such provision. Under the Education Act
of 1982, such term refers to schools. The school system is
synonymous with formal education, which refers to the
hierarchically structured and chronological graded learnings
organized and provided by the formal school system and for
which certification is required in order for the learner to
progress through the grades or move to the higher levels. The
Court examined the Amended Articles of Incorporation and By-
Laws of the YMCA, but found nothing in them that even hints
that it is a school or an educational institution.
CIR v. CA, CTA, & ADMU
The CIR wanted to subject Ateneo to taxes on the theory that a
subsidiary, the Institute of Philippine Culture, was in the
business of rendering work for a fee as an independent
contractor. The Supreme Court struck down the taxes by
showing that the IPC was a non-profit and devoted to
educational purposes. Thus the exemption to educational
institutions still applied.
8. Passage of Tax Bills
Art. 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.
Tolentino v. Secretary of Finance
Congress enacted R.A. No. 7716, otherwise known as the
Expanded Value-Added Tax Law, which aims to resolve the
growing budget deficit of the country.
1. Because revenue bills are required to originate exclusively in
the House of Representatives, the Senate cannot enact revenue
measures of its own without such bills. However, after a
revenue bill is passed and sent over to it by the House, the
Senate certainly can pass its own version on the same subject
matter. This follows from the coequality of the two chambers of
Congress.
2. The phrase "except when the President certifies to the
necessity of its immediate enactment, etc." in Art. VI, §26 (2)
qualifies not only the requirement that "printed copies of a bill
in its final form must be distributed to the members three days
before its passage" but also the requirement that before a bill
can become a law it must have passed "three readings on
separate days."
3. The Constitution does not really prohibit the imposition of
indirect taxes which, like the VAT, are regressive. What it
simply provides is that Congress shall "evolve a progressive
system of taxation."
9. Granting of Tax Exemption
Art. 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.
John Hay Peoples Alternative Coalition v. Lim
President Ramos issued Proc. No. 420, creating a SEZ in John
Hay, granting it the same benefits as those of the Subic SEZ
under RA 7227. Petitioners filed suit, contesting the
constitutionality of the proclamation. The SC held that the
proclamation was not totally unconstitutional, and only voided
the provision granting tax exemption and similar benefits,
because RA 7227 only accorded these incentives to the Subic
SEZ. Thus, due to the lack of any support in law, the benefits
granted to the John Hay SEZ must be declared void.
Sec. 28 (4), Art. VI; it is the legislature that has full power to
exempt any person/corporation/class of property from
taxation (the power to exempt is as broad as its power to tax);
the claimed statutory exemption of the John Hay SEZ from
taxation should be manifest and unmistakable from the
language of the law. Tax exemption cannot be implied as it
must be categorically and unmistakably expressed.
10. Veto Power of the President
Art. 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.
11. Judicial Power to Review Legality of Tax
Art. VIII, Section 5(2). Review, revise, reverse, modify, or affirm
on appeal or certiorari, as the law or the Rules of Court may
provide, final judgments and orders of lower courts in:
(b) All cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation thereto.
 CHAPTER III: ESCAPE FROM TAXATION
I. SHIFTING OF TAX BURDEN
1. Shifting of Tax
The process by which the tax burden is transferred from one
statutory taxpayer to another without violating the law. The
burden is transferred, not the payment.
Indirect taxes can be shifted, direct taxes cannot.
a. Manner of Shifting Taxes
(a) Forward – transfer from the factor of production through
the factor of distribution until it finally rests on the
consumer (producer to consumer)
Example: VAT, percentage tax
(b) Backward – the burden is transferred from the consumer
through the factors of distribution to the producer
(consumer to producer)
Example: A consumer will not buy a product until the
price is reduced to exclude taxes
(c) Onward – taxes are shifted two or more times, either
forward or backward
Example
SEC. 105, NIRC. Persons Liable. - Any person who, in the
course of trade or business, sells barters, exchanges, leases
goods or properties, renders services, and any person who
imports goods shall be subject to the value-added tax (VAT)
imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may
be shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services
at the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the
regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any
person regardless of whether or not the person engaged
therein is a non-stock, non profit private organization or
government entity.
The rule of regularity to the contrary notwithstanding, service
as defined in this Code rendered in the Philippines by
nonresident foreign persons shall be considered as being
rendered in the course of trade or business. [Emphasis
Supplied]
VAT is an indirect tax which is shifted forwards from the
vendor to the consumer.
2. Impact of Tax v. Tax Incidence
Impact of Tax – Imposition of tax on the statutory taxpayer.
Refers to the initial burden.
Incidence of Tax – Setting or coming to rest of a tax burden.
Refers to the ultimate burden. Incidence occurs at the point of
settlement, not imposition. This refers to the point where there
can be no more shifting of taxes
Impact, Incidence, and Shifting – Impact is the initial
phenomenon, shifting happens, resulting in incidence. Impact
is the imposition, shifting is the transfer, incidence is when the
tax finally comes to rest.
Illustration
In VAT, the impact falls upon the vendor, but the incidence falls
upon the consumer
II. EXEMPTION IN GENERAL
1. Definition
A grant of immunity, express or implied, to particular persons
or corporations or to a particular class, from a tax upon
property or an excise which persons and corporations
generally within the same taxing district are obliged to pay. It is
a freedom from a charge or burden to which others are subject.
2. Kinds
a. Express – The law itself provides for the exemption
b. Implied or by omission – The transaction is not
included in taxation. There is also an implied
exemption when a tax is levied on certain classes
without mentioning the other classes. Exemptions are
not presumed, but when public property is involved,
exemption is the rule, and taxation, the exception
c. Contractual - those agreed to by the taxing authority
in contracts such as in bonds and debentures. [Note:
Exemptions granted by a franchise are express
exemptions, since franchises are not contracts as
contemplated by the non-impairment clause]
3. Nature of Power to Grant Exemption / Rationale of
Granting Exemption
Maceda v. Macaraig (1993)
NAPOCOR enjoyed a general tax exemption from all taxes,
direct or indirect. In 1976 this exemption was stated in general
terms. The question brought before the Court was whether
NAPOCOR continued to enjoy tax exemption from indirect
taxes. The Court ruled in the negative, holding that a review of
the chronology of issuances reveal that it has always been the
intention to exempt NAPOCOR from the payment of both direct
and indirect taxes.
Nature of the Grant of Exemption
It is a personal privilege that cannot be assigned or transferred
without the consent of the legislature. It implies a waiver of the
government, of its right to collect what is due to it, hence it
must be strictly construed.
General Rule: Revocable by the government
Exception: If it is based on a contract which is protected from
impairment [Note: That under our Art. XII, Sec. 11 of the
Constitution, franchises are susceptible of amendment]
Rationale of Granting Exemption
Such exemption will benefit the body of the people and not
particular individuals or private interest and that the public
benefit is sufficient to offset the monetary loss entailed in the
grant of the exemption.
4. Constitutional Exemption
Art. VI, Sec. 28, 1987 Constitution
(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.
Art. XIV, Sec. 4, 1987 Constitution
(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 the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the
manner provided by law.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions subject to the limitations provided by law
including restrictions on dividends and provisions for
reinvestment.
(4) Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used actually,
directly, and exclusively for educational purposes shall be
exempt from tax.
See Discussion under CONSTITUTIONAL LIMITATIONS
5. Legislative Exemption
CIR v. Botelho Shipping
Botelho Shipping entered into a “Contract of Conditional
Purchase and Sale of Reparation Goods” with the Reparation
Commission of the Philippines for the purchase of M/V Maria
Rosello. General Shipping Co. entered into a similar contract
with the Commission for the purchase of M/V General Lim.
These contracts are governed by RA 1789. When the 2
companies were about to register the vessels, the Bureau of
Customs placed the 2 vessels in its custody and asked for the
payment of compensating tax. During the pendency of the
cases, RA 1789 was amended by RA 3079 which provides that
buyers of reparation goods are exempt from paying the
compensating tax. The CTA ruled in favor of the 2 companies
prompting the Customs Commissioner and the Collector to
appeal to the Supreme Court.
The Court affirmed CTA decision and ruled that the tax
exemption in RA 3079 is clear and explicit, and that the end-
buyers do not enjoy the exemption unless they follow the
proviso in Sec. 20 which required the end-buyers apply for the
renovation of their respective utilization contracts,. Sec. 20
sought to destroy the discrimination between the buyers of
reparation goods before and after June 17, 1961.
The Court emphasized that there must have been a reason to
impel the Congress to grant the exemption. For no tax
exemption — like any other legal exemption or exception — is
given without any reason therefor. In much the same way as
other statutory commands, its avowed purpose is some public
benefit or interest, which the law-making body considers
sufficient to offset the monetary loss entitled in the grant of the
exemption.
CIR v. GTL Retirement Plan
The GTL Retirement plan was granted a tax exemption through
R.A. 4917. It claimed refunds for taxes withheld from them
from the proceeds of certain investments. The Commissioner
denied the application for the refund. Both the CTA and the CA
agreed in reversing the CIR’s decision, holding that as an
Employee’s Trust, the plan was exempt under R.A. 4917. The
CIR came before the Court arguing that P.D. 1959, a subsequent
law which amended certain provisions of the tax code actually
removed the exemption.
The Court disagreed and held that a subsequent statute,
general in character as to its terms and application, is not to be
construed as repealing a special or specific enactment, unless
the legislative purpose to do so is manifested. This is so even if
the provisions of the latter are sufficiently comprehensive to
include what was set forth in the special act.
CIR v. Guerrero
Paul Gunn, the deceased, operated an air transportation
business. His estate claimed that he was entitled to tax refund
of 50% of taxes he paid for aviation oil, during his lifetime,
based on Section 142 of the NIRC. The estate also invoked the
Ordinance, which embodied the agreement between the
Philippines and the U.S., recognizing the rights of the U.S.
citizens to exploit, develop and utilize natural resources of the
Philippines, and operate public utilities, in the same manner as
to citizens/corporations controlled by citizens of the
Philippines.
The Court ruled that there was no tax exemption granted by
law. What it requires is the recognition of rights only. The law
is clear that tax refund may not be availed of by aliens in the
absence of showing that their country grants similar exemption
to Filipino citizens. Thus, the case was remanded to the court a
quo to give opportunity to estate to provide evidence to show
its claim for refund. In so ruling the Court held that exemption,
being obnoxious to taxation, is not favored and never
presumed; if granted, it must be categorically and
unmistakably expressed in terms that admit of no doubt, yet
such exempting provision must be interpreted in strictissimi
juris against the taxpayer and liberally in favor of the taxing
authority.
Philippine Acetylene v. CIR
The Petitioner was engaged in the sale of oxygen and acetylene.
It sought relief from the assessment of deficiency sales taxes,
which were imposed pursuant to sales made to the National
Power Corporation and The Voice of America, both of which
were exempt from taxation.
The Court ruled that a sales tax is actually imposed on
manufacturers and producers of goods and articles. It did not
matter that the burden could be passed on to another entity. As
such, it was held that petitioner was liable for the deficiency
taxes and that the burden of the tax (being part of the sale
price) may be levied on tax-exempt entities. It also struck down
a BIR circular which went beyond tax exemptions found in an
agreement between the Philippines and the US. The Court
reiterated that a tax exemption must be strictly construed. It
will not be held to be conferred unless the terms under which it
is granted clearly and distinctly show that such was the
intention of the parties. Therefore, the BIR regulation was void
in so far as it gave the exemption expansive construction.
Sea-land Service v. CA
Sealand Service paid income taxes in accordance with the NIRC
and the provisions of the RP-US Tax treaty. It later sought a
refund of the taxes paid on the ground that it was exempt
under the RP-US Bases Agreement.
The Court disagreed. It reiterated the principle that Laws
granting exemption from tax are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The law
does not look with favor on tax exemptions and that he who
would seek to be thus privileged must justify it by words too
plain to be mistaken and too categorical to be misinterpreted.
The business of Sea-land, the hauling of goods and personal
effects of US servicemen, cannot be construed to fall under the
exemption for "construction, maintenance, operation and
defense of the bases."
6. Exemption Created by Treaty
Example:
Art. 12 (Interest), RP-US Tax Treaty
4. Notwithstanding paragraphs 1, 2, and 3, interest derived by -
a) One of the Contracting States, or an instrumentality thereof
(including the Central Bank of the Philippines, the Federal
Reserve Banks of the United States, the Export-Import Bank of
the United States, the Overseas Private Investment Corporation
of the United States, and such other institutions of either
Contracting State as the competent authorities of both
Contracting States may determine by mutual agreement), or
b) A resident of one of the Contracting States with respect to
debt obligations guaranteed or insured by that Contracting
State or an instrumentality thereof. shall be exempt from tax by
the other Contracting State (Emphasis Supplied)
7. Exemption Of Government Agencies
Sec. 27. Rates of Income Tax on Domestic Corporations,
NIRC
(C) Government-owned or Controlled-Corporations, Agencies or
Instrumentalities - The provisions of existing special or general
laws to the contrary notwithstanding, all corporations,
agencies, or instrumentalities owned or controlled by the
Government, except the Government Service Insurance System
(GSIS), the Social Security System (SSS), the Philippine Health
Insurance Corporation (PHIC) and the local waer districts shall
pay such rate of tax upon their taxable income as are imposed
by this Section upon corporations or associations engaged in
similar business, industry, or activity.
Sec. 30, Exemptions from Tax on Corporations, NIRC
(I) Government educational institution
Sec. 32, Gross Income, NIRC
(B) Exclusions from Gross Income
(7) Miscellaneous Items
(b) Income Derived by the Government or its Political
Subdivisions. - Income derived from any public utility or from
the exercise of any essential governmental function accruing to
the Government of the Philippines or to any political
subdivision thereof.
Philippine Ports Authority v. City of Iloilo
The Petitioner was assessed real property tax (for its arrastre
and stevedoring services and leasing of real estate) and
business tax (for its warehouse) by the respondent. Claiming
tax exemption, the former argued the following: that it is a
government-owned corporation; a government
instrumentality; and (for the first time before the Supreme
Court) that its ports are part of public dominion and its
warehouse should be treated as its extension.
The Supreme Court ruled in favor of the respondent as it held
that petitioner could not change theory on appeal; that the
exemption of public property from taxation does not extend to
improvements built thereon; and that any income or profit
generated by an entity, even of a corporation organized
without any intention of realizing profit in the conduct of its
activities, is subject to taxation.
Phil. Fisheries Development Authority v. CA
The City of Iloilo assessed the entire Iloilo Fishing Port
Complex for real property taxes. The Authority failed to pay the
taxes due and claimed for tax exemption instead. However, the
claim was denied.
The Court held that the Authority is an instrumentality of the
government and not a GOCC, hence, it is generally exempt from
paying real property taxes. However, the tax exemption does
not cover those portions leased to private entities. Thus, the
Authority is liable to pay taxes to that extent. Furthermore,
considering that the entire IFPC is property of public dominion,
it may not be levied upon to satisfy the tax delinquency. The
City has to resort to other means to collect the amount.
III. TAX AMNESTY
1. Definition
A tax amnesty partakes of an absolute forgiveness or waiver by
the Government of its right to collect what otherwise would be
due it, particularly to give tax evaders, who wish to relent and
are willing to reform a chance to do so and become a part of the
new society with a clean slate.
It is an immunity from all criminal and civil obligations arising
from non-payment of taxes. It is a general pardon given to all
taxpayers. It applies to past periods, and is therefore
retroactive in application.
A tax amnesty, much like a tax exemption, is never favored nor
presumed in law. If granted, the terms of the amnesty, like that
of a tax exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing authority.
People v. Castañeda
The accused where charged with violations of the NIRC. The
informations were quashed on the strength on an amnesty
granted to one of them (Valencia) under PD 370. The
government questioned the validity of the quashal.
The Court ruled that the quashal was invalid. Valencia was not
entitled to the amnesty since he did not voluntarily declare his
untaxed obligations, and his payment of special tax was
ineffective since he was already under investigation. A tax
amnesty, much like a tax exemption, is never favored nor
presumed in law and if granted by statute, the terms of the
amnesty like that of a tax exemption must be construed strictly
against the taxpayer and liberally in favor of the taxing
authority. Moreover, it is a personal defense; for that defense
relates to the circumstances of a particular accused and not to
the character of the acts charged in the criminal information.
CIR v. Marubeni (Ibid)
The CIR assessed Marubeni for undeclared income from 2
contracts completed in the Philippines in 1984. E.O. No. 41 was
passed declaring a one-time amnesty covering unpaid income
taxes for the years 1981 to 1985 was issued. In accordance
with the EO, respondent filed its tax amnesty return. When the
amnesty was expanded, Marubeni filed a supplemental
petition. The CTA found that the amnesty applied and
withdrew the deficiency taxes due from Marubeni.
The CIR argued in part that Marubeni could not avail of the
amnesty because under the EO “[t]hose with income tax cases
already filed in Court as of the effectivity” of the EO cannot
avail of the amnesty. The Court found however that The EO
took effect August 1986. The case questioning tax assessments
were filed by respondent with the CTA on September 26, 1986.
2. Sample Amnesty Program: RA 9480
“An act enhancing revenue administration and collection by
granting an amnesty on all unpaid internal revenue taxes
imposed by the national government for taxable year 2005 and
prior years”
Philippine Banking Corporation v. CIR
The CIR sent PhilBank notice of DST deficiencies for the Super
Savings Deposit Account product it offered. PhilBank
previously believed it was not liable to pay DST on the
accounts.
While the case was pending, RA 9480 was passed. Metrobank,
which absorbed PhilBank applied for an amnesty. BIR claims
that the amnesty does not cover Philbank because there was
already a pending case.
The Court ruled that the case was not yet final and executory
when Metrobank availed of the amnesty program so it cannot
be excluded.
IV. TAX AVOIDANCE V. TAX EVASION
1. Definitions
Tax Avoidance
The exploitation by the taxpayer of legally permissible
alternative tax rates or methods of assessing taxable property
or income in order to avoid or reduce tax liability. It is politely
called “tax minimization” and is not punishable by law.
Example: Estate planning, tax shifting
Tax Evasion
The use by the taxpayer of illegal or fraudulent means to defeat
or lessen the payment of a tax. It is also known as “tax
dodging.” It is punishable by law.
Example: Deliberate failure to report income, or deliberate
reduction of actual income received.
Elements:
(1) The end to be achieved (i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of
tax when it is shown that a tax is due);
(2) An accompanying state of mind which is described as being
“evil,” in “bad faith,” “willful,” or “deliberate and not
accidental,”; and
(3) A course of action or failure of action which is unlawful.
CIR v. Estate of Toda
A sale of a building was allegedly consummated between
Cibeles Insurance Corporation and Altonaga, and later Altonaga
and Royal Match Inc. Because of this sale, CIC only paid 5%
individual gains tax instead of 35% corporate income tax.
The CTA and CA ruled in favor of CIC, holding that CIR did not
adduce proof that CIC committed fraud, and that the same was
merely tax avoidance, but the Supreme Court held that the sale
that took place was meant to defraud the government, the real
buyer being RMI and not Altonaga.
CIR v. Ariete
Mercado filed an information against Ariete alleging that the
latter didn’t pay income tax for the years 1993-96. The
Revenue Officer investigated Ariete’s tax history and found that
she had no records and that she admitted not having filed her
ITR. Ariete filed her 1993-96 ITR under the VAP (a program for
those who inadvertently failed to file ITRs), but the Revenue
Officer recommended that she be assessed delinquency income
taxes so she was assessed a deficiency of P191,463.04. Ariete
filed a protest).
The Court ruled that since the VAP’s provisions say that the
information must be recorded in the BIR’s Official Registry
Book before Ariete may be excluded from the VAP’s coverage,
and that the CIR failed to do so, then Ariete is not excluded
from the VAP.
 CHAPTER IV – SOURCES AND CONSTRUCTION OF TAX LAWS
I. SOURCES OF TAX LAW Luzon Stevedoring was taxed as a “contractor” by the CIR for
its business of loading and unloading cargo from vessels. It
1. Statutes appeared that all the work done by it is conducted under the
a. Constitution direct supervision of the officers of the vessel and no discretion
b. Existing Tax Laws was left to Luzon or its men.
i. National – NIRC of 1997
ii. Local – Book II, 1991 LGC The SC held that Luzon Stevedoring is not a contractor in the
sense that that word is used in Section 1462, Act No. 2711, and
iii. Special Laws
therefore the tax paid by the it under protest was illegally
1. Tariff and Customs Code
collected and should be repaid. “Contractor” is with reference
2. BCDA Law to persons who, in the pursuit of independent business,
3. PEZA Law undertakes to do a specific job or work for other persons, using
4. Omnibus Investment Law his own means and methods without submitting himself to
5. Tourism Act of 2009 control as to the petty details.
6. Personal Equity Retirement
Account Act of 2009 (PERA) Philippine Health Care Providers v. CIR (2009)
7. Magna Carta for Senior Citizen
8. Magna Carta for Persons with PHCP was assessed deficiency DST for 1996-1997 in the
Disability amount of P224M pursuant to Sec. 185 of the 1997 Tax Code
2. BIR Issuances – BIR Revenue Administrative Order (RAO) which levied stamp tax on insurance policies. In this MR, PHCP
No. 2-2001 reiterated their argument that their health care agreements
a. BIR Revenue Regulations were not contracts of insurance. Further, it already availed of
i. Authority to promulgate the benefits of the Tax Amnesty Act of 2007.
ii. Specific provisions to be contained in
Using the principal object and purpose test, the Court reversed
RR
its earlier Decision and found that health maintenance
iii. What is the force and effect of RR?
organizations (HMOs) like PHCP are not engaged in insurance,
b. BIR Rulings the assumption of risk being merely incidental to its business.
i. Rulings of first impression Thus, it cannot be subject to DST under Sec. 185.
ii. Rulings with established precedent
iii. Power of CIR to interpret tax laws Note: The Court distinguished this from the Blue Cross and
iv. Non-retroactivity of rulings Philamcare cases where it pronounced that a health care
v. Exceptions agreement is in the nature of non-life insurance, which is
c. Revenue Memorandum Circulars (RMC) primarily a contract of indemnity. Those cases did not involve
d. Revenue Memorandum Orders (RMO) the interpretation of a tax provision. Instead, they dealt with
3. Opinions of Secretary of Justice the liability of a health service provider to a member under the
4. Legislative Materials terms of their health care agreement. Such contracts, as
5. Court Decisions contracts of adhesion, are liberally interpreted in favor of the
member and strictly against the HMO.
II. CONSTRUCTION OF TAX LAWS, EXEMPTIONS, AND
REFUNDS 2. Construction of Tax Exemptions

