Person - Orporation: Income Tax

I`
Case Summary Doctrine
INCOME TAX
Section 22
(A) to (I), (A) PERSON – individual, trust, estate, corporation - ITEC
(Z), (GG), (B) CORPORATION
and (HH), 1. Partnership – no matter how created / organized
Tax Code 2. Joint stock companies
3. Joint accounts/ associations
4. Insurance companies
Does not include:
- General professional partnerships – partnerships formed by persons for the sole
purpose of exercising their common profession, no part of their income of which is
derived from engaging in any trade or business
- Joint venture or consortium – formed or the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal, and other energy operations
pursuant to an operating or consortium agreement under a service contact of
government
(C) DOMESTIC – corporation created or organized in the Philippines and under its laws
(D) FOREIGN – corporation which is not domestic
(E) NON-RESIDENT CITIZEN means:
A citizen of the Philippines
1. Who establishes with satisfaction of the Commission the fact of his physical
presence abroad with a definite intention to reside therein
2. Who leaves the Philippines during the taxable year to reside abroad with a
definite intention to reside therein
3. 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 d1erived from
sources abroad until the date of his arrival in the Philippines
5. The taxpayer shall submit PROOF to the commission 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 purposes of this Section.
(F) RESIDENT A. – individual whose residence is within the Philippines, and who is not a
citizen thereof
(G) NONRESIDENT A. – individual who is not within the Philippines, and who is not a
citizen thereof
(H) RESIDENT FOREIGN CORPORATION – foreign corporation engaged in
trade/business within the Philippines
(I) NONRESIDENT FOREIGN CORPORATION – foreign corporation not engaged in
business within the Philippines
(Z) ORDINARY INCOME
- includes GAIN from the sale or exchange of property which is not a capital asset or
property described in Section 39(A)(1)
 CAPITAL ASSETS – property held by the taxpayer (whether connected with his
1
TAXREV 2019 | ATTY. MONTERO JRM – edited by Mich Fellone
I`
trade / business) but does NOT include :

o Stock in trade of the taxpayer
o Other property of a kind which would properly be include in the inventory of
the TP if on hand at the close of the taxable year
o Property held by TP primarily for sale to customers in the ordinary course of
his trade or business
o Property used in the trade or business of a character which is subject to the
allowance for depreciation provided in Subsection (F) of Section 34
o Real property used in the trade or business of TP
(GG) STATUTORY MINIMUM WAGE – refers to the rate fixed by the Regional Tripartite Wage
and Productivity Board, as defined by Bureau of Labor and Employment Statistics of the DOLE
(HH) MINIMUM WAGE EARNER – refers to a worker in the private sector paid in the statutory
minimum wage / 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
Sections TAX ON NONRESIDENT ALIEN INDIVIDUALS

25 (A)(1), A. Nonresident alien engaged in trade/business WITHIN THE PHILIPPINES
31, and 39 1. In general TREATMENT– a NRAETB in the Philippines is subject to an income tax in
(A), Tax the same manner as an individual citizen and a resident alien individual on taxable
Code income received from all sources within the Philippines
2. Who? A NRA individual who shall come to the Philippines and stay therein for an
aggregate period of more than 180 days during any calendar year shall be deemed a
nonresident alien doing busines sin the Philippines, Sec 22(G) of this Code
notwithstanding
RA 10754
Web designer, living in the Philippines, but I design web pages for clients abroad as they
operate solely from abroad – citizen/alien
GR: it is a necessary requirement that work necessitated that you stay outside most of the year,
July 1  if you are designated as an OFW, securing a license and there’s pre-set outside the
PH, you become a non resident citizen on day 1
1. Definitions
Garrison Petitioners are US Citizens who entered the Revenue Regulations No. 2 Section 5 provides:
v. CA country through the Philippine Immigration “An alien actually present in the Philippines who
(1990) Act of 1940 and are employed in the US is not a mere transient or sojourner is a resident
Naval Base in Olongapo City. They earn no of the Philippines for purposes of income tax.”
Philippine source income and it is also their
intention to return to the US as soon as Whether or not an alien is a transient or not is
their employment has ended. further determined by his: “intentions with
regards to the length and nature of his stay. A
The BIR claimed that they were resident mere floating intention indefinite as to time, to
aliens and required them to file their returns. return to another country is not sufficient to
constitute him as transient.”
Petitioners refused stating that they were
not resident aliens but only special If he lives in the Philippines and has no definite
temporary visitors. They also claimed intention as to his stay, he is a resident.”
2
I`
exemption by virtue of the RP-US Military

Bases Agreement, which states that “a Further, if the alien is in the Philippines for a
national of the United States serving in or definite purpose which by its nature may be
employed in the Philippines in connection promptly accomplished, he is considered a
with construction, maintenance, operation or transient. However, if an extended stay is
defense of the bases and reside in the necessary for him to accomplish his purpose, he
Philippines by reason only of such is considered a resident, “though it may be his
employment is only liable for tax on intention at all times to return to his domicile
Philippine sources of income.” abroad when the purpose for which he came
has been consummated or abandoned.
WON PETITIONERS CAN BE
CONSIDERED RESIDENT ALIENS  YES Notwithstanding the fact that the Petitioners are
resident aliens who are generally taxable, their
WON PETITIONERS MUST STILL FILE class is nonetheless exempt from paying taxes
ITR NOTWITHSTANDING THE on income derived from their employment in the
EXEMPTION  YES naval base by virtue of the RP- US Military
bases agreement.
Since they are RESIDENT ALIENS – they
are required to file ITR for BIR to assess Even though the petitioners are exempt from
income derived from PH sources can be paying taxes from their employment in the Naval
taxed. They are only exempted from Base, they must nevertheless file an ITR. The
income derived from employment in US Supreme Court held that the filing of an ITR and
bases the payment of taxes are two distinct obligations.
While income derived from employment
connected with the Naval Base is exempt,
income from Philippine Sources is not. The
requirement of filing an ITR is so that the BIR
can determine whether or not the US National
should be taxed.
RR 1-79 Section 22 (E) of the Tax Code defines a non-resident citizen as any of the following:
(Section
2) 1. A Philippine citizen who establishes to the satisfaction of the Bureau of Internal
Revenue (BIR) Commissioner the fact of his physical presence abroad with a definite
“Who are intention to reside therein.
non- 2. A Philippine citizen who leaves the country during the taxable year to reside abroad,
resident either as an immigrant or for employment on a permanent basis.
citizens” 3. A Philippine citizen 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 person previously considered a non-resident citizen and who arrives in the Philippines
at any time during the taxable year to reside permanently in the country shall likewise
be treated as a non-resident 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.
The forgoing Tax Code provision mirrors the definitions under Section 2 of Revenue
Regulations (RR) No. 1-79 dated Jan. 8, 1979. Under the RR, a non-resident citizen is one
who establishes to the satisfaction of the Commissioner the fact of his physical
3
I`
presence abroad with the definite intention to reside therein, and shall include any
Filipino who leaves the country during the taxable year as an immigrant, a permanent
employee abroad, or a contract worker.
Immigrant – one who leaves the PH to reside abroad as an immigrant for which a foreign visa
is secured
Permanent employee abroad – one who leaves the PH to reside abroad for employment on a
more or less permanent basis
Contract worker – one who leaves the Philippines on account of a contract of employment
which is renewed from time to time under such circumstance as to require him to be physically
present abroad, most of the time (not less than 183 days)
RR 5-01 Revokes the requirement for non-resident citizens, overseas contract workers, and seamen to
file information returns on income derived from sources outside the Philippines beginning
taxable year 2001.
BIR Technoserve International Co., Inc. (TIC), is According to Sec 22(E)(3) of the Tax Code of
Ruling a domestic foreign corporation engaged in 1997, a non- resident citizen is a citizen of the
33-00 rendering specialty and technical services Philippines who:
for overseas or domestic projects in the 1. works and derives income from abroad
“most of areas of engineering, procurement service and
the time” and construction management and other 2. whose employment thereat requires him
related fields. to be physically present abroad most of
the time during the taxable year.
TIC has a Secondment Agreement with its
main client and parent company, JGC Corp. MOST OF THE TIME  At least 183 days
which is based in Japan. abroad
The phrase "most of the time" which is used in
Under this agreement, TIC employees shall determining when a citizen's physical presence
be assigned or seconded to Japan or other abroad will qualify him as non-resident, shall
site offices to work for JGC’s clients but will mean that the said citizen shall have stayed
not lose status of employment under TIC. abroad for at least 183 days in a taxable year.
Since TIC shall pay the salaries of the
employees abroad, Ms. Baria, VP and All employees whose services are rendered
Admin. Mngr. of TIC, requested the BIR to abroad for being seconded or assigned for at
clarify or rule on the proper tax least 183 days may fall under the first category
classification of TIC employees assigned and are thus exempt from payment of
abroad. Philippine income tax.
WON TIC EMPLOYEES WHO ARE The same exemption applies to an overseas
ASSIGNED OVERSEAS FOR AT LEAST contract worker but as such worker, the time
183 DAYS IN A TAXABLE YEAR WERE spent abroad is not material for tax
CLASSIFIED AS NON-RESIDENTS  exemption purposes. The only requirement
YES is that the employment contract be pass
through and be registered with the POEA.
Sec 23(C) of NIRC – an individual citizen of
the Philippines who is working and deriving
income from abroad as an overseas
contract worker is taxable only on income
from sources within the Philippines.
BIR Jose Borromeo, from Houston Texas wrote Section 23 of the Philippine Tax Code espouses
4
I`
Ruling a letter to the BIR requesting to apply for the source rule of income taxation, except for
DA 095- Philippine Dual citizenship under RA. 9225 resident citizens and domestic corporations that
05 and he asks if he is required to pay taxes for remain taxable on their worldwide income.
income earned in the U.S.He was neither a
citizen nor a resident of the Philippines at Nonresident citizens and resident aliens are
the time of this inquiry. taxed only on their Philippine-sourced income.
Under the inherent limitation of territoriality of
Not citizen taxation, a state can only tax properties,
Not resident at time of inquiry activities or services within its territory. If the flow
of wealth proceeded from U.S. territory enjoying
WON BORROMEO IS REQUIRED TO PAY the protection accorded by the U.S. Government
INCOME TAXES FOR INCOME EARNED or obtained by a person enjoying that protection,
IN THE US  NO the situs of the source of income is the US.
In consideration of such protection, the flow of