General Rule: In the construction of tax statutes, exemptions

1. General Rules of Construction of Tax Laws
are not favored and are construed strictissimi juris against the
taxpayer. [Republic Flour Mills v. Comm. & CTA]
Tax laws are construed strictly against the government and
liberally in favor of the taxpayer.
He who claims an exemption from his share of the common
burden of taxation must justify his claim by showing that the
Revenue laws imposing taxes on business must be strictly
Legislature intended to exempt him by words too plain to be
construed in favor of the citizen. In construing a word or
beyond doubt or mistake. [City of Iloilo v. SMART]
expression in the statute susceptible of two or more meanings,
the court will adopt that interpretation most in accord with the
Assurances or promises made by government officials that
manifest purpose of the statute as gathered from the context.
certain income would be tax-exempt, made without statutory
Where a particular word is obscure or of doubtful meaning,
sanction, cannot bind the government. [Rodriguez, Inc. v.
taken by itself, its obscurity or doubt may be removed by
Collector]
reference to associate words. [Luzon Stevedoring v. Trinidad]
Exceptions:
Tax statutes are strictly construed against the taxing authority.
(a) When the law itself expressly provides for a liberal
This is because taxation is a destructive power which interferes
construction, that is, in case of doubt, it shall be resolved
with the personal and property rights of the people and takes
in favor of exemption; and
from them a portion of their property for the support of the
(b) When the exemption is in favor of the government itself or
government. Hence, tax laws may not be extended by
its agencies, or of religious, charitable, and educational
implication beyond the clear import of their language, nor their
institutions because the general rule is that they are
operation enlarged so as to embrace matters not specifically
exempt from tax.
provided. [Philippine Health Care Providers v. CIR]
(c) When the exemption is granted under special
circumstances to special classes of persons.
Luzon Stevedoring v. Trinidad (1922)
(d) If there is an express mention or if the taxpayer falls
within the purview of the exemption by clear legislative
intent, the rule on strict construction does not apply.
City of Iloilo v. SMART (2009)
In 2002, SMART was assessed P764k in deficiency local
franchise and business taxes for 1997-2001. SMART claimed it
had an exemption under its legislative franchise, which
required only a franchise tax of 3% of all gross receipts “in lieu
of all taxes,” including the local franchise and business taxes. It
also cited the “equality clause” of the Public Telecoms Act
which provided that “any xxx exemption” granted to other
holders of telecommunications franchise would also extend to
SMART.
The Court ruled that there is uncertainty in the “in lieu of all
taxes” clause on whether it exempted SMART from both local
and national franchise tax. Thus, it must be construed strictly
against SMART which claims the exemption. It must then apply
only to taxes under the NIRC and not local taxes.Further, the
exemption under the Public Telecoms Act refers to exemption
from certain regulatory/reporting requirements imposed by
govt agencies such as the NTC. The term “exemption” is clearly
too general to also include tax exemption.
Rodriguez, Inc. v. Collector (1969)
The Government expropriated some properties petitioner
owned within the area delimited for the new capital city. Just
compensation was given in the form of cash and government
bonds. The CIR assessed petitioner for deficiency tax after the
latter failed to include in its income the payment it had
received in the form of government bonds. Petitioners refused
to pay alleging that the Government made manifestations that
said bonds would be tax-free.
The Court held that although the bonds were exempted from
documentary stamps, there was no statutory basis for the
income tax exemption invoked by petitioner. Hence, the
deficiency tax assessment was proper.
Wonder Mechanical Engineering v. CTA (1975)
Petitioner was granted tax exemption under RA 35 with
respect to the “manufacture of machines” for making cigarette
paper, pails, lead washers, nails, rivets, candies, etc. The CIR
investigated petitioner and found that it had various unpaid tax
liabilities on the sale of other manufactured items that did not
come within the purview of the tax exemption.
The Court held that RA 35 grants to persons who or which shall
engage in a new and necessary industry, exemption from the
payment of all internal revenue taxes. The exemption was only
for the manufacture and sale of machines, not for the
manufacture and sale of articles produced by those machines.
Finally, a valid exemption!
Republic Flour Mills v. CIR (1970)
Petitioner was granted tax exemption as a new and necessary
industry. In 1958, the company imported wheat grains but a
portion of it was not utilized. The surplus was used in 1959.
RFM paid manufacturer’s sales tax on its produce that year, in
the computation of which the 1958 importation was treated as
a deductible item. CIR assessed deficiency taxes on the ground
that by 1959 the raw materials used by RFM were already
subject to payment of 10% tax.
Sec. 186-A of the Tax Code provides that “whenever a tax free
product is utilized in the manufacture or production of any
article, in the determination of the value of such finished
article, the value of such tax free product shall be deducted.”
The Court ruled that “tax free product” can be given no other
meaning. There is no reason why the value of the raw material
should be subjected to tax just because they were milled in
1959 and not in the year of importation.
3. Construction of Tax Refunds
As a refund undoubtedly partakes of a nature of an exemption,
it cannot be allowed unless granted in the most explicit and
categorical language. No refund, which likewise represents a
diminution of public funds in the treasury, should be allowed
unless the law clearly so provides. [Resins Inc v. Auditor
General]
Resins Inc v. Auditor Gen. (1968)
Petitioner seeks a refund from the Central Bank on the claim
that it was exempt from the margin fee under RA 2609 for the
importation of urea and formaldehyde, as separate units, used
for the production of synthetic glue, of which it was a
manufacturer.
The specific language of RA 2609 is “urea formaldehyde,” a
finished product. Since petitioner admitted that he imported
them separately, the exemption does not apply.
KEPCO Philippines Corp. v. CIR (2009)
KEPCO filed a claim for tax refund for unutilized input VAT
payments on domestic purchases of goods and services,
alleging that the purchases were for the rehabilitation of the
Malaya Power Plant Complex and should be considered as
capital expense to fall within the purview of capital goods.
The Court held that petitioner is not entitled to the refund as
those purchases were recorded under inventory accounts, not
depreciable assets or categorized as capital goods. Thus,
petitioner cannot claim the refund of input taxes paid on
capital goods.
 PART II
INCOME TAX

CHAPTER I – GENERAL PRINCIPLES

I. OVERVIEW OF INCOME TAXATION b. Schedular Tax System

1. What is Income Tax?
Income Tax is defined as a tax on all yearly profits arising from
property, professions, trades, or offices, or as a tax on the
person’s income, emoluments, profits and the like. [Fisher v.
Trinidad]
Different types of incomes are subject to different sets of
graduated or flat income tax rates. The applicable tax rate(s)
will depend on the classification of the taxable income and the
basis could be gross income or net income. Separate income tax
returns (or other types of return applicable) are filed by the
recipient of income for the particular types of income received.

It may be succinctly defined as a tax on income, whether gross
or net, realized in one taxable year.
Income tax is generally classified as an excise tax. It is not
levied upon persons, property, funds or profits but upon the
right of a person to receive income or profits.
Fisher v. Trinidad (1922)
Plaintiff received stock dividends from his ownership of shares
in a company. Defendant tried to impose income taxes on such
dividends.
SC held that income tax cannot be imposed on stock dividends
because they are not income subject to income tax on the part
of the stockholder when he merely holds more shares
representing the same equity interest in the corporation that
declared stock dividends.
c. Semi-Schedular or Semi-Global Tax System
All compensation income, business or professional income,
capital gain and passive income not subject to final tax, and
other income are added together to arrive at the gross income,
and after deducting the sum of allowable deductions, the
taxable income is subjected to one set of graduated tax rates or
normal corporate income tax. With respect to such income the
computation is global.
For those other income not mentioned above, they remain
subject to different sets of tax rates and covered by different
returns.
NOTE: Philippine income taxation is a combination of both
systems but is more schedular for individual while more global
for corporation. Under EO 37 (1986) and RA 8424 (1998), we
follow a semi-schedular and semi-global tax system.

2. Philippine Income Tax Law GLOBAL SYSTEM SCHEDULAR SYSTEM

A system which imposes a A system which imposes
In the Philippines, income tax is imposed on the net income of personal tax upon the total various types of tax on
citizens, resident aliens, domestic corporations, and income of the taxpayer income producing activities
nonresident aliens and foreign corporations engaged in trade Emphasizes the burden Emphasizes on revenue and
or business within the Philippines (Sec. 24 (A), Sec. 25 (A), Sec. allocation aspects administrative aspects
27 (A), Sec. 28 (A), NIRC). It is also imposed on the gross Most equitable in Because of its multiple rates,
income of nonresident aliens and foreign corporations-not distributing tax burden, as the tax burden of a person
doing business in the Philippines (Sec. 25 (B), (C), (D), Sec. 28 burden of an individual is does not respond to his
(B), NIRC). It is further imposed as a final tax on certain passive closely related to his income but rather fall
income (interests, royalties, prizes, and other winnings), cash resources and his ability to fortuitously on the type of
and property dividends, capital gains from the sale of domestic pay his income
shares of stock and real property classified as capital assets It serves as a means for This function is alien to
located in the Philippines (Sec. 24 (B), Sec. 25 (A) (2), (3), Sec. redistributing income and schedular system where in
27 (D), Sec. 28 (A), NIRC). wealth times of plenty or in times of
need, people pay the same
Income Tax Law aims to mitigate the evils arising from the fixed tax on their income
inequalities of wealth by a progressive scheme of taxation It serves as a supplementary Schedular system cannot
which places the burden of on those best able to pay. [Madrigal devise to accomplish non- perform these functions
v. Rafferty & Concepcion, G.R. No. L-12287 August 7, 1918] fiscal goals of the
government
3. Income Tax Systems Administration is not quite Administration is simple
as easy as schedular because being confined to each
a. Global (Unitary) Tax System one has to consider all transaction or activity
income from whatever
Under a global tax system, it did not matter whether the sources
income received by the taxpayer is classified as compensation
income, business or professional income, passive investment d. Progressive System
income, capital gain, or other income. All items of gross income,
deductions, and personal and additional exemptions, if any, are The progressive system of taxation would place stress on direct
reported in one income tax return, and one set of tax rates are rather than indirect taxes, on non-essentiality rather than
applied on the tax base. essentiality to the taxpayer of the object of taxation, or on the
taxpayer’s ability to pay. Example is that individual income tax
 system that imposes rates progressing upwards as the tax base
(taxpayer’s taxable income) increases. A progressive tax, II. GENERAL PRINCIPLES OF INCOME TAXATION
however, must not be confused with a progressive system of
taxation. SEC. 23. General Principles of Income Taxation in the
Philippines. - Except when otherwise provided in this Code:
e. Regressive System (A) A citizen of the Philippines residing therein is taxable on all
income derived from sources within and without the
In a society where the majority of the people have low incomes, Philippines;
regressive taxation system exists when there are more indirect (B) A nonresident citizen is taxable only on income derived
taxes imposed than direct taxes. Since the low-income sector of from sources within the Philippines;
the population as a whole buy more consumption goods on (C) An individual citizen of the Philippines who is working and
which the indirect taxes are collected, the burden of indirect deriving income from abroad as an overseas contract worker is
taxes rests more on them than on the more affluent groups. taxable only on income derived from sources within the
There should be no objection if indirect taxes are raised on Philippines: Provided, That a seaman who is a citizen of the
luxury items consumed mainly by the higher income groups Philippines and who receives compensation for services
and reduced on basic commodities consumed by the lower rendered abroad as a member of the complement of a vessel
income segments of society. engaged exclusively in international trade shall be treated as
an overseas contract worker;
4. Features of Philippine Income Taxation (D) An alien individual, whether a resident or not of the
a. Direct – The tax burden is borne by the income tax Philippines, is taxable only on income derived from sources
recipient upon whom the tax is imposed. within the Philippines;
b. Progressive – The tax rate increases as the tax base (E) A domestic corporation is taxable on all income derived
increases. It is founded on the ability to pay principle from sources within and without the Philippines; and
and is consistent with Sec. 28, Art. VI, 1987 Consti. (F) A foreign corporation, whether engaged or not in trade or
c. Comprehensive - The Philippines has adopted the business in the Philippines, is taxable only on income derived
most comprehensive system of imposing income tax from sources within the Philippines.
by adopting the citizenship principle, the residence
principle, and the source principle [infra]. Any of the SUMMMARY:
three principles is enough to justify the imposition of TAXABLE ON INCOME
income tax on the income of a resident citizen and a TAX
TAXPAYER Within the Without
domestic corporation that are taxed on a worldwide BASE
PH the PH
income.
d. Semi-Schedular or Semi-Global - The Philippines Resident Filipino Taxable
follows the semi-schedular or semi-global system of Citizen Income
income taxation, although certain passive investment Nonresident Taxable
X
incomes and capital gains from sale of capital assets Filipino Citizen Income
(namely: (a) shares of stock of domestic corporations, Overseas Filipino
Taxable
and (b) real property) are subject to final taxes at contract worker X
Income
preferential tax rates. or seaman
e. American origin - The first Philippine Income Tax Taxable
Resident Alien X
Law enacted by the Philippine Legislature was Act No. Income
2833, which took effect on January 1, 1920. Act No. Non-resident
2833 substantially reproduced the U.S. Revenue Law Alien engaged in
Taxable
of 1916 as amended by U.S. Revenue Law of 1917. trade or business X
Income
Being a law of American origin, the authoritative (more than 180
decisions of the official charged with enforcing it in days)
the U.S. have peculiar persuasive force in the Non-resident
Philippines. [CIR v. Baier-Nickel] Alien not engaged
Gross
in trade or X
Income
5. Criteria in Imposing Income Tax business (180
a. Citizenship principle – A citizen of the Philippines is days or less)
subject to income tax: GPP itself not taxable,
(a) on his worldwide income if he resides in the Philippines; or General however, individual
Taxable
(b) only on his income from sources within the Philippines, if he Professional partners will be taxed
Income
qualifies as non-resident citizen. Partnership depending on
b. Residence principle – A resident alien is liable to pay classification
income tax on his income from sources within the Same basis as an
Philippines but exempt from tax on his income from Taxable individual (depending on
Estate and Trust
sources outside the Philippines. Income classification of decedent,
c. Source principle – An alien is subject to Philippine income if estate, trustor, if trust)
tax because he derives income from sources within the Domestic Taxable
Philippines. Thus, a non-resident alien or non-resident Corporation Income
foreign corporation is liable to pay Philippine income tax Resident Foreign Taxable
X
on income from sources within the Philippines, such as Corporation Income
dividend interest, rent, or royalty, despite the fact that he Non-resident
has not set foot in the Philippines. Gross
Foreign X
Income
corporation
 CHAPTER II – CLASSIFICATION OF INCOME TAXPAYERS
I. SCOPE OF INCOME TAXATION
1. Definition of a Taxpayer
SEC. 22. Definitions. - When used in this Title:
(N) The term 'taxpayer' means any person subject to tax
imposed by this Title [Title II].
2. Definition of a Person
SEC. 22. Definitions. - When used in this Title:
(A) The term 'person' means an individual, a trust, estate or
corporation.
For income tax purposes, taxpayers are classified generally as
follows:
(1) Individuals;
(2) Corporations;
(3) Partnerships; and
(4) Estates and Trusts.
3. Who is a “Person liable to tax”
A "person liable for tax" has been held to be a "person subject
to tax" and properly considered a "taxpayer." The terms "liable
for tax" and "subject to tax" both connote legal obligation or
duty to pay a tax. By any reasonable standard, such a person
should be regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of taxes he
believes were illegally collected from him. [CIR v. P&G]
CIR v. P&G (1991)
CIR disallowed P&G-Phil’s request for tax credit for the
dividends declared for taxable years 1974 and 1975 because it
is not the proper party to claim such tax credit but P&G USA, its
parent company.
The Court overturned the decision, ruling that P&G-Phil is the
proper party as it is considered a “taxpayer” under Sec. 309 (3)
of the NIRC.
Silkair v. CIR (2010) – also an Evidence case
Silkair filed for the refund of excise taxes for their purchase of
jet fuel from Petron. Petitioner asserts that the tax exemption,
granted to it as a buyer of a certain product, is a personal
privilege which may not be claimed or availed of by the seller.
Petitioner submits that since it is the entity which actually paid
the excise taxes, then it should be allowed to claim for refund
or tax credit.
The Court held that the proper party to question, or seek a
refund of, an indirect tax is the statutory taxpayer, the person
on whom the tax is imposed by law and who paid the same
even if he shifts the burden thereof to another. Thus, Petron
Corporation, not Silkair, is the statutory taxpayer which is
entitled to claim a refund based on Section 135 of the NIRC of
1997.
Even if Petron Corporation passed on to Silkair the burden of
the tax, the additional amount billed to Silkair for jet fuel is not
a tax but part of the price which Silkair had to pay as a
purchaser.
II. INDIVIDUAL TAXPAYERS
1. Citizens
Art. IV, Sec. 1, 1987 Constitution. The following are citizens
of the Philippines:
(1) Those who are citizens of the Philippines at the time of the
adoption of this Constitution;
(2) Those whose fathers or mothers are citizens of the
Philippines;
(3) Those born before January 17, 1973, of Filipino mothers,
who elect Philippine citizenship upon reaching the age of
majority; and
(4) Those who are naturalized in accordance with law.
Art. IV, Sec. 2, 1987 Constitution. Natural-born citizens are
those who are citizens of the Philippines from birth without
having to perform any act to acquire or perfect their Philippine
citizenship. Those who elect Philippine citizenship in
accordance with paragraph (3), Section 1 hereof shall be
deemed natural-born citizens.
a. Resident citizens
b. Non-resident citizens
Sec. 22(E), NIRC. The term "nonresident citizen" means:
(1) A citizen of the Philippines who establishes to the
satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines
during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income
from abroad and whose employment thereat requires him to
be physically present abroad most of the time during the
taxable year.
(4) A citizen who has been previously considered as
nonresident citizen and who arrives in the Philippines at any
time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines with
respect to his income derived from sources abroad until the
date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to
show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the
Philippines as the case may be for purpose of this Section.
A non-resident citizen is a citizen of the Philippines who:
a. Establishes the fact of his physical presence abroad
with a definite intention to reside therein,
b. Leaves the Philippines during the taxable years to
reside abroad, as immigrant, or for employment on a
permanent basis,
c. Works and derives income from abroad and whose
employment requires him to be physically abroad
most of the time (i.e. not less than 183 days) during
the taxable year, or
d. Previously considered as nonresident citizen and
arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines.
2. Aliens
a. Resident Alien

Sec. 22(F), NIRC. The term "resident alien" means an
individual whose residence is within the Philippines and who is
not a citizen thereof.
Sec. 5, Revenue Regulations No. 2 (last paragraph)
An alien actually present in the Philippines who is not a mere
transient or sojourner is a resident of the Philippines for
purposes of the income tax. Whether he is a transient or not is
determined by his intentions with regard to the length and
nature of his stay. A mere floating intention indefinite as to
time, to return to another country is not sufficient to constitute
him a transient. If he lives in the Philippines and has no definite
intention as to his stay, he is a resident. One who comes to the
Philippines for a definite purpose which in its nature may be
promptly accomplished is a transient. But if his purpose is of
such a nature that an extended stay may be necessary for its
accomplishment, and to that end the alien makes his home
temporarily in the Philippines, he becomes a resident, though it
may be his intention at all times to return to his domicile
abroad when the purpose for which he came has been
consummated or abandoned. [Emphasis supplied]
For purposes of knowing whether or not a person is a transient
in the Philippines is to be determined by his intentions with
regard to the length and nature of his stay.
b. Non-resident alien
Sec. 22(G), NIRC. The term "nonresident alien" means an
individual whose residence is not within the Philippines and
who is not a citizen thereof.
Non-resident aliens are:
a. Those engaged in trade or business in the Philippines
who come and stay in the Philippines for an aggregate
period of more than 180 days during any calendar
year,
b. Those not engaged in trade or business in the
Philippines, which include non-resident aliens whose
stay in the Philippines is 180 days or less,
c. Aliens employed by regional or area headquarters
and regional operating headquarters of multinational
companies in the Philippines,
d. Aliens employed by offshore banking units, or
e. Aliens employed by petroleum contractors and
subcontractors.
i. Engaged in trade or business
Those who have stayed within the Philippines for more than
180 days during the taxable year shall be deemed nonresident
aliens doing business in the Philippines. A nonresident alien
who is engaged in trade or business and has business income
in the Philippines also belongs in this group.
Sec. 25(A), NIRC. A nonresident alien individual engaged in
trade or business in the Philippines shall be subject to an income
tax in the same manner as an individual citizen and a resident
alien individual, on taxable income received from all sources
within the Philippines.
A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more
than one hundred eighty (180) days during any calendar year
shall be deemed a 'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code notwithstanding.
(2) Cash and/or Property Dividends from a Domestic
Corporation or Joint Stock Company, or Insurance or Mutual
Fund Company or Regional Operating Headquarters or
Multinational Company, or Share in the Distributable Net
Income of a Partnership (Except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a
Corporation or Association., Interests, Royalties, Prizes, and
Other Winnings. - Cash and/or property dividends from a
domestic corporation, or from a joint stock company, or from
an insurance or mutual fund company or from a regional
operating headquarters of multinational company, or the share
of a nonresident alien individual in the distributable net
income after tax of a partnership (except a general professional
partnership) of which he is a partner, or the share of a
nonresident alien individual in the net income after tax of an
association, a joint account, or a joint venture taxable as a
corporation of which he is a member or a co-venturer;
interests; royalties (in any form); and prizes (except prizes
amounting to Ten thousand pesos (P10,000) or less which shall
be subject to tax under Subsection (B)(1) of Section 24) and
other winnings (except Philippine Charity Sweepstakes and
Lotto winnings); shall be subject to an income tax of twenty
percent (20%) on the total amount thereof: Provided,
however, that royalties on books as well as other literary
works, and royalties on musical compositions shall be subject
to a final tax of ten percent (10%) on the total amount
thereof: Provided, further, That cinematographic films and
similar works shall be subject to the tax provided under
Section 28 of this Code: Provided, furthermore, That interest
income from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments
evidenced by certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax
imposed under this Subsection:Provided, finally, that should the
holder of the certificate pre-terminate the deposit or
investment before the fifth (5th) year, a final tax shall be
imposed on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of the long-
term deposit or investment certificate based on the remaining
maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or
exchange of shares of stock in domestic corporations not
traded through the local stock exchange, and real properties
shall be subject to the tax prescribed under Subsections (C) and
(D) of Section 24.
ii. Not engaged in trade or business
These aliens are nonresident foreign individuals who have
stayed within the Philippines for 180 days or less and have no
business income derived within the Philippines.
Sec. 25(B), NIRC. There shall be levied, collected and paid for
each taxable year upon the entire income received from all
sources within the Philippines by every nonresident alien
individual not engaged in trade or business within the
Philippines as interest, cash and/or property dividends, rents,
salaries, wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or determinable
annual or periodic or casual gains, profits, and income, and
capital gains, a tax equal to twenty-five percent (25%) of such
income.
Capital gains realized by a nonresident alien individual not
engaged in trade or business in the Philippines from the sale of
shares of stock in any domestic corporation and real property
shall be subject to the income tax prescribed under Subsections
(C) and (D) of Section 24.
Notes regarding residency
1. The intention with regard to the length and nature of
stay of an alien determines whether or not he is a
resident.
2. If one comes to the Philippines with a definite
purpose that can be properly accomplished, he may
be considered as nonresident. When his transaction
can be accomplished with extended period making
his temporary home in the Philippines, he becomes a
resident.
3. A foreigner who shall live in the Philippines with no
definite intention as to his stay is a resident.
4. A foreigner who has acquired residency in the
Philippines shall only become a nonresident when he
actually departs with the intention of abandoning his
residency in the Philippines.
Situs of income Situs of income
Taxpayers Within Outside
Citizens:
Resident citizen Taxable Taxable
Nonresident Taxable Nontaxable
citizen
Aliens: Taxable Nontaxable
3. General Professional Partnership
General professional partnerships are established solely for the
purpose of exerising a common profession and not part of the
income derived from engaging in trade or business.
As an entity, it is not subject to income tax. Partners are liable
for income tax on their distributive shares; thus, each partner
shall report his distributive share as part of his gross income.
Sec. 22(B), NIRC. The term "corporation" shall include
partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not include
general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with
the Government "General professional partnerships" are
partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.
Tan v. Del Rosario (1994)
Petitioners assailed the constitutionality of RA 7496
(Simplified Net Income Taxation Scheme) which amended
certain provisions of the NIRC, and Section 6, Revenue
Regulations No. 2-93.
Firstly, Petitioners said that RA 7496 desecrated the
constitutional requirement that taxation “shall be uniform and
equitable” insofar as the law attempted to tax single
proprietorships and professionals differently from the manner
used to impose tax on corporations and partnerships.
The Court ruled that such a system of income taxation has long
been the prevailing rule even prior to the passage of the RA.
What is instead apparent is that there was legislative intent to
shift the income tax system towards the schedular approach in
the income taxation of individual taxpayers and to maintain the
present global treatment on taxable corporations.
Secondly, petitioners questioned the applicability of the SNIT
to partners in general professional partnerships. The Court
clarified that a general professional partnership, unlike an
ordinary business partnership, is not itself an income taxpayer.
The income tax is imposed not on the professional partnership,
which is tax exempt, but on the partners themselves in their
individual capacity computed on their distributive shares of
partnership profits. The Court further held that there was no
distinction in income tax liability between a person who
practices his profession alone and one who does it through
partnership with others in the exercise of a common
profession.
The amendatory act modified the extent of the deductions
applicable to all non-income taxpayers on their non-
compensation income.
4. Classification of individuals as to income earning
a. Compensation earner
i. Minimum Wage Earner
SEC. 22. Definitions. - When used in this Title:
(HH) The term “minimum wage earner” shall refer to a
worker in the private sector paid the statutory
minimum wage or to an employee in the public sector with
compensation income of not more than the
statutory minimum wage in the non-agricultural sector
where he/she is assigned.
ii. Rank and File Employee
SEC. 22. Definitions. - When used in this Title:
(AA) The term 'rank and file employees' shall mean all
employees who are holding neither managerial nor
supervisory position as defined under existing provisions of
the Labor Code of the Philippines, as amended
iii. Managerial and Supervisory
Officer
b. Self-employed and/ or Professional
Individuals receiving income purely from the practice of
profession or from self-employment are classified as Self-
employed and/ or Professionals
c. Mixed income earner
Mixed income earners are taxpayers earning both
compensation income and income from business or practice of
profession
III. ESTATES AND TRUSTS
1. Definition of estates and trusts
Art. 1440, NCC. A person who established a trust is called the
trustor; one in whom confidence is reposed as regards
property for the benefit of another person is known as the
trustee , and the person for whose benefit the trust has been
created is referred to as the beneficiary.
Art. 1441, NCC. Trusts are either expressed or implied.
Express trusts are created by the intention of the trustor or of
the parties. Implied trusts come into being by operation of law.

Art. 1442, NCC. The principles of the general law of trusts,
insofar as they are not in conflict with this Code, the Code of
Commerce, the Rules of Court, and special laws are hereby
adopted.
Art. 1443, NCC. No express trusts concerning an immovable or
an interest therein may be proved by parole evidence.
Art. 1444, NCC. No particular words are required for the
creation of an express trust, it being sufficient that a trust is
clearly intended.
Art. 1445, NCC. No trust shall fail because the trustee
appointed declines the designation, unless the contrary should
appear in the instrument constituting the trust.
Art. 1446, NCC. Acceptance by the beneficiary is necessary.
Nevertheless, if the trust imposes no onerous condition upon
the beneficiary, his acceptance shall be presumed, in there is no
proof to the contrary.
Art. 1447, NCC. The enumeration of the following cases of
implied trust does not exclude others established by the
general law of trust, but the limitation laid down in Article
1442 shall be applicable.
Art. 1448, NCC. There is an implied trust when property is
sold, and the legal estate is granted to one party but the price is
paid by another for the purpose of having the beneficial
interest of the property. The former is the trustee, while the
latter is the beneficiary. However, if the person to whom the
title is conveyed is a child, legitimate or illegitimate, of the one
paying the price of the sale, no trust is implied by law, it being
disputably presumed that there is a gift in favour of the child.
Art. 1449, NCC. There is also an implied trust when a donation
is made to a person but it appears that although the legal estate
is transmitted to the donee, he nevertheless is either to have no
beneficial interest or only a part thereof.
Art. 1450, NCC. If the price of a sale of property is loaned or
paid by one person for the benefit of another and the
conveyance is made to the lender or payor to secure the
payment of the debt, a trust arises by operation of law in favour
of the person to whom the money is loaned or for whom it is
paid. The latter may redeem the property and compel a
conveyance thereof to him.
Art. 1451, NCC. When land passes by succession to any person
and he causes the legal title to be put in the name of another, a
trust is established by implication of law for the benefit of the
true owner.
Art. 1452, NCC. If two or more persons agree to purchase
property and by common consent the legal title is taken in the
name of one of them for the benefit of all, a trust is created by
force of law in favour of the others in proportion to the interest
of each.
Art. 1453, NCC. When property is conveyed to a person in
reliance upon his declared intention to hold it for, or transfer it
to another or the grantor, there is an implied trust in favour of
the person whose benefit is contemplated.
Art. 1454, NCC. If an absolute conveyance of property is made
in order to secure the performance of an obligation of the
grantor toward the grantee, a trust by virtue of law is
established. If the fulfillment of the obligation is offered by the
grantor when it becomes due, he may demand the
reconveyance of the property to him.
Art. 1455, NCC. When any trustee, guardian, or other person
holding a fiduciary relationship uses trust funds for the
purchase of property and causes the conveyance to be made to
him or to a third person, a trust is established by operation of
law in favour of the person to whom the funds belong.
Art. 1456, NCC. If property is acquired through mistake or
fraud, the person obtaining it is, by force of law, considered a
trustee of an implied trust for the benefit of the person from
whom the property comes.
Art. 1457, NCC. An implied trust may be proved by oral
evidence.
Estate – The estate is composed of all properties, rights, and
obligations including those properties, earnings, or obligations
that have accrued thereto since the opening of the sucession.
(Art. 775, NCC)
During the period when the title to the properties is not yet
finally transferred to the succession, there may be earnings
generated from the estate. These earnings are subject to
income tax. What is taxed is not the property that constitutes
the trust (already subject to donor’s tax), but the income of
such property.
Trust – Arrangement created by agreement under which title
to the property is passed to another for conservation or
invesment with the income and the corpus/principal
distributed in accordance with the directions of the creator; to
be taxable as a separate entity, grantor must have absolutely
and irrevocably given up control and benefit over the trust.
Stated differently, it is an obligation imposed or a right to
administer over a property given to a person for the benefit of
another. This is used to administer funds in behalf of
individuals or organizations.
2. Application of Tax
Sec. 60, NIRC – Imposition of Tax.
A) Application of Tax. - The tax imposed by this Title upon
individuals shall apply to the income of estates or of any kind of
property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent interests, and
income accumulated or held for future distribution under the
terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary
to the beneficiaries, and income collected by a guardian of an
infant which is to be held or distributed as the court may
direct; (3) Income received by estates of deceased persons
during the period of administration or settlement of the estate;
and (4) Income which, in the discretion of the fiduciary, may be
either distributed to the beneficiaries or accumulated.
(B) Exception. - The tax imposed by this Title shall not apply to
employee's trust which forms part of a pension, stock bonus or
profit-sharing plan of an employer for the benefit of some or all
of his employees (1) if contributions are made to the trust by
such employer, or employees, or both for the purpose of
distributing to such employees the earnings and principal of
the fund accumulated by the trust in accordance with such
plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus or income
to be (within the taxable year or thereafter) used for, or
diverted to, purposes other than for the exclusive benefit of his
employees: Provided, That any amount actually distributed to
any employee or distributee shall be taxable to him in the year
in which so distributed to the extent that it exceeds the amount
contributed by such employee or distributee.
(C) Computation and Payment. - (1) In General. - The tax shall
be computed upon the taxable income of the estate or trust and
shall be paid by the fiduciary, except as provided in Section 63
(relating to revocable trusts) and Section 64 (relating to
income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in
the case of two or more trusts, the creator of the trust in each
instance is the same person, and the beneficiary in each
instance is the same, the taxable income of all the trusts shall
be consolidated and the tax provided in this Section computed
on such consolidated income, and such proportion of said tax
shall be assessed and collected from each trustee which the
taxable income of the trust administered by him bears to the
consolidated income of the several trusts.
Tax imposed upon individual taxpayers shall apply to the
income of any property held in trust, including:
1. Income accumulated in trust for the benefit of the
unborn or unascertained person(s) with contingent
interests, and inomce accumulated or held for future
distribution under the terms of the will or trust,
2. Income that is to be distributed currently by the
fiduciary to the beneficiaries, and income collected by
a guardian of an infant that is to be held or distributed
as the court may direct, and
3. Income that, in the discretion of the fiduciary, may be
either distributed to the beneficiaries or accumulated.
CIR v. Visayas Electric (1968)
Visayan Electric was a holder of a legislative franchise, Act
3499, to operate and maintain an electric light, heat, and power
system in Cebu. Subsequently, the company established a
“pension fund,” the funds for which were taken from the gross
operating receipts of the company, which was later invested in
stocks of San Miguel, for which dividends have been regularly
received. These dividends were not declared for tax purposes.
The CIR assessed Visayas Electric P2,443.30 for deficiency
taxes, P3,850 for additional residence taxes, and P35,419.25 as
25% surcharge for late payment of franchise taxes from 1957-
1959. The Supreme Court held that by the resolution of Visayas
Electric’s board and the setting asie of monthly mounts for the
reserve pension found, Visayas Electric was merely acting as
trustee of its employees. The intention was to establish a trust
in favour of the employees, and a valid trust has been created.
Further, given that the dividends are the returns of the trust
estate and not Visayas Electric, the assessment for income tax
on the dividends as income of Visayas Electric was incorrect.
For tax purposes, the employees’ reserve fund is a separate
taxable entity. Visayas Electric, while retaining legal title and
custodyover the property, holds the same in trust for the
beneficiaries.
CIR v. CA, CTA, GCL Retirement Plan (1992)
CGL Plan is an employees’ trust maintained by the employer,
GLC, Inc., to provide retirement, pension, disability, and death
benefits to its employees. In this juncture, it enjoyed tax
exemption at its inception in accordance with RA 4917;
however, it was later subjected to 15% withholding tax on its
investments. The CIR denied its claim for refund saying that PD
1959 had already withdrawn its exemption.
The SC ruled that the specific law granting the exemption and
the NIRC cannot be repealed by a general law that defeats the
purpose of a trust.
Employees’ trusts or benefit plans normally provide economic
assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness,
or disability. It provides security against certain hazards to
which members of the plan may be exposed. It is an
independent and additional source of protection for the
working group. What is more, it is established for their
exclusive benefit and for no other purpose.
Tax exemption is to be enjoyed by the income of the pension
trust. Otherwise, taxation of those earnings would results in a
diminution of accumulated income and reduce whatever the
trust beneficiaries would receive out of the trust fund. (CIR v.
CA, CTA, GCL)
IV. CORPORATIONS
1. Definition of a corporation
Sec. 22(B), NIRC. The term "corporation" shall include
partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not include
general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with
the Government.
"General professional partnerships" are partnerships formed by
persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from
engaging in any trade or business.
The term corporation includes joint stock companies, joint
accounts, associations, insurance companies or partnerships
no matter how they were created or organized.
For income tax purposes, a corporation does not include
general professional partnerships and a joint venture or
consortium formed to undertake construction projects or
engage in petroleum, coal, geothermal, and other energy
related operation, pursuant to an operating or consortium
agreement under a service contract with the Government.
a. Partnerships
Art. 1767, NCC. By the contract of partnership two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves.
Two or more persons may also form a partnership for the
exercise of a profession.
Art. 1768, NCC. The partnership has a juridical personality
separate and distinct from that of each of the partners, even in
case of failure to comply with the requirements of Art. 1772,
first paragraph.
Art. 1769, NCC. In determining whether a partnership exists,
these rules shall apply:
(1) Except as provided by Art. 1825, persons who are not
partners as to each other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a
partnership, whether such co-owners or co-possessors do or
do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a
partnership, whether or not the persons haring them have a
joint or common right or interest in any property from which
the returns are derived;
(4) The receipt of a person of a share of the profits of a
business is a prima facie evidence that he is a partner in the
business, but no such inference shall be frawn if such profts
were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased
partner;
(d) As interest on a lean, though the amount of payment vary
with the profits of the business;
(e) As the consideration for the sale of a goodwill of a business
or other property by installments or otherwise.
Lorenzo Oña v. CIR (1972)
Julia Buñales died, leaving as heirs her surviving spouse,
Lorenzo Oña and her five children. Oña was subsequently
declared as the administrator of her estate. A project of
partition was undertaken and approved by the Court, but no
attempt was made to divide the properties listed therein.
Instead, the properties remained under the management of
Oña who used the properties in business by leasing, selling, and
investing the same.
The CIR decided that petitioners formed an unregistered
partnership and was therefore subject to corporate income tax
pursuant to Section 24 of the Tax Code. The Supreme Court
held that from the moment petitioners allowed not only the
incomes from their respective shares of the inheritance but
even the inherited properties themselves to be used by
Lorenzo Oña as a common fund in undertaking several
transactions or in business, with the intention of deriving profit
to be shared by them proportionally, such act was tantamount
to actually contributing such incomes to a common fund and, in
effect, they thereby formed an unregistered partnership.
Evangelista v. Collector (1957)
Petitioners borrowed a sum of money from their father to buy
several real properties. They later appointed their brother
Simeon Evangelista to manage their properties and lease the
same, among other things. CIR demanded payment from them
for income tax on corporations, real estate dealer’s fixed tax,
and corporation residence tax for the years 1945-1949,
pursuant to Section 24 of the NIRC.
The Court held that the essential elements of a partnership are:
(a) an agreement to contribute money, property, or industry to
a common fund, and (b) an intent to divide the profits among
the contracting parties. The Court looked at the circumstances
surrounding the case and found that the siblings actually
intended to lease the properties in order to derive profit
therefrom., that the properties were not devoted to residential
purposes or to other personal uses of petitioners, and that the
foregoing conditions have existed for more than 10 years,
among others. Thus, they are subject to the tax.
Afisco Insurance Corp. v. CIR (1999)
Petitioners (41 non-life insurance corporations) entered into a
Quota Share Reinsurance Treaty and a Surplus Reinsurance
Treaty with a non-resident foreign insurance corporation. The
reinsurance treaties required petitioners to form a pool which
they did.
They later submitted a financial statement and filed an
Information Return of Organization Exempt from Income Tax,
on the basis of which it was assessed by the CIR deficiency
corporate taxes and withholding taxes.
The Court held that the pool is taxable as a corporation, and
that the government’s right to assess and collect the taxes had
not prescribed. It cited Evanglista v. CIR and said that the term
partnership includes a syndicate, group, pool, joint venture, or
other unincorporated organization, through or by means of
which any business, financial operation, or venture is carried
on. Further, it held that the pool was a partnership because: (1)
it had a common fund which paid for its administration and
operation expenses, (2) it functioned through an executive
board, and (3) its work was indispensable, beneficial, and
economically useful to the business of the ceding companies.
The fact that it did not retain any profit or income did not
obliterate the fact that the pool was being used in the
transaction of business for profit.
b. Co-ownership
Art. 484, NCC. There is co-ownership whenever the ownership
of an undivided thing or right belongs to different persons. In
default of contracts, or special provisions, co-ownership shall
be governed by the provisions of this Title.
Pascual v. CIR (1988)
Petitioners bought and sold 5 parcels of land in two separate
transactons; the first involving 2 parcels of land, and a year
later, a sale involving 3 parcels of land. The corresponding
capital gains taxes were paid by them by availing of the tax
amnesties in the year 1973 and 1974.
However, BIR assessed petitioners and required them to pay
deficiency corporate income taxes for the years 1968 and 1970.
The Court ruled that there was clear evidence of co-ownership
between the petitioners, and there was no adequate basis to
support the proposition that they formed an unregistered
partnership. The two isolated transactions whereby they
purchased properties and sold the same a few years thereafter
did not make them partners. They shared in the gross profits as
co- owners and paid their capital gains taxes on their net
profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an
unregistered partnership which is thereby liable for corporate
income tax, as the respondent commissioner proposes.
c. Joint ventures
RR 10-2012 – Defines the requirements for joint venture or
consortium formed for the purpose of undertaking
construction projects and prescribes the mandatory
enrollment of local contractors in the Electronic Filing and
Payment System.
RR 10-2012. A joint venture or consortium formed for the
purpose of undertaking construction projects, which is not
considered as corporation under Section 22 of the National
Internal Revenue Code (NIRC), of 1997 as amended, should be:
a. for the undertaking of a construction project;
b. should involve joining or pooling of resources by licensed
local contracts; that is, licensed as general contractor by the
Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI);
A foreign corporation is a corporation organised and existing
under the laws of a foreign country irrespective of the
nationality of its stockholders.
It is taxable only on income from sources within the
Philippines.
It may either be a Resident Foreign Corporations or a
Nonresident Foreign Corporations.
4. Resident Foreign Corporation
Sec. 22(H), NIRC. The term "resident foreign
corporation" applies to a foreign corporation engaged in trade
or business within the Philippines.

c. the local contractors are engaged in construction business;
and
d. the Joint Venture itself must likewise be duly licensed as
such by the PCAB of the DTI.
Joint ventures involving foreign contractors may also be
treated as a non-taxable corporation only if the member
foreign contractor is covered by a special license as contractor
by the PCAB of the DTI, and the construction project is certified
by the appropriate Tendering Agency (government office) that
the project is a foreign financed/internationally-funded project
and that international bidding is allowed under the Bilateral
Agreement entered into by and between the Philippine
Government and the foreign/international financing institution
pursuant to the implementing rules and regulations of Republic
Act No. 4566, otherwise known as Contractor’s License Law.
Absent any one the aforesaid requirements, the joint venture
or consortium formed for the purpose of undertaking
construction projects shall be considered as taxable
corporations. In addition, the tax-exempt joint venture or
consortium shall not include those who are mere suppliers of
goods, services or capital to a construction project. The
members to a Joint Venture not taxable as corporation shall
each be responsible in reporting and paying appropriate
Income Taxes on their respective share to the joint ventures
profit.
A resident foreign corporation refers to a foreign corporation
that is engaged in business or trade in the Philippines.
Generally, it establishes a branch or an office for the purpose of
doing such business or trade.
5. Non-Resident Foreign Corporation
Sec. 22(I), NIRC. The term 'nonresident foreign
corporation' applies to a foreign corporation not engaged in
trade or business within the Philippines
A non-resident foreign corporation refers to a foreign
corporation which does not engage in business or trade in the
Philippines. Its earnings are derived from fixed determinable
income from sources within the Philippines that are
enumerated in the Tax Code as follows:
1. Interest, dividends, royalties;
2. Rents, salaries;
3. Premiums, except reinsurance premiums;
4. Annuities, emoluments, or other fixed or
determinable annual, periodic or casual gains, profit
or income; and
5. Capital gains, except capital gains from the sale of
shares of stock not traded in the stock exchange of a
domestic corporation.

All licensed local contractors are required to enroll to the BIR’s

eFPS at the Revenue District Office where they are registered
as taxpayers.

2. Domestic Corporation

Sec. 22(C), NIRC. The term "domestic", when applied to a

corporation, means created or organized in the Philippines or
under its laws.

A domestic corporation is one organized and existing under

Philippine laws. In general, it includes government owned and
controlled corporations (GOCCs) or instrumentalities engaged
in a similar business industry or activity.

It is taxable on all income from sources within and outside the

Philippines.

3. Foreign Corporation

Sec. 22(D), NIRC. The term "foreign", when applied to a

corporation, means a corporation which is not domestic.
31
 CHAPTER III: TAX BASE AND TAX RATES
I. INDIVIDUALS
1. Resident Citizens & Aliens
a. General
RR 8-2018 (summary)
Taxable income for compensation earners is the gross
compensation income less non-taxable income/benefits such as but
not limited to the 13th month pay and other benefits (subject to
limitations specified in Section 6(G)(e) of these Regulations), de
minimis benefits, and employee’s share in the SSS, GSIS, PHIC,
Pag-ibig contributions and union dues.
Husband and wife shall compute their individual Income Tax
separately based on their respective taxable income. If any income
cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the same
shall be divided equally between the spouses, for the purpose of
determining their respective taxable income.
Minimum wage earners shall be exempt from the payment of
Income Tax based on their statutory minimum wage rates. The
holiday pay, overtime pay, night shift differential pay and hazard
pay received by such earner are likewise exempt.
Unless the taxpayer signifies the intention to elect the 8% Income
Tax rate (for those who can avail of this option) in the 1st Quarter
Percentage and/or Income Tax Return, or on the initial quarter
return of the taxable year after the commencement of a new
business/practice of profession, the taxpayer shall be considered as
having availed of the graduated rates under Section 24(A)(2)(a) of
the Tax Code, as amended. Such election shall be irrevocable and
no amendment of option shall be made for the said taxable year.
The option to be taxed at 8% Income Tax rate is not available to a
VAT-registered taxpayer, regardless of the amount of gross
sales/receipts, and to a taxpayer who is subject to other Percentage
Taxes under Title V of the Tax Code, as amended, except those
subject under Section 116 of the same Title. Likewise, partners of a
General Professional Partnership (GPP) by virtue of their
distributive share from GPP, which is already net of cost and
expenses, cannot avail of the 8% Income Tax rate option.
A taxpayer shall automatically be subject to the graduated rates
under Section 24(A)(2)(a) of the Tax Code, as amended, even if the
flat 8% Income Tax rate option is initially selected, when
taxpayer’s gross sales/receipts and other non-operating income
exceeded the VAT threshold during the taxable year. His/her
Income Tax shall be computed under the graduated Income Tax
rates and shall be allowed a tax credit for the previous quarter/s
Income Tax payment/s under the 8% Income Tax rate option.
Taxable income for individuals earning income from self-
employment/practice of profession shall be the net income, if
taxpayer opted to be taxed at graduated rates or has failed to signify
the chosen option.
The provision under Section 24(A)(2)(b) of the Tax Code, as
amended, which allows an option of 8% Income Tax rate on gross
sales/receipts and other non-operating income in excess of P
250,000.00 is available only to purely self-employed individuals
and/or professionals. The said P 250,000.00 is not applicable to
mixed income earners since it is already incorporated in the first
tier of the graduated Income Tax rates applicable to compensation
income.
RR 14-2018 (summary)
There shall be withheld a creditable Income Tax at the rates herein
specified on the gross professional, promotional, and talent fees or
any other form of remuneration for the services rendered by the
following:
If gross income for the current year did not exceed ₱3M — 5%
If gross income is more than ₱3M or VAT Registered regardless of
amount — 10%
RR 15-2018 (summary)
This RR amends RR 8-2018 on the updating of registration of
taxpayers from Value-Added Tax (VAT) to non-VAT which was
due last March 31, 2018.
This RR extends the deadline of registration updates to read as
follows:
“SECTION 13. TRANSITORY PROVISIONS. – In connection
with the provision of Section 24 (A)(2)(b) and Section 2(A)(2)(c)
of the Tax Code, as amended, all existing VAT registered taxpayers
whose gross sales/receipts and other non-operating income in the
preceding year did not exceed the VAT threshold of P3,000,000.00
shall have the option to update their registration to non-VAT until
April 30, 2018, following the existing procedures on registration
updates, and the inventory and surrender/cancellation of unused
VAT invoices/receipt.
After the above-mentioned date, existing VAT-registered taxpayers
who have note exceeded the threshold for the immediately
preceding three years, may opt to update their registration to non-
VAT following rules and regulations on registration updates,
verification, and the inventory and cancellation of VAT
invoices/receipts.”
RMO 23-2018 (summary)
This RMO prescribes the policies, guidelines and procedures in the
availment of the eight percent (8%) Income Tax Rate option for
individuals earning from self-employment and/or practice of
professions.
The following criteria should all be satisfied to be able to qualify
and avail of the 8% Income Tax rate option:
-Individuals(Single Proprietor or Professional or Mixed Income
Earner)earning
from self-employment and/or practice of profession;
-Taxpayers whose gross sales/receipts and other non-operating
income did not exceed the ₱ 3 Million VAT threshold during the
taxable year;
32
-Taxpayers registered and subject only to Percentage Tax under Over P250,000 but not over P 20% of the excess over
Section 116 of the NIRC, as amended; or taxpayers exempt from 400,000 P250,0000
VAT or other Percentage Taxes; and
-Taxpayer must have signified his/her intention to elect the 8% Over P400,000 but not over P30,000 + 25% of the excess
Income Tax rate. P800,000 over P400,000
8% Tax Rate option is not available to the ff individuals:

-Purely Compensation Income Earners; Over P800,000 but not over P130,000 + 30% of the excess
-VAT-registered taxpayers, regardless of the amount of gross sales P2,000,000 over P800,000
or receipts and other non-operating income:
-Taxpayers exempt from VAT or Other Percentage Taxes whose
gross sales/receipts and other non-operating income exceeded the Over P2,000,000 but not over P490,000 + 32% of the excess
PHP 3 Million VAT threshold during the taxable year; P8,000,000 over P2,000,000
-Taxpayers who are subject to Other Percentage Taxes under Title
V of the Tax Code, as amended, except those subject under Section
116 of the same Title; Partners of a General Professional Over P8,000,000 P2,410,000 + 35% of the
Partnership (GPP); excess over P8,000,000
-Individuals enjoying Income Tax exemption.