wealth should share the burden of the
supporting government which is the U.S.
Government. Since income was derived without
the Philippines, the situs of the income is without
the Philippines; hence, the Philippine
Government has no jurisdiction over income
derived outside the Philippines by nonresident
citizens not engaged in trade or business in the
Philippines. “
Since you will be a nonresident citizen, [after

being dual citizen] you will not be required to
pay Philippine tax for income earned in the
United States.”
Sec 5 & 6, An alien who has acquired residence in the Philippines – retains his status until he
RR 2 abandons the same and actually departs from the Philippines
A mere intention to change his residence – does not change his status from resident alien to
non-resident alien. An alien who has acquired a residence is taxable as resident for the
remainder of his stay in the PH
CORPORATIONS
One person corporation v. Sole Proprietorship
1. Different tax implications
Rates : flat 30% rate
Lesser than 7.5 – better sole proprietorship
Greater than 7.5 million – better than corporation
2.MCIT – only applies to one person corporation
3. Deductions
5
I`
4. Donations – threshold for corporations are higher than individual
Domestic Corporations have a fixed 30% regular income tax rate while sole proprietors
have the option to be taxed either at an 8% preferential tax rate or using the graduated
tax table.
5. Optional standard deduction threshold in OPC and sole proprietorship
As for optional standard deductions, corporations can deduct their direct costs first before
deducting a fixed 40% OSD in lieu of itemized deductions while for sole proprietors, the tax
base for OSD is their gross revenues. This means that corporations may have a lower tax
payable compared to their sole proprietor counterparts.
AFISCO AFISCO and 40 other non-life insurance A pool is considered a corporation for taxation
Insurance companies entered into reinsurance treaties purposes. Citing the case of Evangelista v. CIR,
v. CA (Agreement) with Munich, a non- resident the Court held that Sec. 24 of the NIRC covered
(1999) foreign insurance corporation, [NRFC] to these unregistered partnerships and even
cover all their insurance policies over associations or joint accounts, which had no
machinery erection, breakdown and boiler legal personalities apart from individual
explosion. Under the Agreement, AFISCO members.
and 40 other non-life insurance companies
should form a pool for the purpose of The ceding companies entered into a Pool
contracting with Munich. The said “pool” Agreement or an association that would handle
of insurance companies was assessed all the insurance businesses covered under their
deficiency corporate taxes. quota-share reinsurance treaty and surplus
reinsurance treaty with Munich. The following
The “pool” contends that unmistakably indicates a partnership or an
(I) the reinsurance policies were made association covered by Section 24 of the NIRC:
by them individually, a. The pool has a common fund, consisting of
(II) their liability was limited to the extent money and other valuables that are
of their share, deposited in the name and credit of the
(III) there is no common fund, pool. This common fund pays for the
(IV) the executive board does not exercise administration and operation expenses of
control over the funds and the pool.
(V) it could not derive income for itself. b. The pool functions through an executive
board, which resembles the board of
WON THE “POOL” IS A TAXABLE directors of a corporation, composed of
ENTITY  YES one representative for each of the
ceding companies.
Section 22(B) of NIRC: c. True, the pool itself is not a reinsurer and
(B) The term 'corporation' shall include does not issue any insurance policy;
partnerships, no matter how created or however, its work is indispensable,
organized, joint-stock companies, joint beneficial and economically useful to the
accounts (cuentas en participacion), business of the ceding companies and
association, or insurance companies, but Munich, because without it they would not
does not include general professional have received their premiums. The ceding
partnerships and a joint venture or companies share in the business ceded to
consortium formed for the purpose of the pool and in the expenses according to a
6
I`
Rules of Distribution annexed to the Pool

undertaking construction projects or Agreement. Profit motive or business is,
engaging in petroleum, coal, geothermal therefore, the primordial reason for the
and other energy operations pursuant to an pools formation.
operating consortium agreement under a
service contract with the Government. The fact that the pool does not retain any profit
'General professional partnerships' are or income does not obliterate an antecedent
partnerships formed by persons for the sole fact, that of the pool being used in the
purpose of exercising their common transaction of business for profit. It is apparent,
profession, no part of the income of which is and petitioners admit, that their association or
derived from engaging in any trade or coaction was indispensable to the transaction of
business. the business. x x x If together they have
conducted business, profit must have been the
Different corporations magkakasama object as, indeed, profit was earned. Though the
profit was apportioned among the members, this
is only a matter of consequence, as it implies
that profit actually resulted.
Pascual Pascual and Dragon bought 2 sets of 2 ELEMENTS IN FORMING A PARTNERSHIP:
v. CIR parcels of land. They sold the 1st set 1. Agreement to contribute money,
(1988) (consists of 2 parcels of land) in 1968 and property, or industry to a common fund
the 2nd set (consists of 3 parcels of land) [M.P.I]
“Sharing in 1970. Later on, they paid the 2. Intention of dividing profits among
of returns” corresponding capital gains taxes in themselves. [Divide P]
1973 and 1974 by availing the tax
amnesties on the said years. There is no evidence that Pascual and Dragon
entered into an agreement to contribute money,
Different individuals magkaksama property or industry to a common fund, and that
they intended to divide the profits among
However, the CIR assessed them for tax themselves. Basically, they did not intend to
deficiencies saying that they formed an form a partnership.
unregistered partnership and must pay the
corresponding corporate income tax SHARING OF RETURNS  NOT SUFFICIENT
therefor. Pascual and Dragon brought the TO ESTABLISH PARTNERSHIP
matter to the CTA, which affirmed the The sharing of returns does not in itself
decisions of the CIR. establish a partnership whether or not the
persons sharing therein have a joint or common
WON PASCUAL AND DRAGON ARE right or interest in the property. There must be a
LIABLE TO PAY CORPORATE INCOME clear intent to form a partnership, the
TAX  NO existence of a juridical personality different
from the individual partners, and the freedom
of each party to transfer or assign the whole
property. Absence the formation of a
partnership, an entity cannot be liable for the
corresponding taxes therefor
Although there was clear evidence of co-

ownership in this case, the two isolated
transactions of purchasing lots and
7
I`
subsequently selling them do not make them

partners. They shared in the gross profits as co-
owners and paid their CGT on their net profits
and availed of the tax amnesty. Also, even if
they did make an unregistered partnership, there
is the question of from whom the CIR will collect
from since the partnership does not have any
assets to speak of.
Obillos v. Jose Obillos Sr. transferred 2 Greenhills lots Jose Obillos, Jr. testified that they had no
CIR to his four children (petitioners), who hold intention to form an unregistered
(1985) the properties as co-owners to build their partnership. They were co-owners only.
residences.
To consider them partners would obliterate the
“co- distinction between a co-ownership and a
owners After more than a year, the siblings resold partnership.[ A co-owner is an individual or
onli” the lots and derived profit therefrom group that shares ownership in an asset with
amounting to Php 134, 341.88 and another individual or group. Each co-
correspondingly paid capital gains tax. owner owns a percentage of the asset, although
the amount may vary according to
the ownership agreement.]
*resold the properties and derived profit
They were not engaged in any joint venture by
The CIR held them liable for corporate
reason of that isolated transaction. Original
income tax as well, arguing that they formed
purpose was to divide the lots for residential
an unregistered partnership to derive those
purposes. However, later on they found out that
profits.
it was not feasible to build their residences
because of the high cost of construction, then
WON THE PETITIONERS FORMED AN
they had no choice but to resell the same & to
UNREGISTERED PARTNERSHIP OR
dissolve the co-ownership. The division of profit
JOINT VENTURE  NO
was merely incidental to the dissolution of
the co-ownership.
Recall partnership law: Civil Code, Art. 1769(3)

→ “the sharing of gross returns does not itself
establish a partnership…”
Ona v. Julia Buñales died leaving as HEIRS her For tax purposes, the co-ownership of inherited
CIR surviving spouse, Lorenzo Oña and her 5 properties is automatically converted into an
(1972) children. unregistered partnership the moment the said
common properties and/or the incomes derived
“co- A civil case was instituted for the therefrom are used as a common fund with
ownership settlement of her state, in which Oña was intent to produce profits for the heirs in
automatic appointed administrator and later on the proportion to their respective shares in the
ally guardian of the three heirs who were still inheritance as determined in a project partition
converted minors when the project for partition was either duly executed in an extrajudicial
to approved. settlement or approved by the court in the
unregister corresponding testate or intestate proceeding.
8
I`
ed Although the project of partition was

partnershi approved by the Court, no attempt was Scenario #1
p” – made to divide the properties therein Project of partition, then distribution
subject to listed. Instead, the properties remained The reason is simple. From the moment of such
normal under the management of Lorenzo who partition, the heirs are entitled already to their
corporate used said properties in business by leasing respective definite shares of the estate and the
income or selling them and investing the income incomes thereof, for each of them to manage
tax derived therefrom and the proceeds from and dispose of as exclusively his own without
the sales thereof in real properties and the intervention of the other heirs, and,
securities. accordingly, he becomes liable individually
As a result, petitioners' properties and for all taxes in connection therewith.
investments gradually increased.
Scenario #2
Instead of actually distributing the estate of If after such partition, he allows his share to
the deceased among themselves pursuant be held in common with his co-heirs under a
to the project of partition, the heirs allowed single management to be used with the
their properties to remain under the intent of making profit thereby in proportion
management of Lorenzo and let him use to his share, there can be no doubt that, even
their shares as part of the common fund for if no document or instrument were executed,
their ventures, even as they paid for the purpose, for tax purposes, at least, an
corresponding income taxes on their unregistered partnership is formed.
respective shares.
Based on these facts, CIR decided that

petitioners formed an unregistered
partnership and therefore, subject to the
corporate income tax, particularly for years
1955 and 1956.
WON THERE WAS A CO-OWNERSHIP

OR AN UNREGISTERED PARTNERSHIP
 UNREGISTERED PARTNERSHIP
WON THE PETITIONERS ARE LIABLE
FOR THE DEFICIENCY CORPORATE
INCOME TAX  YES
RR 10- The tax exemption of joint ventures for the purpose of construction projects was pursuant to PD
2012 929 to assist local contractors in achieving competitiveness with foreign contractors by pooling
their resources in undertaking big construction projects.
Joint ventures or consortiums formed for the purpose of undertaking construction

projects not considered as a corporation under Section 22 of the NIRC, should be:
1. For the undertaking of a construction project;
2. Should involve joining or pooling of resources by licensed local contractors; that is,
licensed as general contractor by the Philippine Contractors Accreditation Board
(PCAB) of the Department of Trade and Industry (DTI);
3. These local contractors are engaged in construction business; and
4. The joint venture itself must likewise be duly licensed as such by the PCAB
9
I`
Joint ventures with foreign contractors may be treated as a non-taxable corporation,

only if
1. the member foreign contractor is covered by a special license as contractor by the
PCAB and
2. the construction project is certified by the appropriate Tendering Agency (government
office) that
3. the project is a foreign financed/internationally-funded project and
4. that international bidding is allowed under the Bilateral Agreement entered into by and
between the Philippine Government and the foreign/international financing institution.
Absent any of the requirements, the joint venture shall be considered as a taxable corporation.
Mere suppliers of goods, services, or capital to a construction project are not included in the
definition stated above.
NOTE! Members of the joint venture are each responsible in reporting and paying appropriate
income taxes on their respective share to the joint ventures profit.
BIR Avida Land Corp and Aurora Properties Inc. The Development Agreement entered into by
Ruling entered into a joint venture to develop a and between Aurora and Avida is not subject to
108- parcel of land owned by Aurora the income tax under Sec 27 (A). PD929
2010**** Properties into a residential subdivision. excluded joint ventures formed for the purpose
READ of undertaking construction projects. This is
Aurora will contribute the Property to the because
joint venture while Avida will contribute 1. Local contractors contribute substantially
project development services. to the development program of the
country
The developed saleable lots and house 2. Local contractors are at a disadvantage
units will then be allocated to each party in competitive bidding with foreign
(Avida – 89% House and lots; 75% Lots contractors in view of limited capital and
and Aurora – 11% House and lots; 25% financial resources
Lots). 3. In order to compete with big foreign
contractors, it may be necessary for local
WON THE JOINT VENTURE FORMED BY contractors to enter into joint ventures to
AURORA AND AVIDA IS A TAXABLE pool their limited resources in
CORPORATION  NO undertaking big construction projects.
4 stages of a JV The allocation of saleable units between

Aurora and Aviida does not constitute a
2. ENTRY IN AGREEMENT taxable event, as no income is actually
3. CONTRIBUTION IN JV realized by either Aurora or/and Avida.
4. DISTRIBUTION OF THE OUTFLOW Hence, the allocation of units will not be
; ALLOCATION OS SALEABLE subject to income tax, and consequently to
UNITS withholding tax. Likewise, not subject to
-not taxable VAT.
5. SALE FROM THE PARTIES OF Aurora/Avida will only realize income upon
SALEABLE UNITS TO THEM their respective sales of the saleable units
-taxable allocated to each of them. In this regard, sales
1. to third parties would be subject to regular
10
I`
(corporate) income tax at the rate of 30%, and to

withholding tax. It will also be subject to VAT at
12% and DST at P15 per P1,000.
2. With regard to Avida’s undertaking (as provided

in the JVA) of marketing Aurora’s saleable lots
by virtue of an exclusive marketing agreement,
the marketing services which will be performed
by Avida for Aurora in the selling of the lots/
units, which will result to marketing fees, will be
subject to taxes (income tax, withholding tax,
VAT, DST)
11
I`
2. Income
Income – broad sense, it means all wealth that flows into the taxpayer other than as a mere return of
capital. It includes the forms of income specifically described as gains and profits, including gains
derived from the sales or other disposition of capital assets. Income means cash received or its equivalent. It
is an amount of money coming to a person within a specific time. It means something distinct from principal /
capital; for while capital is a fund, income is a flow. As used in our income tax law, income refers to the flow
of wealth.
To be taxable, the amount must be income first!
Requisites for taxability of income:

3. There must be a gain/profit in cash or its equivalent
4. The gain must be realized/received – when income is physically transferred or constructively received
by him. This implies that no all economic gains constitute taxable income
In General
Madrigal Vicente Madrigal filed sworn declaration on CAPITAL v. INCOME
v. the prescribed form with the CIR, showing, Income as contrasted with capital or property is
Rafferty as his total net income for the year 1914, to be the test.
(1918) the sum of P296,302.73. Madrigal argued
that the said amount did not represent his The essential difference between capital and
income for the year 1914, but was in fact income is that capital is a fund; income is a
the income of the conjugal partnership flow.
existing between himself and his wife, and  A fund of property existing at an instant
that in computing and assessing the of time is called capital.
additional income tax provided by the Act of  A flow of services rendered by that
Congress of October 3, 1913, the income capital by the payment of money from it
declared by Vicente Madrigal should be or any other benefit rendered by a fund
divided into two equal parts. of capital in relation to such fund through
a period of time is called an income.
Why does Vicente Madrigal want to do
this? Capital is wealth, while income is the service of
wealth.
Because under the old law, there are tax • No! The point of view of the CIR is that the
deductions where the person making the Income Tax Law, as the name implies, taxes
return is a single person, or married and not upon income and not upon capital and
living with consort, and $1,000 additional property.
• The essential difference between capital and
where the person making the return is
income is that capital is a fund; income is a flow.
married and living with consort. A fund of property existing at an instant of time is
called capital. A flow of services rendered by
WON THE INCOME DECLARED BY that capital by the payment of money from it or
VICENTE MADRIGAL SHOULD BE any other benefit rendered by a fund of capital in
DIVIDED INTO TWO EQUAL PARTS, relation to such fund through a period of time is
ONE-HALF TO BE CONSIDERED THE called income. Capital is wealth, while income is
the service of wealth.
INCOME OF VICENTE AND THE OTHER
• As Paterno has no estate and income, actually
HALF OF HIS WIFE  NO and legally vested in her and entirely distinct
from her husband’s property, the income cannot
properly be considered the separate income of
the wife for the purposes of the additional tax.
12
I`
• To recapitulate, Vicente wants to half his

declared income in computing for his tax since
he is arguing that he has a conjugal partnership
with his wife. However, the court ruled that the
one that should be taxed is the income which is
the flow of the capital, thus it should not be
divided into 2.
The wife of Vicente has an inchoate right in the

property of her husband during the life of the
conjugal partnership. She has an interest in the
ultimate property rights and in the ultimate
ownership of property acquired as income after
such income has become capital.
The wife has no absolute right to one-half the
income of the conjugal partnership. Not being
seized of a separate estate, Susana Paterno
cannot make a separate return in order to
receive the benefit of the exemption which would
arise by reason of the additional tax. As she has
no estate and income, actually and legally
vested in her and entirely distinct from her
husband's property, the income cannot properly
be considered the separate income of the wife
for the purposes of the additional tax.
Fisher v. Philippine American Drug Company was a STOCK DIVIDENDS PER SE NOT TAXABLE
Trinidad domestic corporation doing business in the Generally speaking, stock dividends represent
(1922) City of Manila. undistributed increase in the capital of
FISHER was a stockholder in said corporations or firms, joint stock companies,
stock corporation. Said corporation, as result of etc., etc., for a particular period.
dividends the business for that year, declared a "stock
NOT dividend" and that the proportionate share A stock dividend really takes nothing from the
INCOME of said stock dividend of Fisher was property of the corporation and adds nothing to
P24,800. For this reason, CIR collector the interests of the shareholders. Its property is
demanded payment of income tax for the not diminished and their interest are not
stock dividend received by Fisher. Fisher increased. The proportional interest of each
paid under protest. Fisher filed an action for shareholder remains the same. In short, the
the recovery of the income tax on the stock corporation is no poorer and the stockholder is
dividends. no richer than they were before.
WON THE STOCK DIVIDENDS ARE When a corporation or company issues "stock
TAXABLE INCOME  NO dividends" it shows that the company's
accumulated profits have been capitalized,
instead of distributed to the stockholders or
retained as surplus available for distribution, in
money or in kind, should opportunity offer. The
essential and controlling fact is that the
13
I`
stockholder has received nothing out of the

company's assets for his separate use and
benefit; on the contrary, every dollar of his
original investment, together with whatever
accretions and accumulations resulting from
employment of his money and that of the other
stockholders in the business of the company,
still remains the property of the company, and
subject to business risks which may result in
wiping out of the entire investment. The
stockholder by virtue of the stock dividend has in
fact received nothing that answers the definition
of an "income."
The stockholder who receives a stock dividend

has received nothing but a representation of his
increased interest in the capital of the
corporation. There has been no separation or
segregation of his interest. All the property or
capital of the corporation still belongs to the
corporation. There has been no separation of
the interest of the stockholder from the general
capital of the corporation. The stockholder, by
virtue of the stock dividend, has no separate or
individual control over the interest represented
thereby, further than he had before the stock
dividend was issued. He cannot use it for the
reason that it is still the property of the
corporation and not the property of the individual
holder of stock dividend.
A certificate of stock represented by the stock

dividend is simply a statement of his proportional
interest or participation in the capital of the
corporation. The receipt of a stock dividend in no
way increases the money received of a
stockholder nor his cash account at the close of
the year. It simply shows that there has been an
increase in the amount of the capital of the
corporation during the particular period, which
may be due to an increased business or to a
natural increase of the value of the capital due to
business, economic, or other reasons.
Limpan Limpan Corporation is a domestic business The Court said that Limpan in fact admitted that
Investme entity engaged in leasing properties. it had undeclared income, yet it was not able to
nt v. CIR Sometime in 1958-59, BIR discovered that present by clear and convincing evidence the
(1966) Limpan had undeclared its rental income reason why such income need not be declared.
during years 1956 and 1957. The CIR then
14
I`
issued a letter-assessment and demanded The Court said that the Limpan’s claim (1) and
“construc payment of deficiency against Limpan. (2) are not supported by any document/unbiased
tively Limpan Corp. denied the unreported evidence/satisfactory corroboration.
received, income claiming that:
for (1) For 1956, it was the previous owners For claim (3), the Court said that the deposit
refusal to of the buildings that collected the was resorted to due to the refusal of Limpan to
accept income, accept the same; hence, Limpan is deemed to
the same (2) For 1957, it was its President that have constructively received such rentals.
collected the income and declared it
not as corporate income, but rather For claim (4), the Court said that it should have
personal, been declared as rental income nonetheless,
(3) One of the tenants deposited his because it is income just the same regardless of
rental fee to the court, which Limpan source.
Corp. had no actual/constructive
control, and
(4) A sub-tenant paid rental fees which
should not be declared as rental
income.
WON LIMPAN IS JUSTIFIED IN NOT

REPORTING THE ABOVE-MENTIONED
ITEMS  NO
Conwi v. Petitioners are Filipino citizens and INCOME DEFINED
CTA employees of Procter and Gamble Income may be defined as an amount of money
(1192) Philippines with an office located at Ayala coming to a person or corporation within a
Ave. Makati. (subsidiary) specified time, whether as payment for services,
interest or profit from investment. Unless
The corporation is a subsidiary of P&G otherwise specified, it means cash or its
based at Ohio USA. For the year 1970 and equivalent. Income can also be thought of as
1971, petitioners were assigned outside the flow of the fruits of one's labor.
Philippines with their compensation paid
in US dollars. Petitioners are correct as to their claim that their
dollar earnings are not receipts derived from
When they filed their income tax returns for foreign exchange transactions. For a foreign
the year 1970, they’ve computed the tax by exchange transaction is simply that — a
applying the dollar-to-peso conversion transaction in foreign exchange, foreign
based on the floating rate provided by the exchange being "the conversion of an amount of
BIR ruling No. 70-27. money or currency of one country into an
equivalent amount of money or currency of
However, on 1973, they filed an amended another." When petitioners were assigned to the
tax return using the par value of the peso foreign subsidiaries of Procter & Gamble, they
provided by Sec.40 of RA 265 in relation to were earning in their assigned nation's currency
CA 699. They claim for a refund due to and were ALSO spending in said currency.
overpayment. There was no conversion, therefore, from one
currency to another.
WON PETITIONERS ARE ENTITLED TO
REFUND  NO Petitioners claim that since the dollar earnings
do not fall within the classification of foreign
15
I`
exchange transactions, and are not included in