The 8% Income Tax rate option of self-employed individuals is

effective only for the current taxable year when the election has
been made, and shall automatically revert back to the graduated Tax Schedule Effective January 1, 2023 and onwards:
Income Tax rates at the beginning of the succeeding taxable years.
Thus, the availment of the 8% Income Tax rate option is required to Not over P250,000 0%
be signified and selected every taxable year, if the taxpayer wishes
to be covered by such Income Tax rate. The Income Tax rate Over P250,000 but not over P 15% of the excess over
option, once elected, shall be irrevocable, and no amendment of 400,000 P250,000
option shall be made for the taxable year it has been made.

Over P400,000 but not over P22,500 + 20% of the excess

SEC. 24. Income Tax Rates. P800,000 over P400,000
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines.-
(1) An income tax is hereby imposed: Over P800,000 but not over P102,500 + 25% of the excess
(a) On the taxable income defined in Section 31 of this Code, P2,000,000 over P800,000
other than income subject to tax under Subsections (B), (C) and
(D) of this Section, derived for each taxable year from all
sources within and without the Philippines be every individual Over P2,000,000 but not over P402,500 + 30% of the excess
citizen of the Philippines residing therein. P8,000,000 over P2,000,000

(b) On the taxable income defined in Section 31 of this Code,

other than income subject to tax under Subsections (B), (C) and
(D) of this Section, derived for each taxable year from all
sources within the Philippines by an individual citizen of the
Philippines who is residing outside of the Philippines including
overseas contract workers referred to in Subsection(C) of
Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C) and
(D) of this Section, derived for each taxable year from all
sources within the Philippines by an individual alien who is a
resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals.- The tax shall
be computed in accordance with and at the rates established in
the following schedule:
(a) Tax Schedule Effective January 1, 2018 until December
31, 2022
Not over P250,000 0%
Over P8,000,000 P2,202,500 + 35% of the
excess over P8,000,000
For married individuals, the husband and wife, subject to the
provision of Section 51 (D) hereof, shall compute separately their
individual income tax based on their respective total taxable
income: Provided, That if any income cannot be definitely
attributed to or identified as income exclusively earned or realized
by either of the spouses, the same shall be divided equally between
the spouses for the purpose of determining their respective taxable
income.
Provided, That minimum wage earners as defined in Section
22(HH) of this Code shall be exempt from the payment of income
tax on their taxable income: Provided, further, That the holiday pay,
overtime pay, night shift differential pay and hazard pay received
by such minimum wage earners shall likewise be exempt from
income tax.
(b) Rate of Tax on Income of Purely Self-employed Individuals
and/or Professionals Whose Gross Sales or Gross Receipts
33
 and Other Non-operating Income Does Not Exceed the
Value-added Tax(VAT) Threshold as Provided in Section
109(BB). – Self-employed individuals and/or professionals
shall have the option to avail of an eight percent (8%) tax on
gross sales or gross receipts and other non-operating income in
excess of Two hundred fifty thousand pesos (P250,000) in lieu
of the graduated income tax rates under Subsection (A)(2)(a) of
this Section and the percentage tax under Section 116 of this
Code.
(c) Rate of Tax for Mixed Income Earners. – Taxpayers earning
both compensation income and income from business or
practice of profession shall be subject to the following taxes:
(1) All Income from Compensation – The rate prescribed
under Subsection (A)(2)(a) of this Section.
(2) All Income from Business or Practice of Profession –
(a) If Total Gross Sales and/or Gross Receipts and Other
Non-Operating Income Do Not Exceed the VAT
Threshold as Provided in Section 109(BB) of this
Code. – The rates prescribed under Subsection
(A)(2)(a) of this Section on taxable income, or eight
percent (8%) income tax based on gross sales or
gross receipts and other non- operating income in lieu
of the graduated income tax rates under Subsection
(A)(2)(a) of this Section and the percentage tax under
Section 116 of this Code.
(b) If Total Gross Sales and/or Gross Receipts and Other Non-
operating Income Exceeds the VAT Thresholds Provided
in Section 109(BB) of this Code. – The rates prescribed
under Subsection (A)(2)(a) of this Section..
(B) Rate of Tax on Certain Passive Income: -
(1) Interests, Royalties, Prizes, and Other Winnings. – A final tax
at the rate of twenty percent (20%) is hereby imposed upon the
amount of interest from any currency bank deposit and yield or
any other monetary benefit from deposit substitutes and from
trust funds and similar arrangements; royalties, except on
books, as well as other literary works and musical
compositions, which shall be imposed a final tax of ten percent
(10%); prizes (except prizes amounting to Ten thousand pesos
(P10,000) or less which shall be subject to tax under Subsection
(A) of Section 24; and other winnings (except winning
amounting to Ten thousand pesos (P10,000) or less from
Philippine Charity Sweepstakes and Lotto which shall be
exempt), derived from sources within the Philippines:
Provided, however, That interest income received by an
individual taxpayer (except a nonresident individual) from a
depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of
17
fifteen percent (15%) of such interest income : Provided,
further, That interest income from long-term deposit or
investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts
and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be
exempt from the tax imposed under this Subsection: Provided,
finally, That should the holder of the certificate pre- terminate
th
the deposit or investment before the fifth (5 ) year, a final tax
shall be imposed on the entire income and shall be deducted
and withheld by the depository bank from the proceeds of the
long-term deposit or investment certificate based on the
remaining maturity thereof:
Four (4) years to less than five (5) years — 5%;
Three (3) years to less than (4) years — 12%; and
Less than three (3) years — 20%
(2) Cash and/or Property Dividends. - A final tax at the rate of ten
percent (10%) shall be imposed upon the cash and/or property
dividends actually or constructively received by an individual
from a domestic corporation or from a joint stock company,
insurance or mutual fund companies and regional operating
headquarters of multinational companies, or on the share of an
individual in the distributable net income after tax of a
partnership (except a general professional partnership) of which
he is a partner, or on the share of an individual in the net
income after tax of an association, a joint account, or a joint
venture or consortium taxable as a corporation of which he is a
member or co- venturer.
(C) Capital Gains from Sale of Shares of Stock not Traded in the
Stock Exchange. - The provisions of Section 39(B)
notwithstanding, a final tax at the rate of fifteen percent (15%)
is hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other disposition
of shares of stock in a domestic corporation, except shares sold,
or disposed of through the stock exchange.
(D) Capital Gains from Sale of Real Property. –
(1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code,
whichever is higher, is hereby imposed upon capital gains
presumed to have been realized from the sale, exchange,
or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de
retro sales and other forms of conditional sales, by
individuals, including estates and trusts: Provided, That
the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of
its political subdivisions or agencies or to government-
owned or controlled corporations shall be determined
either under Section 24 (A) or under this Subsection, at the
option of the taxpayer;
(2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or
disposition of their principal residence by natural persons,
the proceeds of which is fully utilized in acquiring or
constructing a new principal residence within eighteen
(18) calendar months from the date of sale or disposition,
shall be exempt from the capital gains tax imposed under
this Subsection: Provided, That the historical cost or
adjusted basis of the real property sold or disposed shall be
carried over to the new principal residence built or
acquired: Provided, further, That the Commissioner shall
have been duly notified by the taxpayer within thirty (30)
days from the date of sale or disposition through a
prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That
the said tax exemption can only be availed of once every
ten (10) years: Provided, finally, That if there is no full
utilization of the proceeds of sale or disposition, the
portion of the gain presumed to have been realized from
the sale or disposition shall be subject to capital gains tax.
For this purpose, the gross selling price or fair market
value at the time of sale, whichever is higher, shall be
multiplied by a fraction which the unutilized amount bears
34
 to the gross selling price in order to determine the taxable
Over P250,000 but not 20% of the excess over
portion and the tax prescribed under paragraph (1) of this
over P400,000 P250,000
Subsection shall be imposed thereon.
Over P400,000 but not P30,000 + 25% of the
Sec. 116. Tax on Persons Exempt from Value-Added Tax (VAT). - over P800,000 excess over P400,000
Any person whose sales or receipts are exempt under Section
109(BB) of this Code from the payment of value-added tax and Over P800,000 but not P130,000 + 30% of the
who is not a VAT- registered person shall pay a tax equivalent to over P2,000,000 excess over P800,000
three percent (3%) of his gross quarterly sales or receipts: Provided,
That cooperatives, and beginning January 1, 2019, self-employed Over P2,000,000 but not P490,000 + 32% of the
and professionals with total annual gross sales and/or gross receipts over P8,000,000 excess over P2,000,000
not exceeding Five hundred thousand pesos (P500,000) shall be
exempt from the three percent (3%) gross receipts tax herein Over P8,000,000 P2,410,000 + 35% of the
imposed. excess over P8,000,000

(NOTE: The amendment introduced by the TRAIN Law was

vetoed by the President. The veto message reads:
Table 1.2: Tax Rate Schedule from January 1, 2023 and onwards
C. Exemptions from percentage tax of gross sales/receipts not [Sec. 24(A)(2)]
exceeding five hundred thousand pesos (P500,000) Not over P250,000 0%

I am constrained to veto the provision which provides for the above Over P250,000 but not 15% of the excess over
under line 12 of Sec. 38 in the enrolled bill, to wit: over P400,000 P250,000

“And Beginning January 1, 2019, Self-Employed and Professionals Over P400,000 but not P22,500 + 20% of the
With Total Annual Gross Sales And/Or Gross Receipts Not over P800,000 excess over P400,000
exceeding Five Hundred Thousand Pesos (P500,000)
Over P800,000 but not P102,500 + 25% of the
The Proposed exemption from percentage tax will result in over P2,000,000 excess over P800,000
unnecessary erosion of revenues and would lead to abuse and
Over P2,000,000 but not P402,500 + 30% of the
leakages. The subject taxpayers under this provision are already
over P8,000,000 excess over P2,000,000
exempted from the VAT, thus, the lower three percent percentage
tax on gross sales or gross receipts is considered as their fair share Over P8,000,000 P2,202,500 + 35% of the
in contributing to the revenue base of the country.) excess over P8,000,000

b. Taxable Income

The term 'taxable income' means the pertinent items of gross

income specified in this Code, less the deductions and/or
personal and additional exemptions, if any, authorized for such
types of income by this Code or other special laws. [Sec. 31,
NIRC]
FORMULA 1.1:
SEC. 24. Income Tax Rates
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines.-
(2)Rates of Tax on Taxable Income of Individuals. - The tax shall
be computed in accordance with and at the rates established in
the following schedule: [Please refer to Table 1.1 and 1.2, infra]

Taxable Income = Gross income – Deductions and/or Personal Xxx

Exemptions (if applicable)
For married individuals, the husband and wife, subject to the
“Tax Base” – amount to which the tax rate is applied provision of Section 51 (D) hereof,
shall compute separately their individual income tax based on
“Tax Rate” – percentage of the Tax Base which must be paid in their respective total taxable income: Provided, That if any
taxes income cannot be definitely attributed to or identified as
income exclusively earned
FORMULA 1.2 or realized by either of the spouses, the same shall be divided
equally between the spouses for the
Tax Due = Taxable Income x Tax Rate purpose of determining their respective taxable income.

Table 1.1: Tax Rate Schedule from January 1, 2018 to December Provided, That minimum wage earners as defined in Section
31, 2022 [Sec. 24(A)(2)(a)] 22(HH) of this Code shall be exempt
from the payment of income tax on their taxable income:
Not over P250,000 0% Provided, further, That the holiday pay,
overtime pay, night shift differential pay and hazard pay
received by such minimum wage earners shall

35
likewise be exempt from income tax.
Notes:
Married Individuals:
Married individuals must compute their income tax separately
based on their respective total taxable income but this is subject
to the provisions on Individual Tax Returns in the NIRC:
Sec. 51 Individual Return
(D) Husband and Wife. - Married individuals, whether citizens,
resident or nonresident aliens, who do not derive income
purely from compensation, shall file a return for the taxable
year to include the income of both spouses, but where it is
impracticable for the spouses to file one return, each spouse
may file a separate return of income but the returns so filed
shall be consolidated by the Bureau for purposes of verification
for the taxable year.
Sec. 51 contemplates married individuals who do not derive
income purely from compensation (income other than
compensation includes income from royalties, rentals, capital
gains etc.). Husband and wife must file a return to include
income from both of them unless it is impracticable to file a
single return, then separate returns may be filed.
Further, under Sec. 24(A)(2), if any income cannot be definitely
attributed to, or identified as income exclusively earned or
realized by either of the spouses, the same shall be divided
equally between them for the purpose of determining their
respective taxable income. The spouses, though filing
separately, are still entitled to deductions whenever applicable
[Casasola]
Q: What if the spouses are separated?
A: If the spouses are only physically separated, and not legally
separated they still have to file joint returns [Casasola]
Minimum Wage Earners
Sec. 22. Definitions
(HH) The term “minimum wage earner” shall refer to a worker
in the private sector paid the statutory
minimum wage or to an employee in the public sector with
compensation income of not more than the
statutory minimum wage in the non-agricultural sector where
he/she is assigned.
Minimum wage earners, no matter what the amount of income
(ie: even if it exceeds P250,00), will be exempt from paying
taxes.
The following received by the minimum wage earners are also
exempt from tax:
1. Holiday pay
2. Overtime pay
3. Night shift differential pay
4. Hazard pay
c. Gross Income Taxation
i. Entitlement to 8%
The following criteria should all be satisfied to be able to qualify
and avail of the 8% Income Tax rate option (RMO-23-18):
a. Individuals (Single Proprietor or Professional or
Mixed Income Earner) earning from self-employment
and/or practice of profession;
b. Taxpayers whose gross sales/receipts and other non-
operating income did not exceed the ₱ 3 Million VAT
threshold during the taxable year;
c. Taxpayers registered and subject only to Percentage
Tax under Section 116 of the NIRC, as amended; or
taxpayers exempt from VAT or other Percentage
d. Taxes; and
e. Taxpayer must have signified his/her intention to
elect the 8% Income Tax rate
ii. Not qualified to 8%
The 8% Income Tax rate option is not available to the following
individual taxpayers who shall correspondingly be taxed based
on the graduated Income Tax rates: (RMO-23-18)
a. Purely Compensation Income Earners;
b. VAT-registered taxpayers, regardless of the amount
of gross sales or receipts and other non-operating
income;
c. Taxpayers exempt from VAT or Other Percentage
Taxes whose gross sales/receipts and other non-
operating income exceeded the ₱ 3 Million VAT
threshold during the taxable year;
d. Taxpayers who are subject to Other Percentage
Taxes under Title V of the Tax Code, as amended,
except those subject under Section 116 of the same
Title;
e. Partners of a General Professional Partnership
(GPP);
f. Individuals enjoying Income Tax exemption
d. Regular Graduated Rate vs. 8% Option
SEC. 24. Income Tax Rates
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines.-
(2)Rates of Tax on Taxable Income of Individuals.
(b) Rate 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 Value-added
Tax (VAT) Threshold as Provided in Section 109(BB). – Self-
employed individuals and/or professionals shall have the
option to avail of an eight percent (8%) tax on gross sales or
gross receipts and other non-operating income in excess of Two
hundred fifty thousand pesos (P250,000) in lieu of the
graduated income tax rates under Subsection (A)(2)(a) of this
Section and the percentage tax under Section 116 of this Code.
36
(c) Rate of Tax for Mixed Income Earners. – Taxpayers earning
both compensation income and income from business or
practice of profession shall be subject to the following taxes:
(1) All Income from Compensation – The rate prescribed under
Subsection (A)(2)(a) of this Section.
(2) All Income from Business or Practice of Profession –
(a) If Total Gross Sales and/or Gross Receipts and Other Non-
Operating Income Do Not Exceed the VAT Threshold as
Provided in Section 109(BB) of this Code. – The rates
prescribed under Subsection (A)(2)(a) of this Section on
taxable income, or eight percent (8%) income tax based on
gross sales or gross receipts and other nonoperating income in
lieu of the graduated income tax rates under Subsection
(A)(2)(a) of this Section and the percentage tax under Section
116 of this Code.
(b) If Total Gross Sales and/or Gross Receipts and Other Non-
operating Income Exceeds the VAT Thresholds Provided in
Section 109(BB) of this Code. – The rates prescribed under
Subsection (A)(2)(a) of this Section.
SEC. 109. Exempt Transactions
(BB) Sale or lease of goods or properties or the performance of
services other than the transactions
mentioned in the preceding paragraphs, the gross annual sales
and/or receipts do not exceed the
amount of Three million pesos (P3,000,000)
i. Compensation
Compensation earners are subject to the graduated tax rate
provided under Section 24 (A)(2)(a) [cf: Table 1.1 and Table
1.2]
ii. Purely Self-Employed and/or Professionals
Two options for self-employed and/or professionals under Sec.
24 (A)(2)(b):
1. 8% tax on gross sales or gross receipts and other non-
operating income in excess of P250,000
2. Graduated income tax rates (Section 24 (A)(2)(a))
iii. Mixed Income Earner
First step: Separate compensation income from income from
business or practice of profession
➢ Compensation income will be subject to the graduated
tax rate
➢ Income from business or practice of profession will be
further classified
Second step: Determine the amount of income from business
or practice of profession, in particular, the total gross sales
and/or gross receipts and other non-operating income
➢ If it exceeds P3,000,000 (Sec. 109 (BB)), then it will be
subject to the graduated tax rate
➢ If it does not exceed P3,000,000 (Sec. 109(BB)), then
the mixed income earner will have the 8% option
Third step: If the total gross sales and/or gross receipts and
other non-operating income does not exceed P3,000,000, then
the income from business or profession will be taxed on one of
two ways, at the option of the mixed earner:
1. 8% tax on the total gross sales and/or gross receipts
and other non-operating expenses
2. Graduated income tax rate (Section 24 (A)(2)(a))
e. Passive Income
• Income derived from enterprises or from sources in
which a person is not materially involved.
Two types in the NIRC:
1. Passive Income subject to the final tax – collected through
the withholding tax system, thus it is no longer required to
be included as part of gross income in an ITR.
Example: interest income from bank deposits.
2. Passive Income NOT subject to the final tax – Not subject to
the withholding tax system and should be included in the
computation of gross income. [Casasola]
i. Interest, Royalties, Prizes & Other
Winnings
SEC. 24. Income Tax Rates
(B) Rates of Tax on Certain Passive Income.-
(1) Interests, Royalties, Prizes, and Other Winnings. –
A final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest from any currency bank
deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements;
royalties, except on books, as well as other literary works and
musical compositions, which shall be imposed a final tax of ten
percent (10%); prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which shall be subject to tax
under Subsection (A) of Section 24; and other winnings (except
Philippine Charity Sweepstakes and Lotto winnings), derived
from sources within the Philippines: Provided, however, That
interest income received by an individual taxpayer (except a
nonresident individual) from a depository bank under the
expanded foreign currency deposit system shall be subject to a
final income tax at the rate of seven and one-half percent (7
1/2%) of such interest income: Provided, further, That interest
income from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko
Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed
under this Subsection: Provided, finally, That should the holder
of the certificate pre-terminate the deposit or investment
before the fifth (5th) year, a final tax shall be imposed on the
entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term deposit or
investment certificate based on the remaining maturity thereof:
37
Four (4) years to less than five (5) years - 5%; Three (3) years
to less than (4) years - 12%; and Less than three (3) years -
20%
Summary of Section 24.B.1
Interest income from ANY
CURRENCY bank deposits in
REGULAR DOMESTIC BANKS,
and yield or any other monetary
benefit from deposit substitutes
and from trust funds and similar
arrangements
That should the holder of the
certificate pre-terminate the
deposit or investment before
the fifth (5th) year, a final tax
shall be imposed on the entire
income and shall be deducted
and withheld by the depository
bank from the proceeds of the
long-term deposit or investment
certificate based on the
remaining maturity thereof.
4 years to less than 5 years
3 years to less than 4 years
Less than 3 years
Royalties on books as well as
other literary works and musical
compositions
Regular royalties
Prizes exceeding 10k
Prizes 10k and below
Other winnings
PCSO and lotto winnings
exceeding 10k
PCSO and lotto winnings of 10k
and below
Interest income from Exempt (under this
• long-term deposit or section)
investment in the form of
savings,
• common or individual trust
funds,
• deposit substitutes,
• investment management
accounts and other
investments
20%
evidenced by certificates in
such form prescribed by the
Bangko Sentral ng Pilipinas
(BSP)
Notes:
Interest income from deposits, yields, other monetary
benefits
• Applies to ANY CURRENCY only if the income is derived
from REGULAR DOMESTIC BANKS located within the
Philippines. The rule is different if it is derived from a
source other than a domestic bank. [Casasola]
• Deposit substitutes – a means of borrowing from the
public (20 or more individual or corporate lenders) other
than by way of deposit with banks through the issuance
of debt. [Sec. 22(Y)]
5% Example: Promissory Notes, Securities
12%
MC Questions:
20%
Q: KM, a resident citizen, received income from interest in a
dollar deposit account in her bank in Chase Manhattan in New
York. What is the tax treatment?
10% A: It is taxed using the regular rate, and not the rate of the final
tax for deposit interest since the provision contemplates
domestic banks.
20% Q: Yong lent a million pesos to Ralph with an interest rate of 2%
per annum. Is Yong liable to pay the final tax rate of 20% on the
20% interest earned?
See S.24.A.2 (regular A: No. The final tax rate refers to interest from deposits in
income tax) banks. Interest earned from lending is still taxable however
under the regular rate.
20%
Foreign Currency Deposit system
20%
• Interest income which is actually or constructively
received by a resident citizen of the Philippines or by a
Exempt resident alien individual from a FOREIGN CURRENCY
bank deposit will be subject to a final withholding tax of
7.5%. The depository bank will withhold and remit the
tax. If a bank account is jointly in the name of a non-
resident citizen, 50% of the interest income from such
bank deposit will be treated as exempt while the other
50% will be subject to a final withholding tax of 7.5%. The
Regulations will apply on taxable income derived
beginning January 1, 1998 pursuant to the provisions of
38
 Section 8 of RA 8424. In case of deposits which were
made in 1997, only that portion of interest which was Long term deposit or investment
actually or constructively received by a depositor starting
January 1, 1998 is taxable. [RR 10-98] Sec. 22 Definitions

Under the TRAIN, the 7.5% rates have been changed to 15%. When used in this title

(FF) The term 'long-term deposit or investment certificate'

Income from FCD: Tax rates
Interest income from FCD
actually received by 15%
citizen/resident alien
If depositor is a non-
resident
Joint account between
resident and non-
resident
Exempt
Section 27.D.3 – Any
income of nonresidents,
whether individuals or
corporations, from
transactions with
depository banks under
the expanded system
shall be exempt from
income tax.
½ Exempt
½ taxed at 15%
shall refer to certificate of time deposit or investment in the
form of savings, common or individual trust funds, deposit
substitutes,
investment management accounts and other investments with
a maturity period of not less than five (5) years, the form of
which shall be prescribed by the Bangko Sentral ng Pilipinas
(BSP) and issued by banks only (not by non-bank financial
intermediaries and finance companies) to individuals in
denominations of Ten thousand pesos (P10,000) and other
denominations as may be prescribed by the BSP.
• “Pre-termination” – The return of the instrument to the
issuer. Under RR 14-2012, however, negotiation or
transfer of an instrument before 5 years is also
considered pre-termination.
• The term remaining maturity for long-term deposit
certificates refers to the holding period, which in banking
means the period of time an investment is attributable to
a particular investor.
The following characteristics must be present for the
exemption to apply:

MC Questions: 1. The depositor or investor is an individual citizen (resident

Q: Joy is an OFW based in Doha, Qatar. She opened two joint
accounts with her husband in Metrobank. One account was a
peso deposit account, the other was a dollar savings account.
What is the tax treatment for interest earned?
A: Half of the Dollar deposit interest is taxed at 7.5% while half
of the Peso deposit interest is taxed at 20%.
Royalties, Prizes and Other Winnings
“Royalties” – refers to a fixed sum either in cash or property
equivalent, to be paid at a definite period for the use or
enjoyment of a thing or right. Example: Sum given to a person
for the use of his trademark
“Prize” – the result of an effort made.
Example: Sum given for winning a contest
“Winnings” – the result of a transaction where the outcome
depends upon luck or chance.
Example: Raffle winnings
MC Question:
or non-resident), a resident alien, or a non-resident alien
engaged in trade or business
2. The certificates should be under the name of the individual
and not under the name of a corporation or the bank or the
trust department of the bank
3. The long-term deposits must be:
a. In the form of savings, common or individual trust
funds, deposit substitutes, investment management
accounts, and other investments evidenced by
certificates in such form by the BSP
b. Issued by banks only and not by other financial
institutions
c. Have a maturity period of not less than 5 years
d. In denominations of P10,000 or other
denominations prescribed by the BSP
4. The deposits should not be terminated before the 5th year,
otherwise they would be subjected to the graduated tax
rate of 5%, 12%, and 20%
5. Except those specifically exempted by law or regulations,
any other income such as gains from trading, foreign
exchange gain shall not be covered by Income tax
exemption

Q: VJ won a million dollars from a lottery ticket he bought in a If any of the above are absent, the 20% final withholding tax
convenience store in San Diego, California. What is the rate shall apply. [RR 14-2012]
applicable tax rate?
A: The regular rate applies. Note that the rule is that the final ii. Dividends
tax rate applies to income derived from sources within the
country. SEC. 24. Income Tax Rates
39
(B) Rates of Tax on Certain Passive Income.-
(2) Cash and/or Property Dividends - A final tax at the
following rates shall be imposed upon the
cash and/or property dividends actually or constructively
received by an individual from a domestic corporation or from
a joint stock company, insurance or mutual fund companies and
regional operating headquarters of multinational companies, or
on the share of an individual in the distributable net income
after tax of a partnership (except a general professional
partnership) of which he is a partner, or on the share of an
individual in the net income after tax of an association, a joint
account, or a joint venture or consortium taxable as a
corporation of which he is a member or co-venturer:
Six percent (6%) beginning January 1, 1998; Eight percent (8%)
beginning January 1, 1999;
Ten percent (10%) beginning January 1, 2000.
Provided, however, that the tax on dividends shall apply only
on income earned on or after January 1, 1998. Income forming
part of retained earnings as of December 31, 1997 shall not,
even if declared or distributed on or after January 1, 1998, be
subject to this tax.
• Refers to the distributions made by a corporation to its
shareholders out of its unrestricted retained earnings and
payable, whether in money or in other property. The
reckoning point is the time of declaration and NOT the
time of payment of dividends as it is taxable whether
actually or constructively received. [Casasola]
Types of Dividends
1. Cash – dividends distributed in sums of money
2. Property – property of corporation is distributed as
dividends
3. Stock – shares are distributed as dividends
4. Liquidating – return of investment at the point of
dissolution of the corporation
The provision contemplates dividends from DOMESTIC
Corporations.
MC Questions:

Summary of Income Tax Rates for Dividends Q: What if citizens receive dividends from a foreign
corporation?
A: The dividends are taxable under the schedule in
Reside NonReside Reside NonReside NonReside
nt nt Citizen nt nt Alien nt Alien
Sec.24(A)(2).
Citizen Alien Engaged Not
in Trade Engaged in Q: Jzev and Bian are partners at a trading company called
or Trade or Villanueva & Villanueva. Each is entitled to a distributive share
Business Business
of a million pesos. What is the tax treatment? What if Villanueva
Cash/Propert S.24.B. S.24.B.2 S.24.B. S.25.A.2 S.25.B & Villanueva was an engineering firm?
y Dividends 2 2 A: A final tax of 10% would apply but if Villanueva & Villanueva
10%FT 20%FT 25% FT
>> depends 10%FT 10%FT
was an engineering firm, a general professional partnership,
from whom Imposed on Jzev and Bian are liable to pay separate income taxes on their
received and the distributive shares.
to whom entire/gross
given. income
>> ONLY For each
REFERS TO taxable year
DOMESTIC From all f. Capital gains on shares of stocks
CORPORATIO sources
NS. within the
PHL Sec. 24 Income Tax Rates
Interest,
cash and/or (C) Capital Gains from Sale of Shares of Stock not Traded in
property
dividends, the Stock Exchange. — The provisions of Section 39(B)
Rents, notwithstanding, a final tax at the rate of fifteen percent (15%)
Salaries, is hereby imposed upon the net capital gains realized during the
Wages,
Premiums,
taxable year from the sale, barter, exchange or other disposition
Annuities, of shares of stock in a domestic corporation, except shares sold,
Compensati or disposed of through the stock exchange.
on,
Remunerati
on,
Emolument "Shares of Stock" - include shares of stock of a corporation;
s, warrants and/or options to purchase shares of stock; as well as
Or other
fixed or units of participation in a partnership (except general
determinabl professional partnerships), joint stock companies, joint
e annual or accounts, joint ventures taxable as corporations, associations,
periodic or
casual
and recreation or amusement clubs (such as golf, polo or similar
gains, clubs); and mutual fund certificates. (Sec. 2, RR 6-2008)
profits, and
income

40
Capital gains – profit from the sale of property or investment.
What is contemplated in this provision is net capital gains, which
is the selling price less the cost. The shares must be from a
DOMESTIC corporation.
FORMULA for Net Capital Gains
Net Capital Gains = Selling Price - Cost
Where:
Selling Price – consideration of the sale or the fair market value
of the stock, whichever is higher.
Cost – original purchase price plus other costs (i.e. documentary
stamp taxes, transfer fees etc.)
Notes:
Capital Asset
For Capital Gains rates to apply (in both disposition of shares not
listed, and in sale of real property), the property must be held as
a capital asset. The term 'capital assets' means property held by
the taxpayer (whether or not connected with his trade or
business). It does not include:
1. Stock in trade of the taxpayer or other properties of a
kind which would properly be included in the
inventory of the taxpayer;
2. Property held by the taxpayer primarily for sale to
customers in the ordinary course of business;
3. Property used in trade or business and subject to
depreciation; and
4. Real property used in trade or business.
Determining the tax base for disposition of stock
The value of the shares of stock at the time of the sale shall be the
fair market value (FMV). In determining the value of the shares,
the Adjusted Net Asset Method shall be used whereby all assets
and liabilities are adjusted to fair market values. The net of
adjusted asset minus the liability values is the indicated value of
the equity. For purposes of this section, the appraised value of
real property at the time of sale shall be the higher of –
(1) The fair market value as determined by the Commissioner, or
(2) The fair market value as shown in the schedule of valued
fixed by the
Provincial and City Assessors, or
(3) The fair market value as determined by Independent
Appraiser. [RR 6-2008 as amended by RR 6-2013]
In RR 6-2008, FMV was the book value of the shares, as certified
by a CPA, nearest to the date of the sale
Shares of stock traded and listed in the Stock Exchange
“Shares Listed and Traded through the Local Stock Exchange” -
refers to all sales, trades or transactions of listed Shares of Stock
executed through the trading system and/or facilities of the
Local Stock Exchange. This term includes block sale or other
types of sales, trades or transactions in the Local Stock Exchange
and executed through the trading system and/or facilities of the
Local Stock Exchange in accordance with the rules of the Local
Stock Exchange as approved by the Securities and Exchange
Commission. (Sec. 2, RR No. 6-2008)
If held as a capital asset, it is subject to a Stock Transaction Tax
of ½ of 1% of the gross selling price or the gross value in money
of the shares of stock sold or transferred, as provided under Sec.
127 of the Tax Code. [Sec. 7, RR 6-2008]
Sale by a dealer in securities
The sale of stocks by a dealer in securities is considered as
ordinary income subject to the scheduler rates provided in
Sec.24(A)(2)
Dealings in shares of stock of a foreign corporation
Gains from these dealings are not subject to CGT but to the
normal schedular rates.
Table 1.4. Tax rate on capital gains on shares of stocks for resident
citizens and aliens [Sec.24(C)]
Tax Base Tax Rate
1. Not listed and Not 15%
traded in the Stock
exchange
2. Traded and listed in the ½ of 1%
Stock Exchange (percentage tax)
MC Question:
Q: Kim owns 50,000 shares in Toys R’Us, a company registered
and domiciled in the United States, and not listed or traded in the
Phil. Stock Exchange. She decided to sell all her shares and netted
over P10 million. What is the applicable tax rate?
A: The schedular rate and not the capital gains tax rate applies.
Under Sec. 24(C), the shares must be in a domestic corporation
for CGT to apply.
TRAIN Notes:
RR No. 8-2018 merely mentions the new rate of the CGT
b. Capital gains on real property
Sec. 24 Income Tax Rates
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher,
is hereby imposed upon capital gains presumed to have been
realized from the sale, exchange, or other disposition of real
property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional
sales, by individuals, including estates and trusts: Provided, That
the tax liability, if any, on gains from sales or other dispositions
of real property to the government or any of its political
41
subdivisions or agencies or to government-owned or controlled
corporations shall be determined either under Section 24 (A) or
under this Subsection, at the option of the taxpayer;
(2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or disposition of
their principal residence by natural persons, the proceeds of
which is fully utilized in acquiring or constructing a new
principal residence within eighteen (18) calendar months from
the date of sale or disposition, shall be exempt from the capital
gains tax imposed under this Subsection: Provided, That the
historical cost or adjusted basis of the real property sold or
disposed shall be carried over to the new principal residence
built or acquired: Provided, further, That the Commissioner shall
have been duly notified by the taxpayer within thirty (30) days
from the date of sale or disposition through a prescribed return
of his intention to avail of the tax exemption herein mentioned:
Provided, still further, That the said tax exemption can only be
availed of once every ten (10) years: Provided, finally, That if
there is no full utilization of the proceeds of sale or disposition,
the portion of the gain presumed to have been realized from the
sale or disposition shall be subject to capital gains tax. For this
purpose, the gross selling price or fair market value at the time
of sale, whichever is higher, shall be multiplied by a fraction
which the unutilized amount bears to the gross selling price in
order to determine the taxable portion and the tax prescribed
under paragraph (1) of this Subsection shall be imposed thereon.
Notes:
A. Sale of Real Property
A.1. Sale of Real property, Generally
Sec. 24(D)(1) contemplates the sale of real property held as a
capital asset, located in the Philippines. This includes conditional
sales, and sales pacto de retro. The tax base is the presumed gain
which is the higher value between the current FMV (i.e. the zonal
value) or the gross selling price. Actual gain is not required.
[Casasola]
Use of the word “gain” is misleading because even if one sells at
a loss, you will still have to pay based on the FMV or gross selling
price.
[Cabreros]
Sale of real property held as ordinary assets are instead subject
to creditable withholding tax. [RR No. 8-1998]
“Gross selling price” – the actual selling price, or gross value in
money of the sum stipulated as the equivalent of the thing sold
and every incident taken into consideration for the fixing of the
price.
A.2. Sale of real property to the government
The tax to be imposed shall be determined either by under Sec.
24(A) where capital gains is added to gross income earned, or
under Sec. 24(D) at the option of the seller
B. Sale of Principal Residence
Principal Residence
This is the dwelling house, including the land on which it is
situated, where the husband and wife or an unmarried
individual, whether or not qualified as head of family, and
members of his family reside. Actual occupancy of such principal
residence shall not be considered interrupted or abandoned by
reason of the individual’s temporary absence therefrom due to
travel or studies or work abroad or such other similar
circumstances. Such principal residence must be characterized
by permanency in that it must be the dwelling house in which,
whenever absent, the said individual intends to return. [RR No.
13-1999 as amended by RR No. 14-2000]
The address shown in the ITR is conclusively presumed to be the
principal residence. If the vendor is exempt from filing any tax
return, in which case, he has no tax record immediately prior to
the sale of his property, then the certification from the Barangay
Chairman or Building Administrator, as the case may be, shall
suffice. [RR No. 13-1999 as amended by RR No. 14-2000]
Conditions for exemption from 6% tax.
From Sec. 24(D):
1. Property must be the principal residence of a natural person
(non-resident aliens are excluded)
2. The proceeds from the sale, exchange, or disposition of his
principal residence must be fully utilized in acquiring or
construing a new principal residence within 18 months.
There must be proof. (Full utilization means that the
taxpayer has actually commenced with the construction of
his new principal residence or has actually entered into a
contract for the purchase of his new principal residence. It
includes any expense paid in effecting the acquisition. )
3. The historical cost of his old principal residence shall be
carried over to the new residence.
4. The owner/seller must notify the Commissioner within 30
days from the date of the sale or disposition through a
prescribed return of his intention to avail of the exemption
5. This can only be availed of ONLY ONCE every 10 years.
6. If there is no full utilization, he shall be liable for the
deficiency capital gains tax of the utilized portion. The tax
base shall be the FMV or gross selling price, whichever is
higher, multiplied by the fraction which the unutilized
amount bears to the gross selling price.
Additional conditions from RR 13-99:
1. If the principal residence is disposed in exchange for a
condo, and if it is used as his new residence, then he is
exempt.
2. The 6% capital gains tax otherwise due must be deposited
in escrow with an authorized agent bank, and can only be
released when sufficient proof is shown that the proceeds
have been fully utilized within 18 months.
42

Adjusted Cost Basis of NPR = Historical Cost of Old Residence +
Cost/expenses to acquire new principal Residence – GSP/FMV
of Old Residence.
A: Recent BIR interpretations have tended to favor a strict
application of Sec. 24(D), which seems to imply that a sale must
have been completed prior to the construction of a new house
[Cabreros]

2. Non-Resident Citizens (Guidelines as per RR 1-2011)

Taxable income

SEC. 23. General Principles of Income Taxation in the

Formula for Adjusted Cost Basis of New Principal Residence
Formula for payment of CGT for unutilized portion of the sale
Table 1.5. Capital gains on real property held as capital assets
Philippines. - Except when otherwise provided in this Code
(C) An individual citizen of the Philippines who is working and
deriving income from abroad as an overseas contract worker is
taxable only on income derived from sources within the
Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an
overseas contract worker;

However if an OCW or OFW has income earnings from business

CGT= 6% x GSP or FMV x Unutilized GSP/Utilized GSP activities or properties in the Philippines, such income is
taxable.

TAX BASE TAX RATE Regular income: Sec. 24(A)(2) See Table 1.1

1. Real property held as capital Passive Income:

asset:
6% Generally
Gross selling price or FMV
(whichever is higher)
The rules on passive income for resident citizens and aliens
2. Real property held as capital 6% apply (including 8% optional for individuals qualified as Self
asset and sold to the OR Employed and/or Professionals [SEP]).
government Schedule under Sec.24(A)(1)
Exception
3. Principal residence Exempt
The exception is foreign currency deposits and/or offshore
4. Principal residence not fully banking units:
utilized:
Sec. 27. Rates of Income tax on Domestic Corporations.
Utilized portion = GSP or 6%
FMV x Unutilized (3) Tax on Income Derived under the Expanded Foreign
GSP/Utilized GSP Currency Deposit System. - Income derived by a depository
bank under the expanded foreign currency deposit system from
5. Real property held as foreign currency transactions with nonresidents, offshore
1.5-7.5% unless Exempt banking units in the Philippines, local commercial banks
ordinary asset:
including branches of foreign banks that may be authorized by
the Bangko Sentral ng Pilipinas (BSP) to transact business with
foreign currency deposit system shall be exempt from all taxes,
Where ownership of the land and the dwelling house thereon except net income from such transactions as may be specified
belongs to different persons- Only the dwelling house shall be by the Secretary of Finance, upon recommendation by the
treated as the principal residence of the owner thereof. Monetary Board to be subject to the regular income tax payable
(Normally, it includes the land.) [RR No. 13-1999 as amended] by banks: Provided, however, That interest income from foreign
currency loans granted by such depository banks under said
Where the land and the dwelling house thereon be owned by expanded system to residents other than offshore banking units
several co-owners- Property shall be treated as the Principal in the Philippines or other depository banks under the
Residence of the co-owner/s actually occupying and using the expanded system, shall be subject to a final tax at the rate of ten
same as his/their Principal Residence but to the extent of percent (10%).
his/their proportionate share in the value of the principal
residence [RR No. 13-1999 as amended]. Any income of nonresidents, whether individuals or corporations,
from transactions with depository banks under the expanded
Q: Does the sale have to precede the purchase or construction of system shall be exempt from income tax. (Emphasis supplied)
the new principal residence?

43
 Less than 3 years
Sec. 28. Rates of Income Tax on Foreign Corporations

(A) Tax on Resident Foreign Corporations

(7) Tax on Certain Incomes Received by a Resident Foreign

Corporation
(b) Income Derived under the Expanded Foreign Currency
Deposit System. - Income derived by a depository bank under
the expanded foreign currency deposit system from foreign
currency transactions with nonresidents, offshore banking
units in the Philippines, local commercial banks including
branches of foreign banks that may be authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business with
foreign currency deposit system units, and other depository
banks under the expanded foreign currency deposit system 4. Royalties on books as well as other
shall be exempt from all taxes, except net income from such literary works and musical 10%
transactions as may be specified by the Secretary of Finance, compositions
upon recommendation by the Monetary Board to be subject to
the regular income tax payable by banks: Provided, however, 5. Regular royalties 20%
That interest income from foreign currency loans granted by
such depository banks under said expanded system to 6. Prizes exceeding P10,000 20%
residents other than offshore banking units in the Philippines
or other depository banks under the expanded system shall be Tax rate under
subject to a final tax at the rate of ten percent (10%). Sec. 24(A)(2), see
Table 1.1
Any income of nonresidents, whether individuals or corporations, Beginning Jan. 1,
from transactions with depository banks under the expanded 7. Prizes P10,000 and below 2018
system shall be exempt from income tax. 8% option or 0% -
35% in 2018-2020
0%-35% (new
brackets) in 2023
Table 1.6. Passive income and Capital gains rates for non-resident
citizens
8. Other winnings 20%

TAX BASE TAX RATE 9. PCSO and lotto winnings (more than
20%
P10,000)
1. Interest income from ANY PCSO and lotto winnings (P10,000 or
CURRENCY bank deposit in Exempt
less)
REGULAR domestic banks, and yield
20% 10. Dividend from a domestic
or any other monetary benefit from
deposit substitutes, and trust funds corporation, or from a joint stock
and similar arrangements company, insurance or mutual fund
company, & regional operating
2. Interest income received from a headquarters of multinational
depositary bank under the company or share in the distributive 20%
15%
expanded foreign currency net income after tax of a partnership
deposit system (except a general professional
partnership), joint stock or joint
3. Interest income from a 5-year long- Exempt venture or consortium taxable as a
term deposit or investment in the corporation
form of savings, common or
individual trust funds, deposit 11. Disposition of stocks not listed and
substitutes, investment not traded in the Stock exchange: 15%
management accounts and other
investment certificates prescribed 12. Real property held as capital asset:
by the BSP. 5% Gross selling price or FMV 6%
12% (whichever is higher)
In case of pre-termination of said 20%
long-term deposit before the 5th 13. Real property held as capital asset 6%
year, rates are based on the and sold to the government OR
remaining maturity as follows: Schedule under
4 years to less than 5 years Sec.24(A)(2)
3 years to less than 4 years

44
 14. Principal residence Exempt
15. Principal residence not fully utilized:
6%
Utilized portion = GSP or FMV x
Unutilized GSP/Utilized GSP
3. Non-Resident Aliens
a. Engaged in Trade or Business
i. Taxable Income
SEC. 25. Tax on Nonresident Alien Individual. -
(A) Nonresident Alien Engaged in trade or Business Within the
Philippines. –
(1) In General. - A nonresident alien individual engaged in trade
or business in the Philippines shall be subject to an income tax
in the same manner as an individual citizen and a resident alien
individual, on taxable income received from all sources within
the Philippines. A nonresident alien individual who shall come
to the Philippines and stay therein for an aggregate period of
more than one hundred eighty (180) days during any calendar
year shall be deemed a 'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code notwithstanding.
Generally
A nonresident alien engaged in trade or business within the
Philippines is taxed at the same rate as resident citizens or
aliens for all income earned from within the Philippines (See
Table 1.1. for rates)
ii. Passive Income
SEC. 25. Tax on Nonresident Alien Individual. -
(A) Nonresident Alien Engaged in trade or Business Within the
Philippines. –
(2) Cash and/or Property Dividends from a Domestic
Corporation or Joint Stock Company, or Insurance or Mutual
Fund Company or Regional Operating Headquarter or
Multinational Company, or Share in the Distributable Net
Income of a Partnership (Except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a
Corporation or Association., Interests, Royalties, Prizes, and
Other Winnings. - Cash and/or property dividends from a
domestic corporation, or from a joint stock company, or from
an insurance or mutual fund company or from a regional
operating headquarter of multinational company, or the share
of a nonresident alien individual in the distributable net income
after tax of a partnership (except a general professional
partnership) of which he is a partner, or the share of a
nonresident alien individual in the net income after tax of an
association, a joint account, or a joint venture taxable as a
corporation of which he is a member or a co-venturer;
interests; royalties (in any form); and prizes (except prizes
amounting to Ten thousand pesos (P10,000) or less which shall
be subject to tax under Subsection (B)(1) of Section 24) and
other winnings (except Philippine Charity Sweepstakes and
Lotto winnings); shall be subject to an income tax of twenty
percent (20%) on the total amount thereof: Provided, however,
that royalties on books as well as other literary works, and
royalties on musical compositions shall be subject to a final tax
of ten percent (10%) on the total amount thereof: Provided,
further, That cinematographic films and similar works shall be
subject to the tax provided under Section 28 of this Code:
Provided, furthermore, That interest income from long-term
deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, that should the holder of the
certificate pre-terminate the deposit or investment before the
fifth (5th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%; Three (3) years
to less than four (4) years - 12%; and Less than three (3) years -
20%
(See Table 1.7 infra for summary)
Note that for FCDU, the rules for non-residents apply.
Key differences
1. A new category, income derived from cinematographic
films and similar works, is taxed at 25%
2. Cash and property dividends are subject to a 20% final
tax.
iii. Capital Gains
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in trade or Business Within the
Philippines. –
(3) Capital Gains. - Capital gains realized from sale, barter or
exchange of shares of stock in domestic corporations not traded
through the local stock exchange, and real properties shall be
subject to the tax prescribed under Subsections (C) and (D) of
Section 24.
The same rules for resident citizens or aliens apply. But
according to RR 13-99, the exemption for sale of principal
residence does not apply.
Note also that while aliens are not allowed to own land under
the constitution, other forms of real property (i.e. condominium
units, other immovables are still taxable.
Table 1.7. Passive income and Capital gains rates for non-resident
aliens engaged in trade or business
TAX BASE TAX RATE
45
1. Interest income from ANY
CURRENCY bank deposit in
REGULAR domestic banks, and yield
or any other monetary benefit from
deposit substitutes, and trust funds
and similar arrangements
2. Interest income received from a
depositary bank under the expanded Exempt
foreign currency deposit system
3. Interest income from a 5-year long-
term deposit or investment in the
form of savings, common or
individual trust funds, deposit
substitutes, investment
management accounts and other
investment certificates prescribed
by the BSP.
In case of pre-termination of said
long-term deposit before the 5th
year, rates are based on the
remaining maturity as follows:
4 years to less than 5 years
3 years to less than 4 years
Less than 3 years
4. Royalties on books as well as other
literary works and musical
compositions
5. Regular royalties
6. Prizes exceeding P10,000
7. Prizes P10,000 and below
8. Other winnings
16. PCSO and lotto winnings (more than
20%
P10,000)
PCSO and lotto winnings (P10,000 or
Exempt
less)
9. Gross income from all sources
within the Philippines derived
from cinematographic films and
other works as distributor,
owner, or lessor
10. Dividend from a domestic
corporation, or from a joint stock
company, insurance or mutual
20%
fund company, & regional
operating headquarters of
multinational company or share
20%
in the distributive net income
after tax of a partnership (except
a general professional
partnership), joint stock or joint
venture or consortium taxable as
Exempt a corporation
11. Disposition of stocks not listed and
not traded in the Stock exchange: 15%
12. Real property held as capital asset:
Gross selling price or FMV 6%
5% (whichever is higher)
12%
20% 13. Real property held as capital asset 6%
and sold to the government OR
Schedule under
Sec.24(A)(2)
14. Principal residence N/A
17. Principal residence not fully
utilized:
10% N/A
Utilized portion = GSP or FMV x
Unutilized GSP/Utilized GSP
20%
20%
Tax rate under Note: the items in bold are the items with rates which depart
Sec. 24(A)(2), see from the rates for resident citizens and/or aliens
Table 1.1
Beginning Jan. 1, 2018 b. Not Engaged in Trade or Business
8% option or 0% -
35% in 2018-2020
0%-35% (new
Sec. 25 Tax on Nonresident Alien Individual –
brackets) in 2023
(B) Nonresident Alien Individual Not Engaged in Trade or
20% Business Within the Philippines. - There shall be levied,
collected and paid for each taxable year upon the entire income
received from all sources within the Philippines by every
nonresident alien individual not engaged in trade or business
within the Philippines as interest, cash and/or property
dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or
determinable annual or periodic or casual gains, profits, and
income, and capital gains, a tax equal to twenty-five percent
25%
(25%) of such income. Capital gains realized by a nonresident
alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock in any domestic
corporation and real property shall be subject to the income tax
prescribed under Subsections (C) and (D) of Section 24.
Generally
The Tax rate is 25% for income received from within the
Philippines other than Capital Gains
46