the coverage of Central Bank Circular No. 289
which provides for the specific instances when
the par value of the peso shall not be the
conversion rate used. They conclude that their
earnings should be converted for income tax
purposes using the par value of the
Philippine peso.
They’re not included in transactions under
Circular No. 289
A careful reading of said CB Circular No. 289
shows that the subject matters involved therein
are export products, invisibles, receipts of
foreign exchange, foreign exchange payments,
new foreign borrowing and investments —
nothing by way of income tax payments.
Thus, petitioners are in error by concluding
that since C.B. Circular No. 289 does not
apply to them, the par value of the peso
should be the guiding rate used for income tax
purposes.
Revenue Memorandum Circular Nos. 7-71 10

and 41-71 11 were issued to prescribe a uniform
rate of exchange from US dollars to Philippine
pesos for INTERNAL REVENUE TAX
PURPOSES for the years 1970 and 1971.
Petitioners argue that since there were no

remittances and acceptances of their salaries
and wages in US dollars into the Philippines,
they are exempt from the coverage of such
circulars. Petitioners forget that they are
citizens of the Philippines, and their income,
within or without, and in these cases wholly
without, are subject to income tax. Sec. 21,
NIRC, as amended, does not brook any
exemption.
CIR v. In this case, the US Supreme Court The treble and punitive damages must be
Glenshaw consolidated two cases with a similar issue. reported as part of the gross income. Gross
Glass income includes any income from any source. In
In the first case, Glenshaw Glass was in
(1955) determining what constitutes "gross income" as
LITIGATION with the Hartford-Empire
Company, which manufactures machinery defined in § 22(a), effect must be given to the
used by Glenshaw. Glenshaw made catch-all language "gains or profits and income
demands for exemplary damages for fraud derived from any source whatever."
and treble damages for injury to its business
for Hartford’s VIOLATIONS OF ANTI The mere fact that such payments are
TRUST laws. The parties settled and extracted from the wrongdoers as
Glenshaw received $800,000. Of that,
16
I`
$324,529.94 represented punitive punishment for unlawful conduct cannot

damages. Glenshaw did not report that detract from their character as taxable
amount as income. income to the recipients.
In the second case, William Goldman sued
Loew’s Inc. for violations of antitrust law and Certainly punitive damages cannot reasonably
sought treble damages. William Goldman be classified as gifts, nor do they come under
received $375,000 in treble damages but any other exemption provision in the Code.
claimed $250,000 of that represented
punitive damages and did not report it as
The Court then held that the amounts received
income. by the taxpayers in this case were "instances of
undeniable accessions to wealth, clearly
WON PUNITIVE DAMAGES SHOULD BE
INCLUDED AS PART OF THE “GROSS realized, and over which the taxpayers have
INCOME” FOR TAX PURPOSES  YES complete dominion."
WINDFALL GAIN is also part of income ELEMENTS OF INCOME

1. Undeniable accession to wealth
2. Clearly realized
3. Over which the taxpayer has complete
dominion
4. Must not be excluded by law (Section 32)
Cesarini In 1957, the plaintiffs purchased a used Congress has used a broad all-inclusive
v. United piano at an auction sale for $15, and the language to exert the full measure of its taxing
States piano was used by their daughter for piano power.
lessons. In 1964, while cleaning the piano,
(1969)
they discovered $4,467 in old currency.
Gross income means all income from
Money Being unable to ascertain who put the whatever source derived, unless excluded by
found in money there, they exchanged the old law. Gross income includes income realized in
Piano currency for new at a bank, and reported any form, whether in money, property, or
the money on their 1964 joint income tax services.
return as income from other sources.
In addition, IRS Revenue Ruling points that
“the finder of treasure trove is in receipt of
They then filed an amended return
eliminating the sum from their gross income, taxable income, for income tax purposes, to the
and requesting a refund. The CIR rejected extent of its value in United States currency, for
their refund claim. The district court denied the taxable year in which it is reduced to
the Cesarinis’ claim for the recovery of undisputed possession.”
income tax paid in the year 1964. The
district court found that the Cesarinis were So the income should be declared not in 1957,
not entitled to a refund for taxes paid on
when they bought the piano, but in 1964, when
money found in a second-hand piano. The
district court held that the statute of the treasure was reduced to their undisputed
limitations did not foreclose assessment of possession.
the tax merely because the money was not
found until 1964, seven years after the WHEN DO U REALIZE?
piano had been purchased. The Cesarinis Realization v Complete dominion
sought appellate review. When they bought the piano – no income
There will be income as to the time of discovery
WON THE MONEY FOUND IS
–
CONSIDERED AS INCOME  YES
Treasure trove doctrine
17
I`
Rent agreement
- Advanced deposit – dependent on
some form of time
- Security deposit – because there is
no setting in of elements of income
yet, no certainty that security deposit
will be owned (dependent on certain
factors pa)
- Current Rent – income already
- What constitutes the
Hornung Hornung is a football player for the Green 1962 Corvette - Item was constructively
v. CIR Bay Packers. He played in the NFL received when it has been set apart for the
(1967) championship game on December 31, Taxpayer or otherwise made available for him to
1961. After the game, he was named the draw upon, if the intent to do so is unknown. On
outstanding player of the game and was Dec 31, 1961, there were substantial
given a new Corvette. Hornung agreed to limitations or restrictions on his control over
appear at a luncheon in NYC to officially the Corvette. Since Dec 31 was a Sunday,
accept the car. dealership was closed and he could not have
On January 3, 1962, he accepted the car in accessed it on that date.
NYC.
He did not report the car as part of his Constructive receipt doctrine was inapplicable
income in 1962 or any other year. and Corvette was received by Hornung for
Commissioner said that the value of the car income tax purposes in 1962.
should have been included in his gross
income for 1962. The Corvette should still form part of his gross
income since it is not a gift. The Court stated
In July 1962, Hornung asked a friend to that the gifts that the law was referring to was
arrange a car to be available for him to drive gift or awards received for outstanding
while in Green Bay. A local Ford dealership contribution for “enhancing the public good”,
furnished him with a 1962 Thunderbird, the which does not include performance in sports.
title to the car remained with Ford, but The award contemplated by the law was the
Hornung paid the insurance and all awards similar to Nobel Prize. Hence, the
operating costs. value of the Corvette should have been
included in Hornung’s gross income for
He was not asked to make any personal taxable year 1962.
appearances or special efforts but was
asked to “come in and say hi” during a 1962 Thunderbird - The court rejected the
Ford-sponsored children’s football event. contention of Hornung that his use of the
This was not reported as part of his income. thunderbird was a gift or loan to him. Under the
(value determined to be $600) exemptions, the “intention” of the donor
should be controlling on whether the
After winning the division title of NFL in “donation” would fall under “generosity.”
1961, Lombardi bought and distributed fur The court stated that FMC’s motive for
stoles to the wives, friends, and mothers of Hornung’s free use was to advertise the use of
each player. Hornung’s mother received the the thunderbirds by famous athletes and was
stole in 1961. It was reported by the thus considered as motivated commercial
Packers as other unallowable deductions consideration. Hence, the rental value of the
18
I`
and was described as Awards to Players’ Thunderbirds should be included in Hornung’s

Wives etc. (value determined to be $395 income for taxable year 1962.
each)
Fur Stole – it was found out by the court that
WON THE VALUE OF THE FOLLOWING Hornung’s mother actually received the fur stole
ITEMS SHOULD HAVE BEEN INCLUDED in 1961, and since Hornung is using cash
IN THE COMPUTATION OF HIS GROSS receipts method in computing his income, the fur
INCOME should not be considered as income for Hornung
1. CORVETTE  YES in 1962.
2. THUNDERBIRD  YES
3. FUR STOLE  NO
Murphy v. Marrita Murphy (plaintiff) was unlawfully The Court ruled that Ms. Murphy was not entitled
Internal fired from her job at the New York Air to the tax refund she claimed, and that the
Revenue National Guard (NYANG) after reporting personal injury award she received was "within
Service environmental hazards to state authorities. the reach of the congressional power to tax
(2007) Murphy filed a retaliation claim against under Article I, Section 8 of the Constitution"—
NYANG with the Department of Labor even if the award was "not income within the
(DOL). meaning of the Sixteenth Amendment."
Murphy testified to her physical and The Congress amended Sec 104 (a) to explicitly
emotional damages. The DOL awarded provide that “emotional distress shall not be
Murphy $45,000 for emotional distress treated as a physical injury or physical sickness,”
and $25,000 for injury to reputation. thus making clear that an award received on
account of emotional distress is not excluded
Murphy initially included the $70,000 award from gross income.
as income and paid taxes on it. Murphy later
filed an amended return, seeking The Court ruled:
reimbursement of the taxes paid on the (1) that the taxpayer's compensation was
$70,000 award, arguing it was not income. received on account of a non-physical
The Internal Revenue Service (IRS) injury or sickness;
(defendant) denied reimbursement. (2) that gross income under section 61 of the
Internal Revenue Code does include
WON PERSONAL INJURY AWARD WAS compensatory damages for non-physical
INCOME  YES injuries, even if the award is not an
"accession to wealth,"
(3) that the income tax imposed on an award
for non-physical injuries is an indirect tax,
regardless of whether the recovery is
restoration of "human capital," and
therefore the tax does not violate the
constitutional requirement of Article I,
section 9, that capitations or other direct
taxes must be laid among the states only
in proportion to the population;
Citing Commissioner v. Banks, the court noted

that "the power of the Congress to tax income
19
I`
extends broadly to all economic gains.”