Capital Gains
The same rate for residents, non-resident aliens engaged in
trade or business applies.
FCDU/OBU
The rule for non-residents applies (exemption).
Table 1.8. Rates for Non-resident aliens not engaged in trade or
business
TAX BASE TAX RATE
1. Gross Income within 25%
2. Disposition of stocks not
listed and not traded in
the Stock exchange:
15%
3. Real property held as
6%
capital asset:
a. Special Aliens
[Note: Paragraphs (C), (D), and (E) of Sec. 25, as cited below,
are quoted in their original texts as they appeared in the TRAIN
Law. But such is not the law now, at least as far as BIR is
concerned, pursuant to the Veto Message of the President on
RA 10963 and RR 08-2018. They still apply, nevertheless, to
existing international tax treaties.
However, please be reminded that there is still no hard law on
the matter. RR 08-2018 only interprets the Veto Message by the
President.]
Sec. 25 Tax on Nonresident Alien Individual –
(C) Alien Individual Employed by Regional or Area
Headquarters and Regional Operating Headquarters of
Multinational Companies. - There shall be levied, collected and
paid for each taxable year upon the gross income received by
every alien individual employed by regional or area
headquarters and regional operating headquarters established
in the Philippines by multinational companies as salaries,
wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, from such
regional or area headquarters and regional operating
headquarters, a tax equal to fifteen percent (15%) of such gross
income: Provided, however, That the same tax treatment shall
apply to Filipinos employed and occupying the same position as
those of aliens employed by these multinational companies. For
purposes of this Chapter, the term 'multinational company'
means a foreign firm or entity engaged in international trade
with affiliates or subsidiaries or branch offices in the Asia-
Pacific Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. -
There shall be levied, collected and paid for each taxable year
upon the gross income received by every alien individual
employed by offshore banking units established in the
Philippines as salaries, wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and
allowances, from such off-shore banking units, a tax equal to
fifteen percent (15%) of such gross income: Provided, however,
That the same tax treatment shall apply to Filipinos employed
and occupying the same positions as those of aliens employed
by these offshore banking units.
(E) Alien Individual Employed by Petroleum Service
Contractor and Subcontractor. - An Alien individual who is a
permanent resident of a foreign country but who is employed
and assigned in the Philippines by a foreign service contractor
or by a foreign service subcontractor engaged in petroleum
operations in the Philippines shall be liable to a tax of fifteen
percent (15%) of the salaries, wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and
allowances, received from such contractor or subcontractor:
Provided, however, That the same tax treatment shall apply to a
Filipino employed and occupying the same position as an alien
employed by petroleum service contractor and subcontractor.
Any income earned from all other sources within the
Philippines by the alien employees referred to under
Subsections (C), (D) and (E) hereof shall be subject to the
pertinent income tax, as the case may be, imposed under this
Code.
Table 1.9. Tax rates for Special Aliens [Sec. 25(C)(D)(E)]
CATEGORY TAX RATE
1. Employed by regional
or area headquarters
& regional operating
15% on gross
headquarters
income
established in the
Philippines by
multinational agency
2. Employed by offshore 15% on gross
banking units income
3. Petroleum service 15% on gross
contractors income
Gross income
Gross income in this case actually covers compensation, since
passive income that may be derived is still subject to the rules
under the NIRC.
47

Common provisos
1. The same tax shall apply to Filipinos occupying the same
position
Note: For Filipinos working in a multinational agency’s
regional or area headquarters & regional operating
headquarters, they may exercise the option to be taxed at
15% or according to the rates provided by the NIRC
2. Income from other sources shall be taxed according to the
provisions of the NIRC (i.e. either as Non-resident alien or
resident alien)
Tests for determining application of preferential tax rates for
Filipinos [RR 11-2010]
[Note: Not anymore relevant pursuant to RR 08-2018.]
(1) Position and function test - must occupy a managerial
position or technical position AND must actually
exercise such function.
(2) Compensation Threshold test - must have received or
is due to receive a gross annual taxable compensation
of at least P975,000.
(3) Exclusivity test - must be exclusively working for the
regional or area headquarters & regional operating
headquarters as a regular employee and not just a
consultant or contractual personnel
The Veto Message on RA 10963 and RR 08-2018
[Note: This is the law NOW, at least as far as BIR is concerned.
Everything stated above as regards Special Aliens has been
modified by these.]
The preferential income tax rate under subsection (C), (D) and
(E) of Section 25 of the Tax Code, as amended, shall no longer
be applicable without prejudice to the application of
preferential tax rates under existing international tax treaties, if
warranted. Thus, all concerned employees of the regional or
area headquarters and regional operating headquarters of
multinational companies, offshore banking units and petroleum
service contractor and subcontractors shall be subject to the
regular income tax rate under Sec. 24 (A) (2) (a) of the Tax
Code, as amended.
This is in accordance with the veto message of the President
which reads as follows:
II. DIRECT VETO
By the power vested in me by Article VI, Section 27(2) of the
Constitution, which provides that “the President shall have the
power to veto any particular item or items in an appropriation,
revenue, or tariff bill,” I hereby register the following line item
vetoes to this law:
A. Reduced income tax rate of employees of Regional
Headquarters (RHQs), Regional Operating Headquarters
(ROHQs), Offshore Banking Units (OBUs), and Petroleum Service
Contractors and Subcontractors.
I am constrained to veto the proviso under Section 6(F) of the
enrolled bill that effectively maintains the special tax rate of 15%
of gross income for the aforementioned employees to wit:
“PROVIDED, HOWEVER, THAT EXISTING RHQs/ROHQs, OBUs OR
PETROLEUM SERVICE CONTRACTORS AND SUBCONTRACTORS
PRESENTLY AVAILING OF PREFERENTIAL TAX RATES FOR
QUALIFIED EMPLOYEES SHALL CONTINUE TO BE ENTITLED TO
AVAIL OF PREFERENTIAL TAX RATE FOR PRESENT AND
FUTURE QUALIFIED EMPLOYEES.”
While I understand the laudable objective of the proposal, the
provision is violative of Equal Protection Clause under Section 1,
Article III of the Constitution, as well as the rule of equity and
uniformity in the application of the burden of taxation:
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.
In line with this, the overriding consideration is the promotion of
fairness of the tax system for individuals performing similar
work. Given the significant reduction in the personal income tax,
the employees of these firms should follow the regular tax rates
applicable to other individual taxpayers.
4. Minimum Wage Earners
Sec. 22 Definitions
When used in this Title
(HH) The term 'minimum wage earner' shall refer to a worker
in the private sector paid the statutory minimum wage or to an
employee in the public sector with compensation income of not
more than the statutory minimum wage in the non-agricultural
sector where he/she is assigned
Minimum wage earners (MWEs) enjoy exemption from taxes on
compensation income including benefits like holiday pay,
overtime pay, night shift differential pay and hazard pay.
Private sector MWEs – paid the statutory minimum wage
Public sector MWEs – paid not more than the statutory
minimum wage in the nonagricultural sector where he/she is
assigned
Q: What is the statutory minimum wage (SMW)?
A: It is the rate fixed by the Regional Tripartite Wage and
Productivity Board (RTWPB), as defined by the Bureau of Labor
and Employment Statistics (BLES) of the Department of Labor
and Employment (DOLE). [Sec. 22(GG)]
Exemptions
Sec. 24. Income Tax Rates
(A) (2) (a) (last par.) Provided, That minimum wage earners as
defined in Section 22 (HH) of this Code shall be exempt from
the payment of income tax on their taxable income: Provided,
further, That the holiday pay, overtime pay, night shift
48
differential pay and hazard pay received by such minimum
wage earners shall likewise be exempt from tax. For 13th month pay, and other benefits

Minimum wage earners shall be exempt from the payment of
income tax based on their statutory minimum wage rates. The
holiday pay, overtime pay, night shift differential pay and
hazard pay received by such earner are likewise exempt.
Example: (as provided in RR 08-2018)
Mr. CSO, a MWE, works for G.O.G., Inc. He is not engaged in
business nor has any other source of income other than his
employment. For 2018, Mr. CSO earned a total compensation
income of P135,000.00.
(a) The taxpayer contributed to SSS, Philhealth, and
HDMF amounting to P5,000.00 and has received 13th month
pay of P11,000.00. His income tax liability will be computed as
follows:
Under Sec. 32 (B), 13th Month Pay and other Benefits (NB:
distinguish these from benefits de minimis like rice subsidies up
to P1,500 or clothing allowance which are exempt from tax) are
excluded from Gross Income up to P82,000. This exclusion
applies not just to MWEs but under RR 10-2008, MWEs
receiving benefits beyond this limit are taxed on the excess as
well as on salaries, wages, and allowances like an employee
earning compensation income beyond the SMW.
Also, under RR 10-2008, MWEs receiving other income, such as
income from the conduct of trade, business, or practice of
profession, except income subject to final tax, in addition to
compensation income are not exempted from income tax on
their entire income earned during the taxable year but the
SMW, Holiday pay, overtime pay, night shift differential pay and
hazard pay shall still be exempt from withholding tax.

Total Compensation Income Example:

P 135,000.00
Less: Mandatory contributions P B is a MWE. In 2015, his basic salary was P125,000 (Ang hirap
5,000.00 maghanapbuhay). In addition to this he received P10,500 as
Non-taxable benefits 13th month pay. His employer gave him P25,000 as a
11,000.00 16,000.00 productivity incentive. The P125,000 is exempt from taxes. The
Taxable income incentive and the 13th month pay are excluded from the
P 119,000.00 computation of Gross Income. (But Bian, what use is the
exclusion if he’s already exempt from paying taxes on his
*Taxpayer is exempt since he is considered a compensation? Well just because he’s an MWE doesn’t mean he
minimum income earner. can’t receive other types of income right? Malay natin)

(b) The following year, Mr. CSO earned, aside from his 5. Members of General Professional Partnerships
basic wage, additional pay of P140,000.00 which consists of the
overtime pay- P80,000.00, night shift differential- P30,000.00, SEC. 26. Tax Liability of Members of General Professional
hazard pay- P15,000.00, and holiday pay- P15,000.00. He has Partnerships. - A general professional partnership as such
the same benefits and contributions as above. shall not be subject to the income tax imposed under this
Chapter. Persons engaging in business as partners in a general
Total Compensation Income professional partnership shall be liable for income tax only in
P 135,000.00 their separate and individual capacities. For purposes of
Add: Overtime, night shift differential, computing the distributive share of the partners, the net
hazard, and holday pay income of the partnership shall be computed in the same
140,000.00 manner as a corporation. Each partner shall report as gross
Total Income income his distributive share, actually or constructively
P 275,000.00 received, in the net income of the partnership.
Less: Mandatory contributions P
5,000.00 The General Professional Partnership (GPP) is exempt since it
Non-taxable benefits acts as a “pass through”, but the income of the partners are
11,000.00 16,000.00 subject to tax on their distributive share [See also Tan v. Del
Net taxable income Rosario]
P 259,000.00
Tax due Thus, the distributive shares must be included in the returns of
EXEMPT the individual partners, if there is a loss, the loss will also be
divisible in proportion to them in the same manner as net
*Taxpayer is tax exempt as an MWE. The statutory income [Casasola]
minimum wage as well as holiday pay, overtime pay, night shift
differential pay and hazard pay received buy such MWE are
specifically exempted from income tax under the law.
INDIVIDUALS

CITIZENS ALIENS

49
 Resident Non-resident Resident Non-resident Non-resident not
(including OFWs) engaged in trade or engaged in trade
business or business

TAXABLE INCOME

Source Within and Within Within Within Within

without

Tax Base Taxable income = Gross income – Deductions and/or Personal Exemptions (if Gross income
applicable)

Tax Rate 5%-34% in 1998 5%-34% in 1998 5%-34% in 1998 5%-34% in 1998 25% FT
5%-33% in 1999 (for income within 5%-33% in 1999 5%-33% in 1999
5%-32% in 2000- PH) 5%-32% in 2000- 5%-32% in 2000-
2017 5%-33% in 1999 2017 2017
0%-35% in 2018- (for income within 0%-35% in 2018- 0%-35% in 2018-
2022 PH) 2022 2022
Change in 2023 5%-32% in 2000- Change in 2023 Change in 2023
2017 (for income
Option of 8% on within PH) Option of 8% on Option of 8% on
gross sales/receipts 0%-35% in 2018- gross gross sales/receipts
and other non- 2022 (for income sales/receipts and and other non-
operating income in within PH) other non- operating income in
lieu of business Change in 2023 operating income lieu of business taxes
taxes under Sec. Exempt for income in lieu of business under Sec. 116
116 without the PH taxes under Sec.
116
5%-34% in 1998
5%-33% in 1999
5%-32% in 2000-
2017
0%-35% in 2018-
2022
Change in 2023

Option of 8% on
gross sales/receipts
and other non-
operating income in
lieu of business
taxes under Sec.
116

PASSIVE INCOME

Interest from:

Bank deposits 20% FT 20% FT 20% FT 20% FT 25% FT

FCDU/OBU 15% FT Exempt 15% FT Exempt Exempt

Long term-deposits Exempt Exempt Exempt Exempt 25% FT

Pre-termination of N/A
deposits:
a. 4 years to less than 5% 5% 5% 5%
5 years
b. 3 years to less than 12% 12% 12% 12%
4 years
c. Less than 3 years 20% 20% 20% 20%

50
Royalties on books as 10% FT 10% FT 10% FT 10% FT 25% FT
well as other literary
works and musical
compositions

Royalties in general 20% FT 20% FT 20% FT 20% FT 25% FT

Income from 25% FT 25% FT

Cinematographs

Prizes exceeding 20% FT 20% FT 20% FT 20% FT 25% FT

P10,000

Prizes P10,000 and Regular rate: 5%- Regular rate: 5%- Regular rate: 5%-32% Regular rate: 5%- 25% FT
below 32% 32% 32%

Other winnings 20% FT 20% FT 20% FT 20% FT 25% FT

PCSO and lotto Exempt Exempt Exempt Exempt 25% FT

winnings

Cash and/or Property 10% FT 10% FT 10% FT 20% FT 25% FT

Dividends

CAPITAL GAINS TAX

Real Property 6% FT 6% FT 6% FT 6% FT 6% FT

Real property sold to 6% FT 6% FT 6% FT 6% FT 6% FT

the government or or or or or
Regular Rate Regular Rate Regular Rate Regular Rate Regular Rate

Principal residence Exempt Exempt Exempt N/A N/A

Shares of stock not

listed/traded in PSE:
a. First P100,000
b. Excess of 5% FT 5% FT 5% FT 5% FT 5% FT
P100,000
10% FT 10% FT 10% FT 10% FT 10% FT

Shares of stock ½ of 1% ½ of 1% ½ of 1% ½ of 1% ½ of 1%
listed/traded in the (Percentage Tax) (Percentage Tax) (Percentage Tax) (Percentage Tax) (Percentage Tax)
PSE

SPECIAL ALIENS

Aliens employed by:

Regional or area VETO MESSAGE

headquarters

Offshore banking Units VETO MESSAGE

Petroleum service VETO MESSAGE

contractors

51

II. CORPORATIONS
1. Domestic Corporations [Sec. 27]
a. In General
SEC. 27. Rates of Income tax on Domestic Corporations. -
(A) In General. - Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed
upon the taxable income derived during each taxable year from
all sources within and without the Philippines by every
corporation, as defined in Section 22(B) of this Code and
taxable under this Title as a corporation, organized in, or
existing under the laws of the Philippines: Provided, That
effective January 1, 2009, the rate of income tax shall be thirty
percent (30%).
Definition: Those corporations created or organized in the
Philippines and under its laws.
General rule: The NIRC imposes a 30% normal corporate
income tax rate on the taxable income received by domestic
corporations and taxable partnerships, no matter how created
or organized, during each taxable year from all sources,
whether derived from within and without the Philippines.
b. Special Corporations
i. Proprietary Educational Institutions and Hospitals
(B) Proprietary Educational Institutions and Hospitals. –
Proprietary educational institutions and hospitals which are
nonprofit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof:
Provided, that if the gross income from 'unrelated trade,
business or other activity' exceeds fifty percent (50%) of the
total gross income derived by such educational institutions or
hospitals from all sources, the tax prescribed in Subsection (A)
hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term 'unrelated trade, business
or other activity' means any trade, business or other activity,
the conduct of which is not substantially related to the exercise
or performance by such educational institution or hospital of
its primary purpose or function. A 'proprietary educational
institution' is any private school maintained and administered
by private individuals or groups with an issued permit to
operate from the Department of Education, Culture and Sports
(DECS) [now DepEd], or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance with
existing laws and regulations.
Proprietary educational institution
Any private school maintained and administered by private
individuals or groups with an issued permit to operate from
the DECS or the CHED, or the TESDA, as the case may be, in
accordance with existing laws and regulations.
Proprietary non-profit hospitals
(1) Proprietary – private, with a government permit; and
(2) Non-profit – no net income or asset accrues to or benefits
any member or specific person, with all the net income or
asset devoted to the institution’s purposes and all its
activities conducted not for profit. [CIR v. St. Luke’s]
General rule: They shall pay a preferential tax rate of 10% on
their taxable income except those covered by Subsection (D) of
Sec. 27 [passive income].
Exceptions: The following shall be subject to the regular
corporate tax rate of 30% –
(1) Predominance test: If the gross income from unrelated
trade, business or other activity exceeds 50% of the total
gross income derived by such educational institutions or
hospitals from all sources.
Unrelated trade, business or other activity are those
not substantially related to the exercise or performance by
such educational institution or hospital of its primary
purpose or function.
(2) Hospitals and educational institutions claiming to be
within the coverage of Sec. 27(B) that fails to meet the
above definition of “proprietary” and “nonprofit.”
CIR v. St. Luke’s Medical Center (2012)
BIR assessed St. Luke’s for deficiency income tax under Section
27(B) of the NIRC of 1997, which imposes a 10% preferential
tax rate on the income of proprietary non-profit educational
institutions and hospitals. St. Luke’s questioned it before the
CTA, citing the exemption granted to charitable institutions
under Sec. 30 (E) and (G) of the same law.
The Supreme Court harmonized the two provisions and found
that for a charitable institution to be completely tax exempt
under Sec. 30(E), it must be “organized and operated
exclusively” for charitable purposes. St. Luke’s clearly did not
fall in that category so its activities conducted for profit was
subject to income tax, but only at 10%.
Proprietary educational institutions and hospitals do not lose
its tax exempt status if it earns income from its for-profit
activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax,
previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).
ii. Government Owned and Controlled Corporations
(C) Government-owned or -Controlled Corporations,
Agencies or Instrumentalities. — The provisions of existing
special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or
controlled by the Government, except the Government Service
Insurance System (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), and the local
water districts shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations or
associations engaged in a similar business, industry, or activity.
General rule: GOCCs shall pay the same 30% tax rate upon
their taxable income as are imposed upon corporations or
associations engaged in a similar business, industry, or activity.
Exceptions:
(1) Government Service and Insurance System (GSIS);
(2) Social Security System (SSS);
(3) Philippine Health Insurance Corporation (PHIC);
(4) Local water districts (LWDs); and
c. Passive Income
52
 i. Interest, Royalties (D) (4) Intercorporate Dividends. - Dividends received by a
domestic corporation from another domestic corporation shall
(D) Rates of Tax on Certain Passive Incomes. — not be subject to tax.
(1) Interest from Deposits and Yield or any other Monetary
Benefit from Deposit Substitutes and from Trust Funds and Dividends from a domestic corporation
Similar Arrangements, and Royalties. — A final tax at the Intercorporate dividends – Dividends received by a domestic
rate of twenty percent (20%) is hereby imposed upon the corporation from another domestic corporation are NOT
amount of interest on currency bank deposit and yield or any subject to income tax.
other monetary benefit from deposit substitutes and from trust
funds and similar arrangements received by domestic Dividends from a foreign corporation
corporations, and royalties, derived from sources within the Dividends received by a domestic corporation from a foreign
Philippines: Provided, however, that interest income derived corporation are subject to income tax and shall form part of the
by a domestic corporation from a depository bank under the gross income because there is no law exempting this type of
expanded foreign currency deposit system shall be subject to a dividend from income tax.
final income tax at the rate of fifteen percent (15%) of such
interest income. d. Capital Gains
XXX
(3) Tax on Income Derived under the Expanded Foreign i. Real Property Classified as Capital Asset
Currency Deposit System. - Income derived by a depository
bank under the expanded foreign currency deposit system (D) (5) Capital Gains Realized from the Sale, Exchange or
from foreign currency transactions with nonresidents, offshore Disposition of Lands and/or Buildings. – A final tax of six
banking units in the Philippines, local commercial banks percent (6%) is hereby imposed on the gain presumed to have
including branches of foreign banks that may be authorized by been realized on the sale, exchange or disposition of lands
the Bangko Sentral ng Pilipinas (BSP) to transact business with and/or buildings which are not actually used in the business of
foreign currency deposit system shall be exempt from all taxes, a corporation and are treated as capital assets, based on the
except net income from such transactions as may be specified gross selling price of fair market value as determined in
by the Secretary of Finance, upon recommendation by the accordance with Section 6(E) of this Code, whichever is higher,
Monetary Board to be subject to the regular income tax of such lands and/or buildings.
payable by banks: Provided, however, That interest income
from foreign currency loans granted by such depository banks
under said expanded system to residents other than offshore
ii. Shares of Stock
banking units in the Philippines or other depository banks
under the expanded system, shall be subject to a final tax at the
(2) Capital Gains from the Sale of Shares of Stock Not Traded in
rate of ten percent (10%). [20]
the Stock Exchange. — A final tax at the rate of fifteen percent
Any income of nonresidents, whether individuals or
(15%) shall be imposed on net capital gains realized during the
corporations, from transactions with depository banks under
taxable year from the sale, exchange or other disposition of
the expanded system shall be exempt from income tax.
shares of stock in a domestic corporation except shares sold or
disposed of through the stock exchange.
The tax treatment of the passive incomes of domestic
corporations derived from within the Philippines shall also be
subject to the final withholding tax just like passive incomes of
a resident citizen derived within the Philippines. (1) Capital gains from sale of shares of stock Final tax
not traded in the stock exchange 15%
(1) Interest income from any currency bank
20% (2) Sale of shares of stocks traded in the local 6/10 of
deposit in regular banking units
stock exchange (stock transaction tax) 1%
(2) Yield or any monetary benefit from deposit
20% Selling price
substitutes
(3) Interest income and yield from trust funds (3) Capital gains on sale or exchange of lands Final tax
20&
and similar arrangements and/or buildings located in the 6%
(4) Royalties derived from sources within the Philippines
20%
Philippines Selling price or FMV whichever is higher
(5) Interest income derived from a depositary
15%
bank under the FCDU (4) Net capital gains on sales or exchange or Regular
(6) Interest income from foreign currency disposition of other capital assets corp. tax
loans granted by depositary bank under 30%
the expanded foreign currency deposit
10%
system to residents other than OBUs in the
Philippines or other depository banks
under the expanded depository system
(7) Gross income derived from contracts by 8%, in
sub-contractors from service contractors lieu of
engaged in petroleum operations as any and
defined under PD 87 (“Oil Exploration and all taxes,
Development Act” in the Philippines), as national
imposed under PD 1354 and local