Officemet Petitioner, Officemetro Philippines, Inc., is a Association/condominium dues and other fees
ro duly organized domestic corporation. CIR and charges collected from members that are
Philippine conducted an examination of petitioner's used solely for administrative purposes are not
s v. CIR books of accounts and other accounting subject to income tax and withholding tax. The
(2014) records for all internal revenue tax liabilities BIR held that association/condominium dues,
for taxable year 2005. After doing so, CIR membership fees and other assessment/charges
found the petitioner liable for tax collected from the members, which are merely
deficiencies in its Expanded Withholding held in trust and which are to be used solely for
Tax (EWT), Final Withholding of VAT and administrative expenses in implementing their
Final Withholding Tax (FWT). For the EWT purpose(s), viz., to protect and safeguard the
it was contesting the payment of Rentals welfare of the owners, lessees and occupants;
and Purchase of Services. provide utilities and amenities for their members,
and from which the corporation could not realize
WON CONDO/ASSOCIATION DUES ARE any gain or profit as a result of their receipt
CONSIDERED AS TAXABLE INCOME  thereof, must not be included in said
NO corporation’s gross income. This means that the
same are not subject to income tax and to
withholding tax.
ELEMENTS THAT DON’T MAKE THE CUT Calamansi tree

Must it be in money?- NO - Situations where no counterparty
Cow - liquidate upon
No wherewithal to pay –
Need not arise from capital / investment

- windfall can generate income
Need not be severance in capital
- must be return ON capital not
return of capital ; capital and
return may still be attached so
taxable (Helvering v Bruun)
Realization income
- “no closed and completed
transaction” – closed and
completed transaction means ‘
requires counterparty; where
government cannot establish
clearly there is no closed and
complete transaction
Associati Bureau of Internal Revenue (BIR) issued RMC No. 35-2012 only clarified the taxability
on of RMC No. 35-2012, which was addressed to (particularly, income tax and VAT liability) of
Non- all revenue officials, employees, and others clubs organized and operated exclusively for
pleasure, recreation, and other non-profit
Profit concerned for their guidance regarding the
purposes based on the BIR's own interpretation
20
I`
Clubs income tax and Valued Added Tax (VAT) of the NIRC provisions on income tax and VAT.
(ANPC) v. liability of the said recreational clubs.
BIR RMC No. 35-2012 erroneously foisted a
BIR claims that under the doctrine of casus sweeping interpretation that membership
fees and assessment dues are sources of
omissus proomisso habendus est, a person, income of recreational clubs from which
object, or thing omitted from an enumeration income tax liability may accrue.
must be held to have been omitted
intentionally. The provision in the 1977 Tax The distinction between "capital" and "income" is
Code which granted income tax exemption well-settled in our jurisprudence. As held in the
47
to such recreational clubs was omitted in early case of Madrigal v. Rafferty, "capital" has
been delineated as a "fund" or "wealth," as
the current tax list of tax exemptions under
opposed to "income" being "the flow of services
1997 NIRC. Hence, the income of rendered by capital" or the "service of wealth":
recreational clubs from whatever source,
including but not limited to membership Income as contrasted with capital or property is
fees, assessment dues, rental income, and to be the test. The essential difference
service fees are subject to income tax. between capital and income is that capital is
a fund; income is a flow. A fund of property
WON the membership fees, assessment existing at an instant of time is called capital. A
dues, and similar nature collected by flow of services rendered by that capital by the
clubs which are organized and operated payment of money from it or any other benefit
exclusively for pleasure, recreational rendered by a fund of capital in relation to such
clubs from whatever source are “subject fund through a period of time is called
to income tax”? – NO income. Capital is wealth, while income is the
service of wealth. (See Fisher, "The Nature of
Capital and Income.")
In Conwi v. Court of Tax Appeals,49 the Court

elucidated that "income may be defined as an
amount of money coming to a person or
corporation within a specified time, whether
as payment for services, interest or profit
from investment. Unless otherwise specified, it
means cash or its equivalent. Income can also
be thought of as a flow of the fruits of one's
labor."50
The membership fees, assessment dues, and

other fees of similar nature only constitute
contributions to and/or replenishment of the
funds for the maintenance and operations of
the facilities offered by recreational clubs to
their exclusive members. They represent
funds "held in trust" by these clubs to defray
their operating and general costs and hence,
only constitute infusion of capital.
There was no realized “gain.”

In order to constitute "income," there must be
realized "gain." Clearly, because of the nature of
membership fees and assessment dues as
funds inherently dedicated for the maintenance,
preservation, and upkeep of the clubs' general
operations and facilities, nothing is to be gained
21
I`
from their collection.
This stands in contrast to the fees received by

recreational clubs coming from their income-
generating facilities, such as bars, restaurants,
and food concessionaires, or from income-
generating activities, like the renting out of
sports equipment, services, and other
accommodations: In these latter examples,
regardless of the purpose of the fees'
eventual use, gain is already realized from
the moment they are collected because
capital maintenance, preservation, or upkeep
is not their pre-determined purpose. As such,
recreational clubs are generally free to use these
fees for whatever purpose they desire and thus,
considered as unencumbered "fruits" coming
from a business transaction.
For as long as these membership fees,

assessment dues, and the like are treated as
collections by recreational clubs from their
members as an inherent consequence of
their membership, and are, by nature,
intended for the maintenance, preservation,
and upkeep of the clubs' general operations
and facilities, then these fees cannot be
classified as "the income of recreational
clubs from whatever source" that are
"subject to income tax."
Instead, they only form part of capital from

which no income tax may be collected or
imposed.
It is a well-enshrined principle in our jurisdiction

that the State cannot impose a tax on capital as
it constitutes an unconstitutional confiscation of
property. The due process clause may
properly be invoked to invalidate, in
appropriate cases, a revenue measure when
it amounts to a confiscation of
property. Certainly, an income tax is arbitrary
and confiscatory if it taxes capital because
capital is not income. In other words, it.is
income, not capital, which is subject to income
tax.
Thus, by sweepingly including in RMC No. 35-

2012 all membership fees and assessment dues
in its classification of "income of recreational
clubs from whatever source'' that are "subject to
income tax,"59 the BIR exceeded its rule-making
authority.
22
I`
23
I`
GROSS INCOME | Statutory Inclusions