ii. Dividends

53
2. Resident Foreign Corporations [Sec. 28(A)]
a. In General
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws
of any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 2009, the rate of income tax
shall be thirty percent (30%).
Definition: Those corporations organized, authorized, or
existing under the laws of any foreign country, but engaged in
trade or business within the Philippines. A foreign corporation
can engage in business in the Philippines only after it had
registered with the regulatory agencies of the government,
however, even without registration, but if the facts show that
such foreign corporation actually engages in business in the
Philippines, then it will be considered a resident foreign
corporation. (Ingles)
General rule: They are subject to the regular/normal
corporate income tax rate of 30% of the taxable income in the
preceding taxable year from all sources within the Philippines.
Rationale: Taxability of a foreign corporation’s income
depends upon the locus of the activity, property or services
giving rise thereto. It is sufficient that such income is derived
from an activity within the Philippines. Place of activity, not
place of business, is controlling.
N.V. Reederit Armsterdam v. Commission (1988)
N.V. Reederij filed a protest against the deficiency income tax
imposed on its freight fees. SC agreed with CIR’s assessment on
the basis that N.V. Reederij is a non-resident foreign
corporation, organized and existing under the laws of the
Netherlands with its principal office in Amsterdam, and not
licensed to do business in the Philippines. It is therefore taxable
on income from all sources within the Philippines, such as
interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical or casual gains, profits and
income and capital gains.
In order that a foreign corporation may be considered engaged
in trade or business, its business transactions must be
continuous. A casual business activity in the Philippines by a
foreign corporation (as in the present case of only making 2
calls in Philippine ports) does not amount to engaging in trade
or business in the Philippines for income tax purposes.
b. Special Foreign Corporations
i. International Carriers
(A) (3) International Carrier. - An international carrier doing
business in the Philippines shall pay a tax of two and one-half
percent (2 1/2 %) on its 'Gross Philippine Billings' as defined
hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings'
refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo, and mail originating from the
Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of
payment of the ticket or passage document: Provided, That
tickets revalidated, exchanged and/or indorsed to another
international airline form part of the Gross Philippine Billings if
the passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which originates
from the Philippines, but transshipment of passenger takes
place at any part outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket corresponding
to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine Billings.
(b) International Shipping. - 'Gross Philippine Billings' means
gross revenue whether for passenger, cargo or mail originating
from the Philippines up to final destination, regardless of the
place of sale or payments of the passage or freight documents.
Provided, That international carriers doing business in the
Philippines may avail of a preferential rate or exemption from
the tax herein imposed on their gross revenue derived from the
carriage of persons and their excess baggage on the basis of an
applicable tax treaty or international agreement to which the
Philippines is a signatory or on the basis of reciprocity such
that an international carrier, whose home country grants
income tax exemption to Philippine carriers, shall likewise be
exempt from the tax imposed under this provision.
General rule: International carriers doing business in the
Philippines shall pay a tax of 2.5% on its “Gross Philippine
Billings [GPB],” which could either be:
(1) International air carriers; or
(2) International shipping
Exception: International carriers may avail of a preferential
rate or exemptions from the tax imposed on the basis of –
(1) An applicable tax treaty or international agreement to
which the Philippines is a signatory; or
(2) Reciprocity such that an international carrier, whose home
country grants income tax exemption to Philippine
carriers, shall likewise be exempt from the tax imposed.
International Air Carriers
A foreign airline corporation doing business in the Philippines
having been granted landing rights in any Philippine port to
perform international air transportation services/activities or
flight operations anywhere in the world.
Gross Philippines Billings refers to: (Ingles)
▪ Gross revenue derived from carriage of persons, excess
baggage, cargo, and mail;
▪ Originating from the Philippines in a continuous and
uninterrupted flight;
▪ Irrespective of the place or issue and the place of
payment of the ticket or passage document.
What is included in computing GBP? (Ingles)
Gross revenues derived from:
(1) Passage of persons [a.k.a tickets];
a. If sold in the Philippines – it shall be the actual
amount derived for transportation services, as
reflected in the remittance area of the tax coupon
forming an integral part of the plane tickets
b. If sold outside – determined using the locally
available net fares applicable to such flight taking into
consideration the seasonal fare rate established at the
time of the flight, the class of passage, classification of
passenger, date of embarkation, and the place of final
destination
54
(2) Excess baggage – computed based on the actual revenue
derived as appearing on the official receipt or any similar
document;
(3) Cargo – determined based on the amount appearing on the
airway bill after deducting the amount of discounts granted;
and/or
(4) Mail – determined based on the amount as reflected in the
cargo manifest of the carrier
originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue
and the place of payment of the ticket or passage document.
Tickets revalidated, exchanged and/or indorsed to another on-
line international airline form part of the GPB if the passenger
is lifted/boarded on a plane from any port or point in the
Philippines towards a foreign destination.
For a flight which originates from the Philippines, but
transshipment or passenger takes place at any port outside the
Philippines on another airline, only the aliquot portion of the
cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of the
GPB.
GPB does not include:
(1) Non-revenue passengers
(2) Refunded tickets
Different kinds of international air carriers:
(1) Off-line carrier – no flight operations to and from the
Philippines
(2) On-line carrier – having or maintaining flight operations to
and from the Philippines
Different terms referring to flights:
(1) Off-line flights – flight operations outside the territorial
jurisdiction of the Philippines, without touching a port or point
situated in the Philippines, except when in distress or due to
force majeure
(2) On-line flights – flight operations in the territorial
jurisdiction of the Philippines and any port or point outside the
Philippines
(3) Chartered flight – includes block charter, placed under the
custody and control of a charterer by a contract/charter for
rent or hire relating to a particular airplane
Off-line carrier with branch office/sales agent in the
Philippines
They sell tickets for compensation or commission to cover off-
line flights of its principal head office, or for other airlines
covering flights originating from Philippine ports or off-line
flights.
They are not considered engaged in business as an
international air carrier, hence, not subject to tax, without
prejudice to classifying them under a different category
pursuant to a separate provision under the Code.
Their taxability depends upon the locus of the activity. Since
the tickets exchanged hands here and payments for fares were
also made in Philippine currency, their revenues in the
Philippines are taxable income from “whatever source” under
Sec. 32(A).
Classification of passengers:
(1) Transient – originated from outside of the Philippines
towards a final destination also outside of the Philippines but
stops here for a period of less than 48 hours, or even more than
48 hours, if the delay is due to force majeure, wherein he
boarded an airplane of the same airline company bound to the
place of final destination
(2) Non-revenue
(3) Adult – attained 12th birthday
(4) Children – attained 2nd but not 12th birthday
(5) Infant – not attained 2nd birthday
Off-line carrier with branch office/sales agent in the
Philippines
An offline airline which has a branch/agent in the Philippines
and sells tickets for compensation or commission to cover off-
line flights of its principal head office, or for other airlines is
not considered engaged in business as an international air
carrier in the Philippines, and hence, not subject to GBP.
Their taxability depends upon the locus of the activity. Since
the tickets exchanged hands here and payments for fares were
also made in Philippine currency, their revenues in the
Philippines are taxable income from “whatever source” under
Sec. 32(A).
International Shipping
A foreign shipping corporation doing business in the
Philippines having been granted landing rights in any
Philippine port to perform international shipping
services/activities or shipping operations anywhere in the
world.
GPB for International shipping
The amount of gross revenues whether for passenger, cargo or
mail originating from the Philippines up to final destination,
regardless of the place of sale or payments of the passage or
freight documents.
“Originating from the Philippines” — shall include the
following: (RR 15-2013)
(1) Passengers, their excess baggage, cargo and/or mail
originally commence their flight or voyage from any
Philippine port to any other point outside the Philippines;
(2) Chartered flights or voyages of passengers, excess
baggage, cargo and/or mail originally commencing their
flights or voyages from any foreign port and whose stay
in the Philippines is for more than forty-eight (48) hours
prior to embarkation
• Except in cases where the flight of the airplane failed to
depart within forty-eight (48) hours by reason of force
majeure;
(3) Chartered flights of passengers, excess baggage, cargo
and/or mail originally commencing their flights or
voyages from any Philippine port to any foreign port; and
(4) Passenger, excess baggage, cargo and/or mail originally
commencing his flight or voyage from a foreign port
alights or is discharged in any Philippine port and
thereafter boards or is loaded on another airplane owned
by the same airline company, the flight or voyage from
the Philippines to any foreign port shall not be considered
originating from the Philippines,
• Unless the time intervening between arrival and
departure of said passenger, his excess baggage, cargo
and/or mail from the Philippines exceeds forty-eight
(48) hours,
• Except, when the failure to depart within forty-eight
(48) hours is due to reasons beyond his control, such as,
when the only next available flight or voyage leaves
beyond forty-eight (48) hours or by force majeure.
• Provided, however, that if the second aircraft belongs to
a different airline company, the flight or voyage from
the Philippines to any foreign port shall be considered
55
 originating from the Philippines regardless of the
intervening period between the arrival and departure
from the Philippines by said passenger, his excess
baggage, cargo and/or mail.
“Continuous and Uninterrupted Flight or Voyage” (RR 15-
2013) —
▪ Refers to a flight or voyage in the carrier of the same
company from the moment a passenger, excess
baggage, cargo, and/or mail is lifted from the
Philippines up to the point of final destination of the
passenger, excess baggage, cargo and/or mail.
▪ The flight or voyage is not considered continuous and
uninterrupted if transshipment of passenger, excess
baggage, cargo and/or mail takes place at any port
outside the Philippines on another aircraft or vessel
belonging to a different company.
Summary:
GR: Resident foreign corporation 30%
X: Resident foreign corporations that are
2.5%
international carriers
X to the X: Off-line carriers with ticket
30%
reservation services
ii. Offshore Banking Units (OBU)
(A) (4) Offshore Banking Units. - The provisions of any law to
the contrary notwithstanding, income derived by offshore
banking units authorized by the Bangko Sentral ng Pilipinas
(BSP), from foreign currency transactions with nonresidents,
other offshore banking units, local commercial banks, including
branches of foreign banks that may be authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business with
offshore banking units shall be exempt from all taxes except
net income from such transactions as may be specified by the
Secretary of Finance, upon recommendation of the Monetary
Board which shall be subject to the regular income tax payable
by banks: Provided, however, That any interest income derived
from foreign currency loans granted to residents other than
offshore banking units or local commercial banks, including
local, branches of foreign banks that may be authorized by the
BSP to transact business with offshore banking units, shall be
subject only to a final tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or
corporations, from transactions with said offshore banking
units shall be exempt from income tax.
Definition: A branch, subsidiary or affiliate of a foreign
banking corporation which is duly authorized by the BSP, as a
separate accounting unit, to transact offshore banking business
in the Philippines.
Offshore Banking
The conduct of banking transactions in foreign currencies
involving the receipt of funds principally from external sources
and the utilization of such funds.
Foreign Currency Deposit Unit (FCDU)
An accounting unit or department in a local bank or in an
existing local branch of foreign banks, authorized by the BSP to
operate under the expanded foreign currency deposit system.
FCDU authority shall be distinguished from the authority to
accept foreign currency deposits.
Deposits
Funds in foreign currencies which are accepted and held by an
OBU in the regular course of business, with the obligation to
return an equivalent amount to the owner, with or without
interest.
Gross Offshore Income
All income arising from transactions allowed by the BSP
conducted by and between –
(1) In the case of an OBU with another OBU or with an
expanded FCDU or with a nonresident;
(2) In the case of an expanded FCDU with another expanded
FCDU or with an OBU or with a nonresident.
Gross Onshore Income
Gross interest income arising from foreign currency loans and
advances to and/or investment with residents made by OBUs
or EFCDUs. Includes all fees, commissions, and other charges
which are integral parts of the income from the above
transactions.
In the case of foreign currency loan transactions, such gross
interest shall refer only to the stipulated interest and shall not
include any and all fees, commissions and other charges which
are integral parts of the income from the above transactions.
Taxation of Income of OBUs
Income derived by OBUs authorized by the
BSP from foreign currency transactions
with nonresidents, other OBUs, local
EXEMPT
commercial banks, including branches of
foreign banks authorized by the BSP to
transact business with OBUs
Any income of nonresidents, whether
individuals or corporations, from
EXEMPT
transactions with depositary banks under
the expanded system
Net income from operations of RBUs,
30%
payable by banks
Interest income derived from foreign
FWT of
currency loans granted to residents other
10%
than OBUs and FCDUs/EFCDUs
The bank (income earner) cannot evade its liability for FCDU
Onshore Tax by shifting the blame on the payor-borrower as
the withholding agent. It is liable for payment of deficiency
onshore tax on interest income derived from foreign currency
loans, pursuant to Sec. 27(D)(3).
Tax Rate on Interest Income from Foreign Currency
Deposit (RR 10-98, Ingles)
Interest income actually received by a 15% FWT
resident citizen or resident alien from FCD
If it was deposited by an OFW, Seaman, or EXEMPT
non-resident citizen
If it was a bank account in the joint names 50%
of an OFW and his spouse (resident) exempt,
50% FWT
of 15%
Interest income actually received by a 15% FWT
domestic corporation from FCD
Interest income actually received by 7.5% FWT
resident foreign corporation from FCD
56
 iii. Regional or Area Headquarters (RHQs) and
Regional Operating Headquarters (ROHQs)
(A) (6) Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies. -
(a) Regional or area headquarters as defined in Section 22(DD)
shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section
22(EE) shall pay a tax of ten percent (10%) of their taxable
income.
Sec. 22. (DD) The term 'regional or area headquarters' shall
mean a branch established in the Philippines by multinational
companies and which headquarters do not earn or derive
income from the Philippines and which act as supervisory,
communications and coordinating center for their affiliates,
subsidiaries, or branches in the Asia-Pacific Region and other
foreign markets.
(EE) The term 'regional operating headquarters' shall mean a
branch established in the Philippines by multinational
companies which are engaged in any of the following services:
general administration and planning; business planning and
coordination; sourcing and procurement of raw materials and
components; corporate finance advisory services; marketing
control and sales promotion; training and personnel
management; logistic services; research and development
services and product development; technical support and
maintenance; data processing and communications; and
business development.
Multinational companies
Foreign firm or entity engaged in international trade with
affiliates or subsidiaries or branch offices in the Asia-Pacific
region and other foreign markets
Regional or Area Headquarters (RHQs)
(1) Branch established in the Philippines by multinational
companies;
(2) Does not earn or derive income from the Philippines; and
(3) Acts as supervisory, communications and coordinating
center for their affiliates, subsidiaries, or branches in the
Asia-Pacific region and other foreign markets.
When exempt from income tax:
(1) Does not earn or derive income from within the
Philippines; and
Does not participate in any manner in the management of
any subsidiary or branch office they might have in the
Philippines nor solicit or market goods and services
whether on behalf of their mother company or their
branches, affiliates, subsidiaries.
(2) Any other company which acts as supervisory,
communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific
region and other foreign markets.
Regional Operating Headquarters (ROHQs)
Allowed to derive income in the Philippines by performing
qualifying services to its affiliates, subsidiaries or branches in
the Philippines, in the Asia-Pacific region and other foreign
markets and may engage in the following activities:
(1) General administration and planning;
(2) Business planning and coordination;
(3) Sourcing/procurement of raw materials and components;
(4) Corporate finance and advisory services;
(5) Marketing control and sales promotion;
(6) Training and personnel management;
(7) Logistics services;
(8) Research and development services, and product
development;
(9) Technical support and maintenance;
(10) Data processing and communication; and
(11) Business development.
Summary:
Regional or Area Headquarters
EXEMPT
(RHQs)
Regional Operating Headquarters 10% on taxable
(ROHQs) income
c. Passive Income
i. Sec. 28 (A)(7) – General Rule – 20%
ii. Interest
(A) (7) Tax on Certain Incomes Received by a Resident
Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary
Benefit from Deposit Substitutes, Trust Funds and Similar
Arrangements and Royalties. - Interest from any currency
bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar
arrangements and royalties derived from sources within the
Philippines shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided, however,
That interest income derived by a resident foreign corporation
from a depository bank under the expanded foreign currency
deposit system shall be subject to a final income tax at the rate
of seven and one-half percent (7 1/2%) of such interest
income.
(b) Income Derived under the Expanded Foreign Currency
Deposit System. - Income derived by a depository bank under
the expanded foreign currency deposit system from foreign
currency transactions with nonresidents, offshore banking
units in the Philippines, local commercial banks including
branches of foreign banks that may be authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business with
foreign currency deposit system units, and other depository
banks under the expanded foreign currency deposit system
shall be exempt from all taxes, except net income from such
transactions as may be specified by the Secretary of Finance,
upon recommendation by the Monetary Board to be subject to
the regular income tax payable by banks: Provided, however,
That interest income from foreign currency loans granted by
such depository banks under said expanded system to
residents other than offshore banking units in the Philippines
or other depository banks under the expanded system shall be
subject to a final tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or
corporations, from transactions with depository banks under
the expanded system shall be exempt from income tax.
The following forms of income derived from within the
Philippines shall be subject to a final withholding tax in the
hands of a foreign corporation based on the gross amount and
at the rate of tax prescribed herein:
(i) Interest income from any currency bank
deposit and yield or any other monetary
benefit from deposit substitutes and from 20%
trust funds and other similar arrangements
derived from sources within the Philippines
(ii) Royalties derived from sources within the
20%
Philippines
(iii) Interest income derived from a depository
7.5%
bank under the expanded FCD system
57
 (iv) Interest income derived by a resident
depository bank under the expanded FCD
system from foreign currency loans granted
by such depositary banks to RESIDENTS,
other than OBUs in the Philippines or
other depository banks under the
expanded system
(v) On net capital gains during the taxable year
from sale of shares of stock in a domestic
corporation not traded in the stock
exchange (EXCEPT shares sold or
disposed of through the stock exchange)
Not over P100,000 (i.e. first P100,000)
On any amount in excess of P100,000
d. Capital Gains
(A) (7) (c) Capital Gains from Sale of Shares of Stock Not
10% Traded in the Stock Exchange. - A final tax at the rates
prescribed below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange
or other disposition of shares of stock in a domestic
corporation except shares sold or disposed of through the
stock exchange:
Not over P 100,000 5%
On any amount in excess of P 100,000 10%
e. Subsidiary v. Branch of a Foreign Corporation
5% If branch – subject to Branch Profit Remittance Tax

10% If subsidiary – amounts received by non-resident foreign

(vi) Gross income derived from contracts by sub- 8%, in corporation would be treated as dividends – it becomes part of
contractors from service contractors lieu of its gross income from within taxable at 30%
engaged in petroleum operations as defined any and
under PD 87 (“Oil Exploration and all Branch will first be subjected to ordinary corporate tax as a
Development Act” in the Philippines) taxes, resident foreign corporation (30%). Afterwards, the profits for
national remittance shall then be subject to 15% BPRT. (Because branch
and assumes personality of an RFC and is therefore taxable as such)
local
Any remittance, so long as you can trace it from a branch to the
iii. Dividends foreign parent corporation subject to BPRT
Ex. X foreign corp. has both regional headquarters and branch
(A) (7) (d) Intercorporate Dividends. - Dividends received in Philippines. Instead of remitting straight to X, branch pays
by a resident foreign corporation from a domestic corporation amount to regional headquarters supposedly for
liable to tax under this Code shall not be subject to tax under administrative support services – The amount paid for the
this Title. services will still be subject to BPRT because the tax is imposed
on “any form of remittance, direct or indirect.”

Home Office (HO) – Parent-Subsidiary

Branch
Branch is classified as a
Resident Foreign
Corporation
HO is classified as a
Resident Foreign
Corporation
HO and Branch are taxed
on taxable income within
the Philippines
Income repatriation by
Branch to HO is referred to
as Branch profit
remittances
Branch profit remittances
are subject to 15% tax on
remittance of branch
profits effectively
connected to the conduct of
Branch’s trade or business
in the Philippines
HO and Branch are
considered as one and the
same corporate entity
Tax and other liability of
the Branch in the
Philippines can be
collected from the HO in
Subsidiary is classified as a
Domestic Corporation
Parent Company is
classified as a Non-
Resident Foreign
Corporation
Subsidiary is taxed on
taxable income within and
without the Philippines
while Parent Company is
taxed on gross income
within the Philippines
Income repatriation by a
Subsidiary to Parent
Company is referred to as
dividends
Dividends paid by
Domestic Corporation to a
Non-Resident Foreign
Corporation is subject to
the preferential rate of
15% subject to the tax
sparing condition
Parent Company and
Subsidiary are two
separate legal entities
Tax and other liability of
the Subsidiary cannot be
collected from the Parent
Company in a foreign
country as they are

58
 foreign country as they are considered separate legal
one and the same entities
f. Branch Profit Remittance Tax
(A) (5) Tax on Branch Profits Remittances. - Any profit
remitted by a branch to its head office shall be subject to a tax
of fifteen (15%) which shall be based on the total profits
applied or earmarked for remittance without any deduction
for the tax component thereof (except those activities which
are registered with the Philippine Economic Zone Authority).
The tax shall be collected and paid in the same manner as
provided in Sections 57 and 58 of this Code: Provided, that
interests, dividends, rents, royalties, including remuneration
for technical services, salaries, wages premiums, annuities,
emoluments or other fixed or determinable annual, periodic or
casual gains, profits, income and capital gains received by a
foreign corporation during each taxable year from all sources
within the Philippines shall not be treated as branch profits
unless the same are effectively connected with the conduct of
its trade or business in the Philippines.
Rationale: To equalize the tax burden on foreign corporations
maintaining, on one hand, local branch offices, and organizing,
on the other hand, a subsidiary domestic corporation.
Basis of the 15% tax: Total profits applied or earmarked for
remittance without any deduction for the tax component
thereof (except those activities which are registered with the
PEZA, SBMA and CDA)
The petitioner sought to refund an overpayment because of an
interpretation of the NIRC. The Court allowed for the refund
sought as the Revenue Code existing in the particular taxable
year expressly stated that the 15% tax shall be imposed on the
amount actually remitted abroad, hence the 15% should not
form part of the tax base.
The law on the imposition of tax to profits of corporations
remitted to their head office abroad specifies that the tax base
is composed of the total “profit remitted abroad,” hence the tax
should NOT be inclusive of the sum remitted.
3. Nonresident Foreign Corporation
a. In General
Sec. 28 (B) (1) In General. — Except as otherwise provided in
this Code, a foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to thirty-five
percent (35%) of the gross income received during each
taxable year from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums
(except reinsurance premiums), annuities, emoluments or
other fixed or determinable annual, periodic or casual gains,
profits and income, and capital gains, except capital gains
subject to tax under subparagraph 5(c): Provided, That effective
January 1, 2009, the rate of income tax shall be thirty percent
(30%).
Definition: Foreign corporation not engaged in trade or
business within the Philippines.

Exception: Interests, dividends, rents, royalties, including General rule: The income of a nonresident foreign corporation
remuneration for technical services, salaries, wages premiums, derived from all sources within the Philippines shall be subject
annuities, emoluments or other fixed or determinable annual, to the 30% final withholding tax based on the gross income
periodic or casual gains, profits, income and capital gains received during each taxable year.
received by a foreign corporation during each taxable year
from all sources within the Philippines shall not be treated as Income includes: Interests, dividends, rents, royalties,
branch profits unless the same are effectively connected with salaries, premiums (except reinsurance premiums), annuities,
the conduct of its trade or business in the Philippines. emoluments or other fixed or determinable annual, periodic or
casual gains, profits and income, and capital gains EXCEPT
Marubeni Corp v. Commissioner (1989) capital gains from shares of stock not traded in the local stock
exchange
Marubeni: Following the principal-agent relationship theory,
the head office and the office branch constitute but one
corporate entity, the Marubeni Corporation, which, under both
Philippine tax and corporate laws, is a resident foreign
corporation because it is transacting business in the
Philippines. Thus, Marubeni Japan is subject only to the 10%
intercorporate final tax on dividends received from a domestic
corporation in accordance with Sec. 24(c)(1) NIRC.

CIR and CTA: Marubeni Japan, being a non-resident foreign

corporation and not engaged in trade or business in the
Philippines, is subject to tax on income earned from Philippine
sources at the rate of 35% of its gross income under Sec.
24(b)(1) NIRC but expressly made subject to the special rate of
25% under Art. 10(2)(b) of the Tax Treaty.

Held: When the foreign corporation (branch office) transacts

business in the Philippines independently of its branch (foreign
corporation), the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation (branch),
not of the branch (foreign corporation). Consequently, the
taxpayer is the foreign corporation (branch).

Bank of America NT & SA v. CA & CIR (1994)

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b. Special Non-Resident Foreign Corporations
Sec. 28 (B) (2) Nonresident Cinematographic Film Owner, Lessor
or Distributor. — A cinematographic film owner, lessor, or
distributor shall pay a tax of twenty-five percent (25%) of its
gross income from all sources within the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by
Philippine Nationals. — A nonresident owner or lessor of
vessels shall be subject to a tax of four and one-half percent (4
1/2%) of gross rentals, lease or charter fees from leases or
charters to Filipino citizens or corporations, as approved by the
Maritime Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and
Other Equipment. — Rentals, charters and other fees derived
by a nonresident lessor of aircraft, machineries and other
equipment shall be subject to a tax of seven and one-half
percent (7 1/2%) of gross rentals or fees.
Cinematographic film owner, 25% gross income
lessor, or distributor
Lessor of vessels chartered by 4.5% gross income
Philippine nationals
Lessor of aircraft, machineries 7.5% gross income
and other equipment
c. Passive Income
i. Interest
Sec. 28 (B) (5) Tax on Certain Incomes Received by a
Nonresident Foreign Corporation. —
(a) Interest on Foreign Loans. — A final withholding tax at the
rate of twenty percent (20%) is hereby imposed on the amount
of interest on foreign loans contracted on or after August 1,
1986;
ii. Dividends
Sec. 28 (B) (5) Tax on Certain Incomes Received by a
Nonresident Foreign Corporation. —
(b) Intercorporate Dividends. — A final withholding tax at the
rate of fifteen percent (15%) is hereby imposed on the amount
of cash and/or property dividends received from a domestic
corporation, which shall be collected and paid as provided in
Section 57(A) of this Code, subject to the condition that the
country in which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due from the
nonresident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to twenty percent (20%),
which represents the difference between the regular income
tax of thirty-five percent (35% and the fifteen percent (15%)
tax on dividends as provided in this subparagraph: Provided,
That effective January 1, 2009, the credit against the tax due
shall be equivalent to fifteen percent (15%), which represents
the difference between the regular income tax of thirty percent
(30%) and the fifteen percent (15%) tax on dividends;
Nonresident foreign corporations are entitled to the
preferential 15% tax rate on the intercorporate dividends
derived by from a domestic corporation.
Reciprocity rule: The foreign corporation must show that the
country of origin grants a tax credit to the nonresident foreign
corporation, taxes deemed to have been paid in the Philippines
equivalent to at least 15% against the tax due from the said
nonresident foreign corporation. This must be strictly complied
with because the 15% tax rate is a concession in the nature of a
tax exemption vis-à-vis the normal rate of 30% on
corporations,
Commissioner v. Proctor & Gamble (1991)
CIR disallowed P&G-Phil’s request for tax credit for the
dividends declared for taxable years 1974 and 1975
because it is not the proper party to claim such tax credit
but P&G USA, its parent company. The Court overturned
the decision, ruling that P&G-Phil is the proper party as it is
considered a “taxpayer” under Sec. 309 (3) of the NIRC.
The law states that the tax rate of 35% applicable to
dividend remittances to nonresident corporate
stockholders (i.e. P&G-SA) of a Filipino corporation (i.e.
P&G-Phil) is reduced if the USA allows P&G-USA a tax credit
for "taxes deemed paid in the Philippines" applicable
against the US taxes of P&G-USA. Such tax credit must, as a
minimum, reach an amount equivalent to 20%, or the
difference between the regular 35% dividend tax rate and
the preferred 15% dividend tax rate.
Commissioner v. Wander Phils (1988)
As a wholly owned subsidiary, Wander paid 35%
withholding tax on its dividends remitted to its parent
company Glaro. Wander filed a claim for refund after
realizing that it overpaid taxes on dividends, as it should
only be assessed at 15%, and not 35%. The Court affirmed
the decision of the CTA granting the refund as the tax
sparing credit applies in this case.
The Tax Sparing Credit allows 15% final tax on
intercorporate dividends subject to the condition that the
country where the nonresident foreign corporation (NRFC)
is domiciled allows a credit for taxes deemed paid in the
Philippines equivalent to at least 15%. (Note that prior to
January 2009, the tax rate was 35% as applied in this case).
15% represents the difference between the regular income
tax of 30% on corporations and the 15% tax on dividends.
If the country within which the NRFC is domiciled does not
allow a tax credit, a final withholding tax at the rate of 30%
is imposed.
d. Capital Gains
Sec. 28 (B) (5) Tax on Certain Incomes Received by a
Nonresident Foreign Corporation. —
(c) Capital Gains from Sale of Shares of Stock not Traded in the
Stock Exchange. — A final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange, or other
disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange:
Not over P100,000 ………………………………….. 5%
On any amount in excess of P 100,000 …….. 10%
4. Minimum Corporate Income Tax (MCIT)
Tax Rate and Base [Sec. 27(E)(1) and Sec. 28 (A)(2)]
(E) Minimum Corporate Income Tax on Domestic
Corporations. -
(1) Imposition of Tax. - A minimum corporate income tax of
two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth
taxable year immediately following the year in which such
corporation commenced its business operations, when the
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minimum income tax is greater than the tax computed under 1998 excess MCIT (25,000)
Subsection (A) of this Section for the taxable year. 1999 excess MCIT (40,000) 65,000
Net amount of tax payable 35,000
(A) Tax on Resident Foreign Corporations
(2) Minimum Corporate Income Tax on Resident Foreign Relief from MCIT
Corporations. – A minimum Corporate Income tax of two MCIT may be suspended by the Sec. of Finance when
percent (2%) of gross income, as prescribed under Section 27 corporation’s losses are due to:
(E) of this code, shall be imposed, under the same conditions, (1) Prolonged labor dispute
on a resident foreign corporation taxable under paragraph (1) (2) Force majeure
of this subsection. (3) Legitimate business reverses

b. Gross Income [Sec. 27(E)(4)]

MCIT Rate = 2% of gross income
(4) Gross Income Defined. - For purposes of applying the
When to begin/apply MCIT minimum corporate income tax provided under Subsection (E)
Beginning on the 4th taxable year immediately following the hereof, the term 'gross income' shall mean gross sales less sales
year in which the corporation commenced its business returns, discounts and allowances and cost of goods sold. 'Cost
operations. Commencement is upon issuance of BIR Certificate of goods sold' shall include all business expenses directly
of Registration. incurred to produce the merchandise to bring them to their
present location and use.
When corporation liable For a trading or merchandising concern, 'cost of goods sold'
(1) Whenever the corporation has zero or negative taxable shall include the invoice cost of the goods sold, plus import
income; or duties, freight in transporting the goods to the place where the
(2) Whenever the amount of MCIT is greater than the normal goods are actually sold including insurance while the goods are
income tax computed using the 30% regular income tax in transit.
rate. For a manufacturing concern, 'cost of goods manufactured and
sold' shall include all costs of production of finished goods,
Rationale: To forestall the prevailing practice of domestic such as raw materials used, direct labor and manufacturing
corporations (and resident foreign corporations) of overhead, freight cost, insurance premiums and other costs
overclaiming deductions in order to reduce their income tax incurred to bring the raw materials to the factory or
payments. The filing of income tax returns showing a tax loss warehouse.
every year goes against the business motive which impelled the In the case of taxpayers engaged in the sale of service, 'gross
stockholders to form the corporation. income' means gross receipts less sales returns, allowances,
discounts and cost of services. 'Cost of services' shall mean all
As a tax on gross income, it prevents tax evasion and direct costs and expenses necessarily incurred to provide the
minimizes tax avoidance schemes. It is not an additional tax services required by the customers and clients including (A)
imposition but one imposed in lieu of the normal net income salaries and employee benefits of personnel, consultants and
tax and only if the normal income tax is suspiciously low. specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as
a. Carry Forward Excess Minimum Tax [Sec. depreciation or rental of equipment used and cost of supplies:
27(E)(2)] Provided, however, That in the case of banks, 'cost of services'
shall include interest expense.
(2) Carry Forward of Excess Minimum Tax. - Any excess of
the minimum corporate income tax over the normal income tax Gross income shall mean gross sales (–) sales returns,
as computed under Subsection (A) of this Section shall be discounts and allowances (–) cost of goods sold.
carried forward and credited against the normal income tax for
the three (3) immediately succeeding taxable years. Cost of goods sold shall mean all business expenses directly
incurred to product the merchandise to bring them to their
present location and use.
Excess of MCIT over the normal income tax shall be carried
forward and credited against normal income tax for the 3
For taxpayers engaged in the sale of services, gross income
succeeding years.
shall mean gross receipts (–) sales returns, discounts and
allowances (–) cost of services
Note: MCIT Carry Forward can only be deducted if regular
income tax is greater than MCIT.
Cost of services shall mean all direct costs and expenses
necessarily incurred to provide the services required by the
Illustration:
customers and clients.
Year (A) (B) (B-A)
Normal MCIT (2%) Excess MCIT
Note: Pursuant to RR No. 12-07, MCIT shall apply at the time of
income tax
the filing of the quarterly corporate income tax.
(30%)
1998 50,000 75,000 25,000
Chamber of Real Estate and Builders’ Associations Inc v. Romula
1999 60,000 100,000 40,000
(2010)
2000 100,000 60,000
Petitioner assails the constitutionality of Sec. 27(E) of RA 8424
Computation of Net Amount of Tax Payable in 2000: and the implementing RRs issued by the BIR, particularly the
Amount of tax payable 100,000 imposition of MCIT and creditable withholding tax (CWT)
Less: because it levies income tax even if there was no realized gain.

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The SC held that there was nothing unconstitutional about such
impositions, and that they did not violate the due process
clause or equal protection clause.
Under the MCIT scheme, a corporation, beginning on its fourth
year of operation, is assessed an MCIT of 2% of its gross
income when such MCIT is greater than the normal corporate
income tax imposed under Sec. 27(A). If the regular income tax
is higher than the MCIT, the corporation does not pay MCIT.
Any excess of the MCIT over the normal tax shall be carried
forward and credited against the normal income tax for the
three immediately succeeding taxable years. MCIT is a result of
perceived inadequacy of self-assessment in capturing the true
income of corporations.
The Manila Banking Corporation v. CIR (2006)
Manila Banking Corporation, a company engaged in the
commercial banking industry, was prohibited by the Monetary
Board from engaging in business due to insolvency. While
Manila Banking is insolvent, RA 8424 was enacted which
introduced the imposition of the MCIT on domestic and
resident foreign corporations and allowed a 4 year period from
the time the corporations were registered with the BIR during
which the minimum corporate income tax should not be
imposed. Eventually, BSP authorized Manila Banking to operate
as a thrift bank. It filed its annual corporate income tax return
and paid for taxable year 1999 with the BIR. Manila Banking
requested a ruling from BIR whether it is entitled to the 4 year
grace period. SC ruled that Manila Banking is entitled to the 4
year grace period being a thrift bank (under RA 7906) and the
BIR Revenue Regulation 4-95 (which defined the phrase date of
commencement of operation as the date when the thrift bank
was registered with the SEC or the date when the Certificate of
Authority to Operate was issued by the Monetary Board of the
BSP, whichever comes later)
Revenue Regulations No. 9-98, implementing R.A. No. 8424
imposing the minimum corporate income tax on corporations,
provides that for purposes of this tax, the date when business
operations commence is the year in which the domestic
corporation registered with the BIR. However, under Revenue
Regulations No. 4-95, the date of commencement of operations
of thrift banks (like Manila Banking) is the date the particular
thrift bank was registered with the SEC or the date when the
Certificate of Authority to Operate was issued to it by the
Monetary Board of the BSP, whichever comes later.
5. Improperly Accumulated Earnings Tax (IAET)
a. Definition and Tax Rate
SEC. 29. Imposition of Improperly Accumulated Earnings
Tax. -
(A) In General. - In addition to other taxes imposed by this
Title, there is hereby imposed for each taxable year on the
improperly accumulated taxable income of each corporation
described in Subsection B hereof, an improperly accumulated
earnings tax equal to ten percent (10%) of the improperly
accumulated taxable income.
(B) Tax on Corporations Subject to Improperly
Accumulated Earnings Tax. -
(1) In General. - The improperly accumulated earnings tax
imposed in the preceding Section shall apply to every
corporation formed or availed for the purpose of avoiding the
income tax with respect to its shareholders or the shareholders
of any other corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed.
IAET = 10% tax imposed for each taxable year on the
improperly accumulated taxable income of domestic and
closely-held corporations
Rationale: If the earnings and profits were distributed, the
shareholders would then be liable to income tax thereon,
whereas if the distribution were not made to them, they would
incur no tax.
It is in the nature of a penalty to the corporation and as a form
of deterrent to the avoidance of tax upon shareholders.
Exception: The use of undistributed earnings and profits are
for the reasonable needs of the business.
Immediacy test: The reasonable needs of the business are the
–
(1) Immediate needs of the business; and
(2) Reasonably anticipated needs (ex. expansion)
The following constitute accumulation of earnings for the
reasonable needs of the business:
(1) Allowance for the increase in the accumulation of earnings
up to 100% of the paid-up capital of the corporation as of
Balance Sheet date, inclusive of accumulations taken from
other years;
(2) Earnings reserved for definite corporate expansion
projects or programs requiring considerable capital
expenditure as approved by the Board of Directors or
equivalent body;
(3) Earnings reserved for building, plants or equipment
acquisition as approved by the Board of Directors or
equivalent body;
(4) Earnings reserved for compliance with any loan covenant
or pre-existing obligation established under a legitimate
business agreement;
(5) Earnings required by law or applicable regulations to be
retained by the corporation or in respect of which there is
legal prohibition against its distribution;
(6) In the case of subsidiaries of foreign corporations in the
Philippines, all undistributed earnings intended or
reserved for investments within the Philippines as can be
proven by corporate records and/or relevant
documentary evidence.
b. Corporations Subject to IAET
Only domestic AND closely-held corporations are liable for
IAET.
Closely-held corporations
Those where at least 50% in value of the outstanding capital
stock OR at least 50% of the total combined voting power of all
classes of stock entitled to vote is owned directly or indirectly
by or for not more than 20 individuals.
c. Exceptions
(2) Exceptions. - The improperly accumulated earnings tax as
provided for under this Section shall not apply to:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.
IAET shall NOT apply to the following corporations:
(1) Banks and other non-bank financial intermediaries;
(2) Insurance companies;
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(3) Publicly held corporations;
(4) Taxable partnerships;
(5) General professional partnerships;
(6) Non-taxable joint ventures;
(7) Enterprises duly registered with PEZA, BCDA, as well as
other enterprises duly registered under special economic
zones
d. Evidence of Purpose to Avoid Income Tax
(C) Evidence of Purpose to Avoid Income Tax. -
(1) Prima Facie Evidence. - the fact that any corporation is a
mere holding company or investment company shall be prima
facie evidence of a purpose to avoid the tax upon its
shareholders or members.
(2) Evidence Determinative of Purpose. - The fact that the
earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business shall
be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by the clear
preponderance of evidence, shall prove to the contrary.
Holding or investment company
Corporation having practically no activities except holding
property, and collecting the incomes therefrom or investing the
same
Unreasonable accumulation of profits
If it is not required for the purpose of the business, considering
all the circumstances of the case (ex. nature of the business,
financial condition at the close of the taxable year,
undistributed earnings or profits)
Prima facie instances of accumulation of profits beyond
the reasonable needs of a business and indicative of
purpose to avoid income tax upon shareholders
(1) Investment of substantial earnings and profits of the
corporation in unrelated business or in stock or securities
of unrelated business;
(2) Investment in bonds and other long-term securities; and
(3) Accumulation of earnings in excess of 100% of paid-up
capital, not otherwise intended for the reasonable needs of
the business. The controlling intention of the taxpayer is
that which is manifested at the time of accumulation. A
speculative and indefinite purpose will not suffice. The
mere recognition of a future problem or the discussion of
possible and alternative solutions is not sufficient.
Definiteness of plan/s coupled with action/s taken
towards its consummation is essential.
e. Improperly Accumulated Taxable Income
(D) Improperly Accumulated Taxable Income. - For
purposes of this Section, the term 'improperly accumulated
taxable income' means taxable income adjusted by:
(a) Income exempt from tax;
(b) Income excluded from gross income;
(c) Income subject to final tax; and
(d) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(a) Dividends actually or constructively paid; and
(b) Income tax paid for the taxable year.
Provided, however, That for corporations using the calendar
year basis, the accumulated earnings tax shall not apply on
improperly accumulated income as of December 31, 1997. In
the case of corporations adopting the fiscal year accounting
period, the improperly accumulated income not subject to this
tax, shall be reckoned, as of the end of the month comprising
the twelve (12)-month period of fiscal year 1997-1998.
Illustration:
Taxable income for the year (ex. 2010) Pxxxxx
Add:
(a) Income subjected to final tax Pxxxx
(b) Amount of net operating loss carry- xxxx
over (NOLCO) deducted
(c) Income exempt from tax xxxx
(d) Income excluded from gross income xxxx xxxx
Pxxxxx
Less:
Income tax paid Pxxx
Dividends declared/paid xxxx xxxxx
Total Pxxxx
Add: Retained earnings from prior years
Accumulated earnings as of Dec. 31, 2010
Less: Amount that may be retained Xxxxx
(100% of paid-up capital as of Dec. 31,
2010)
Improperly accumulated taxable income Pxxx
(IATI)
Resulting IATI is multiplied by 10% to get the IAET.
CIR v. Tuason
Accumulation of surplus profits, if not used for expansion of the
business, but rather left alone, would still be taxable (via Sec.
25, 1977 Tax Code); all assessments presumptions are in favor
of the correctness of petitioner's assessment against the
private respondent; it is incumbent upon the taxpayer to prove
otherwise.
Cynamid v. CA
Petitioner did not declare dividends or distribute earnings to
shareholders in 1981, alleging that accumulation is needed to
increase its working capital for reasonable business needs. CIR
and the courts (CTA, CA, SC) all ruled that petitioner was not
able to prove that such accumulation of profit was for
immediate needs of the business. They all found that the
company was sufficiently liquid based on its financial
statements. Also, it was not among those excepted from
additional tax on improperly accumulated earnings tax, as
enumerated in Section 25 of the 1977 NIRC. Finally, tax
amnesty availed of in Oct. 1987 only bars assessments after
Aug. 21, 1986, but not assessment in question, which was
issued in Jan. 1985.
In order to determine whether profits are accumulated for the
reasonable needs of the business to avoid the surtax upon
shareholders, it must be shown that the controlling intention of
the taxpayer is manifested at the time of accumulation, not
intentions declared subsequently, which are mere
afterthoughts. Furthermore, the accumulated profits must be
used within a reasonable time after the close of the taxable
year.
6. Exemption from Tax On Corporation (Sec. 30)
SEC. 30. Exemptions from Tax on Corporations. - The
following organizations shall not be taxed under this Title in
respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not
organized principally for profit;
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(B) Mutual savings bank not having a capital stock represented
by shares, and cooperative bank without capital stock
organized and operated for mutual purposes and without
profit;
(C) A beneficiary society, order or association, operating for
the exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual aid
association or a nonstock corporation organized by employees
providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or
association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for
the benefit of its members;
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific, athletic,
or cultural purposes, or for the rehabilitation of veterans, no
part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific
person;
(F) Business league chamber of commerce, or board of trade,
not organized for profit and no part of the net income of which
inures to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a
purely local character, the income of which consists solely of
assessments, dues, and fees collected from members for the
sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and
operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds
of sales, less the necessary selling expenses on the basis of the
quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs,
the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of
the disposition made of such income, shall be subject to tax
imposed under this Code.
Construction: Strictly against the grantee and liberally in favor
of the government
Non-stock: Where no part of its income is distributable as
dividends to its members, trustees, or officers
Non-profit: No income accrues to the benefit of any member of
the corporation
When liable to income tax:
(1) Income from any of their properties, real or personal (ex.
income from corporate dividends, rentals received from
their properties, interests received from capital loaned to
other persons, income from agricultural lands, profits
from sale); or
(2) From any of their activities conducted for profit,
regardless of the disposition made of such income.
Note: The exemption does not extend to members.
a. Educational
It must prove that:
(1) It falls under the classification of non-stock, non-profit
educational institution; and
(2) The income it seeks to be exempted from taxation is
actually, directly and exclusively used for educational
purposes.
Jesus Sacred Heart College v. CIR (1954)
CIR assessed JSHC, an educational organization in Lucena,
Quezon offering elementary, secondary and collegiate courses,
income taxes on the ground that it generated profits as it was
of the view that no matter how these profits were disposed of,
as long as an educational institution generated profits, it was
subject to income tax. JSHC claimed a refund. CIR denied. SC
found the interpretation of the CIR was erroneous and
rendered the provision nugatory. To hold that an educational
Institution is subject to income tax whenever it is operated to
reasonably assure that it will not run at a deficit, is to nullify
and defeat the exemption.
b. Cooperatives
Dumaguete Catherdral Credit Cooperative v. CIR (2010)
DCCCO was assessed with deficiency withholding taxes for
payments of honorarium of the Board of Directors, security and
janitorial services, legal and professional fees, and interest on
savings and time deposits of its members. DCCCO protested the
assessment. SC held that DCCCO is not liable to pay the
deficiency withholding tax on interest from savings and time
deposit of its members
Cooperatives exist for the benefit of their members. The
primary objective of every cooperative is to provide goods and
services to its members to enable them to attain increased
income, savings, investments, and productivity. Therefore,
limiting the application of the tax exemption to cooperatives
would go against the very purpose of a credit cooperative.
Extending the exemption to the members, on the other hand,
would be consistent with the legislative intent. Although the
exemption in the law only mentions cooperatives, this should
be construed to include the members.
Cooperatives, including their members, deserve a preferential
tax treatment because of their vital role in the attainment of
economic development and social justice. Although taxes are
the lifeblood of the government, the State’s power to tax must
give way to foster the creation and growth of cooperatives. The
power of taxation, while indispensable, is not absolute and may
be subordinated to the demands of social justice.
c. Hospitals
CIR v. St. Luke’s Medical Center (2012)
BIR assessed St. Luke’s for deficiency income tax under Section
27(B) of the NIRC of 1997, which imposes a 10% preferential
tax rate on the income of proprietary non-profit educational
institutions and hospitals. St. Luke’s questioned it before the
CTA, citing the exemption granted to charitable institutions
under Sec. 30 (E) and (G) of the same law. The Supreme Court
harmonized the two provisions and found that for a charitable
institution to be completely tax exempt under Sec. 30(E), it
must be “organized and operated exclusively” for charitable
purposes. St. Luke’s clearly did not fall in that category so its
activities conducted for profit was subject to income tax, but
only at 10%.
Proprietary educational institutions and hospitals do not lose
its tax exempt status if it earns income from its for-profit
activities. Such income from for-profit activities, under the last
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paragraph of Section 30, is merely subject to income tax,
previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).

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