TAXABLE INCOME – pertinent items of gross income COMPENSATION FOR SERVICES
specified in this Code, less deductions, if any, authorized SEC 78(A) : Definitions –
for such types of income by this Code or other special WAGES – the term wages shall mean all
laws renumeration (other than fees paid to a public
official) for services performed by an employee
SEC 32. GROSS INCOME for his employer, including the cash value of all
(A) General definition – Except when otherwise renumeration paid in any medium other than
provided in this title, gross income means, all income cash,
DERIVED FROM WHATEVER SOURCE, including except that such term shall not include
but not limited to: remuneration paid:
1. Compensation for services in 1. For agricultural labor paid entirely in
whatever form paid, including but not products of the farm where the labor is
limited to: fees, wages, salaries, performed or
commissions, similar items 2. For domestic service in a private home
2. Gross income derived from the or
conduct of trade or business, or 3. For casual labor not in the course of
exercise of a profession employer’s trade or business or
3. Gains derived from dealings in 4. For services by a citizen or resident of
property the Philippines for a foreign
4. Interests government or an international
5. Rents organization
6. Royalties
7. Dividends If the renumeration paid by an employer to an
8. Annuities employee for services performed during ½ or
9. Prizes and winnings more of any payroll period of not more than 31
10. Pensions and consecutive days constitute wages, all the
11. Partner’s distributive share from the renumeration paid by such employer to such
net income of the general professional employee for such period shall be deemed to be
partnership wages;
BUT if renumeration paid by an employer to an

employee for services performed during more
than ½ of any such payroll period does not
constitute wages, then none of the renumeration
paid by such employer to such employee for
such period shall be deemed to be wages.
Old William Wood was president of the FORM OF PAYMENT IS IMMATERIAL

Colony American Woolen Company for the years The payment of the tax by the employers was
Trust Co. 1918 through 1920. in consideration of the services rendered by
v. CIR the employee, and was again derived by the
(1929) The company instituted a policy for 1919 employee from his labor.
and 1920 wherein the company would pay
the taxes of the president and other The form of the payment is expressly declared to
company officers. The company paid make no difference. It is therefore immaterial
24
I`
$681,169.88 for 1918 and $351,179.27 for that the taxes were directly paid over to the
1919 on behalf of Wood. government. The discharge by a third person of
an obligation to him is equivalent to receipt by
The Board of Tax Appeals held that the person taxed.
these amounts paid were income of
Wood. The certificate shows that the taxes were
imposed upon the employee, that the taxes were
WON THE TAXES PAID BY THE actually paid by the employer, and that the
COMPANY ARE ADDITIONAL TAXABLE employee entered upon his duties in the years in
INCOME OF WOOD  YES question under the express agreement that his
income taxes would be paid by his employer.
Claim of right doctrine The taxes were paid upon a valuable
- It does not mean that I never got consideration – namely, the services
my hands the said income, even rendered by the employee and as part of the
if somebody else is receiving it, it compensation therefor.
may be still be considered an
income
Position of taxpayer –cannot it be a gift? –

no, anything that flows out of employee
employer relationship will in default be part
of the compensation. If it were a gift – it
would create a different tax implication 
excluded from gross income, as long as
donor’s taxes were paid
RENTS
Helvering Bruun leased land and an old building to a Brun insists that gain derived from capital must
v. Bruun tenant for a period of 99 years. be something of exchangeable value proceeding
(1940) The tenant was allowed to make from property, severed from capital, however
improvements to the land, but the invested or employed, and received by the
improvements would be forfeited back to recipient for his separate use, benefit, and
Bruun if the lease was canceled at the disposal. These expressions, however, were
tenant’s fault used to clarify the distinction between stock
The tenant removed the old building, dividends from ordinary dividends.
constructed a new building, and
subsequently failed to pay rent and GAIN NEED NOT BE IN THE FORM OF CASH
taxes. Bruun received the property back, While it is true that economic gain is not
including the new building, which was always taxable as income, it is settled that
valued about $50,000 higher than the old the realization of gain need not be in cash
building. derived from the sale of an asset. Gain may
occur as a result of exchange of property,
CIR issued a deficiency notice against payment of the taxpayer's indebtedness, relief
Bruun for failing to report any income from a liability, or other profit realized from the
resulting from the receipt of the property completion of a transaction.
WON THE NET GAIN UPON RECEIPT OF
THE PROPERTY SHOULD BE TAXABLE The fact that the gain is a portion of the value
AS INCOME  YES of property received by the taxpayer in the
25
I`
transaction does not negate its realization.

Entered into lease contract
Demolition of standing improvements Bruun received back his land with a new building
Construction over the property on it, which added an ascertainable amount to
Discontinuance of the lease its value. It is not necessary that he should be
Return of the property to Bruun able to sever the improvement begetting the
gain from his original capital to recognize it
One specific point where gain realized– as taxable gain. If that were necessary, no
gain, realized, tax payer had complete income could arise from the exchange of
dominion ; since there was a default on the property; whereas such gain has always been
part of the tenant and gave rise to the recognized as realized taxable gain.
landlord owning the improvements which
was built on by the land lord,
Without the default?

End of lease?
Entitlement on the landlord on

improvements is merely inchoate – bago
maglapse lease nag earthquake if
pinareport income at time binuild building –
falling into situation as fisher, cannot force
somebody to force income when there is
distinct
Gains from property

- Amount Realized (Selling price)
– purchase price
- Amount > Basis = gain
Royalties
- Licensor creates, licensee uses
Dividends
Cash
Property
Liquidating
Stock
Disguise Dividends – for tax purposes
1.
DIVIDENDS
26
I`
Sec 73(A) to (C)
(A) Definition of Dividends –

The term 'dividends' when used in this Title means
any distribution made by a corporation to its shareholders out of its earnings or profits and
payable to its shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or
a deductible loss, as the case may be.
(B) Stock Dividend. - A stock dividend representing the transfer of surplus to capital account shall
not be subject to tax.
XPN: However, if a corporation cancels or redeems stock issued as a dividend at such time and in
such manner as to make the distribution and cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the extent that it
represents a distribution of earnings or profits.
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any distribution
made to the shareholders or members of a corporation shall be deemed to have been made form the
most recently accumulated profits or surplus, and shall constitute a part of the annual income of the
distributee for the year in which received.
CIR v. CA A. Soriano Corp. (ANSOR) is wholly Redemption is the y. The corporation gets back
(1999) owned and controlled by the family of some of its stock, distributes cash or property to
Don Andres Soriano. When Don Andres the shareholder in payment for the stock, and
Redempti died, he had a total shareholdings of continues in business as before.
on of 185,154 shares (50,495 shares which
stock were of original issue when the In sum, for stock redemptions to be taxed, it is
dividends corporation was founded and 134,659 indispensable that:
shares as stock dividend declarations). a. There is a redemption or cancellation
Half of which went to his wife as her b. The transaction involves stock dividends
conjugal share and half went to his estate. c. The time and manner of the transaction
ANSCOR redeemed a total of 108,000 makes it essentially equivalent to a
common shares from his estate. The BIR distribution of taxable dividends.
assessed ANSCOR for deficiency
withholding tax for these transactions. There is no dispute that ANSCOR redeemed
ANSCOR contested the assessment shares. But its taxability depends on the source
claiming that redemption was done in of the stock dividend.
furtherance of its Filipinization plan. a. If its source is the original capital
subscriptions upon establishment of the
WON THE REDEMPTION WAS TAXABLE corporation or formed initial capital
 YES investment, it will not be taxable under
Section 83.
Stock dividends, strictly speaking, represent b. If the redeemed shares are from stock
capital and do not constitute income to its dividend declarations, it is taxable for it is
recipient. So that the mere issuance thereof not merely a return of capital but a gain.
27
I`
is not yet subject to income tax as they are

nothing but an enrichment through increase Such an exception came about as a response to
in value of capital investment. the devious means to circumvent the law and
evade tax, i.e., corporate earnings would be
However, the redemption or cancellation of distributed under the guise of its initial
stock dividends, depending on the time and capitalization by declaring the stock dividends
manner it was made, is essentially previously issued and later redeem said
equivalent to a distribution of taxable dividends by paying cash to the stockholder.
dividends, making the proceeds thereof Here, the redemption amounts to a distribution
taxable income to the extent it represents a of taxable cash dividends which was just
distribution of earnings or profits. The delayed to escape the tax.
exception was designed to prevent the
issuance and cancellation or redemption of The purpose for which the shares were
stock dividends, which is fundamentally not redeemed is immaterial and the legitimacy of
taxable, from being made use of as a device such business purpose cannot be an excuse
for the actual distribution of cash dividends, to be exempt from tax
which is taxable.
Redemption or cancellation of stock dividends,
Held: General Rule depending on the “time” and “manner” it was
made, is essentially equivalent to a distribution
Section 83(b) of the 1939 NIRC was taken of taxable dividends, making the proceeds
from Section 115(g)(1) of the U.S. Revenue
thereof taxable income to the extent it
Code of 1928. 60 It laid down the general
rule known as the ‘proportionate test’ 61 represents profits.
wherein stock dividends once issued form
part of the capital and, thus, subject to Whether the amount distributed in the
income tax. 62 Specifically, the general rule redemption should be treated as the equivalent
states that: of a “taxable dividend” is a question of fact,
"A stock dividend representing the transfer which is determinable on the basis of the
of surplus to capital account shall not be
subject to tax." particular facts of the transaction in question.
Having been derived from a foreign law,
resort to the jurisprudence of its origin may But where did the shares redeemed come
shed light. Under the US Revenue Code, from? If its source is the original capital
this provision originally referred to "stock subscriptions upon establishment of the
dividends" only, without any exception. corporation or from initial capital investment in
Stock dividends, strictly speaking, represent an existing enterprise, its redemption to the
capital and do not constitute income to its concurrent value of acquisition may not invite the
recipient.So that the mere issuance thereof application of Sec. 83(b) under the 1939 Tax
is not yet subject to income tax 64 as they Code, as it is not income but a mere return of
are nothing but an "enrichment through capital. On the contrary, if the redeemed shares
increase in value of capital investment." 65 are from stock dividend declarations other than
As capital, the stock dividends postpone the as initial capital investment, the proceeds of the
realization of profits because the "fund redemption is additional wealth, for it is not
represented by the new stock has been merely a return of capital but a gain thereon.
transferred from surplus to capital and no
longer available for actual distribution." 66
Income in tax law is "an amount of money Collapsing the transaction case – like CIR v.
coming to a person within a specified time, TODA case
whether as payment for services, interest, 1 company – ANSCOR
or profit from investment." 67 It means cash
- Incorporation, shareholders
or its equivalent. 68 It is gain derived and
- Declared dividends --- they declared
28
I`
severed from capital, 69 from labor or from stock dividends to all shareholders
both combined 70 — so that to tax a stock - After declaration, the company
dividend would be to tax a capital increase REDEEMED
rather than the income. 71 In a loose sense, If tail end is the redemption  NOTE:
stock dividends issued by the corporation,
are considered unrealized gain, and cannot redemption is no different from sale of shares
be subjected to income tax until that gain but the buyer is the COMPANY
has been realized. Before the realization,
stock dividends are nothing but a Net capital gains = redemption
representation of an interest in the
corporate properties. 72 As capital, it is not Pano stock dividends na nauna?
yet subject to income tax. It should be noted
that capital and income are different. Capital
is wealth or fund; whereas income is profit We look at the case of fisher as absolute rule –
or gain or the flow of wealth. 73 The exception to fisher, because it was the “manner’”
determining factor for the imposition of and “method” in which redemption was done
income tax is whether any gain or profit was
derived from a transaction. 74 Issue stock dividends then redeem
Between ANSCOR give shares (stock dividend
The Exception
declaration not taxable) after a while redeem the
"However, if a corporation cancels or shares, shareholder nakareceive shares,
redeems stock issued as a dividend at such nakareceive ako ng pera (is there actual gain?)
time and in such manner as to make the amount realized – basis = mababa and halos
distribution and cancellation or redemption, walang gain, no implication stock dividends and
in whole or in part, no implication si redemption
Ang talagang gusto nyong ginawa is to declare

cash dividends kasi pag nagdeclare cash
dividends, taxable yun and on gross! So for a
fact, that under Sec 24 and 25 10-20-25% tax
rate. Definitely mas unfavorable if cash
dividends. In the same way we did in TODA,
why did you interfere BIR? Even if taxes were
probably lower?
NO LEGITIMATE PURPOSE
Toda: the counter to a situation where a
government to impose its will to tax is the the
ability to pose a legitimate business purpose ! =
in this cae no LBP
ANSCOR’s defense: para mabawasan foreign

shareholders – redemption exercise in
consonance to filipinize the company
BIR : kung gusto mo ifilipinize, you would not

have declared dividends that resulted to
increase in foreign shareholdings
Wise & This complaint was filed by Wise & Co., et. The amounts received were liquidating
Co., et. al. al. to recover certain amounts they paid dividends. A distribution does not necessarily
29
I`
v Meer & under protest as deficiency income taxes become a dividend by reason of the fact that it is
CIR for the year 1937. called a dividend by the distributing corporation.
(1947) The determining element is whether the
Wise & Co., et. al. were stockholders of distributions were in the ordinary course of
Liquidatin Manila Wine Merchants, Ltd (an HK business and with intent to maintain the
g Company). The BOD of such HK corporation as a going concern, or after deciding
dividends Company sold its business and assets to to quit and with intent to liquidate the business.
Manila Wine Merchants, Inc (Manila
Company) The amounts were taxable income. The Income
Tax Law, Act No. 2833 Sec 25 (a), as amended
Pursuant to a RESOLUTION BY ITS BOD, by Sec 4, Act. No. 3761: Where a corporation,
the HK Company made a DISTRIBUTION partnership, association, joint-account, or
from its earnings for the year 1937 to its insurance company distributes all of its assets
stockholders (Wise & Co, et. al). in complete liquidation or dissolution, the
gain realized or loss sustained by the
HK Company has paid PH income tax on stockholder, whether individual or corporation, is
the entire earnings from which the said a taxable income or a deductible loss as the
distributions were paid. case may be.
After HK Company gained surplus from the The earnings and profits accumulated by the
active conduct of its business, it distributed corporation were to be treated NOT under
said surplus to its stockholders. PH income section 201 (a) of the U.S. Revenue Act of 1918
tax had been paid by the HK Company on but distributions under section 201 (c), which
the said surplus. deal specifically with such liquidation "as other
gains or profits."
The stockholders of the HK Company
directed that company be voluntarily The profit realized by Wise & Co., et. al.
liquidated. CIR subsequently made constitutes as income from PH sources and is
deficiency assessments against Wise & Co., subject to Philippine taxes. The HK Company
et. al for the said distributions. was incorporated for the purpose of carrying
on in the PH Islands the business of wine, beer,
and spirit merchants and the other objects set
WON THE DISTRIBUTIONS WERE out in its memorandum of association.
LIQUIDATING DIVIDENDS  YES
Redemption sale of shares, liquidation is also
WON SUCH AMOUNTS WERE TAXABLE sale of shares, sell to company that originally
INCOME  YES issued the stock ;
Ordinary dividends? Liquidating dividends?

Distinction – same form
1 M = ordinary cash dividends or liquidating
dividends
For tax purposes there is a difference
Cash dividends = taxed on gross amount
Liquidating dividend = still offset it on the basis
of the price of share of stock
30
I`
 Bought shares for 900,000 pesos

 Dividends declared1 M ; if it were cash
dividends
 1M based on applicable rate (cash d)
 1m less 900,000 characterized as sales of
shares of stock (Amount realized – basis ; if
liquidating d)
Form part of gross income

Not taxed on gross,
Tax on Capital Gain not taxed at final tax on
15%
BIR A trading company is in the process of Since upon the company’s complete liquidation,
Ruling liquidation. On July 1987, it wrote a letter to its individual stockholders will receive all its
322- 87 the BIR. It mentioned that its individual assets as liquidating dividends, capital gain or
stockholders will receive dividends in loss will be realized.
excess of their investments.
The gain, if any, is the difference between the
WON THE LIQUIDATING DIVIDENDS fair market value of the liquidating dividends
RECEIVED BY STOCKHOLDERS, IN and the adjusted cost to the stockholders of
EXCESS OF THEIR INVESTMENT, ARE their respective shareholdings in the
TAXABLE  YES corporation. And if any such gain is realized, it
shall be subject to income tax rates prescribed
by the tax code.
BIR Aguirre Pawnshop Company, Inc.’s (APC) (Decision of Kim Henares is very short and
Ruling corporate term has expired and it has ambiguous. Copied in verbatim)
479- 11 ceased to exist as a corporate entity.
Its BOD decided to distribute the “In reply, please be informed that it is the
remaining corporate assets to its position of this Office that your request cannot
stockholders by liquidating dividends. be granted for lack of legal basis under the
To be able to transfer a parcel of land to National Internal Revenue Code of 1997, as
stockholder Marmitz Inc., Olondriz, a amended. Consequently, the previously issued
director of APC, wrote the BIR requesting BIR Ruling No. 039-02 cited in your letter and
for a Certificate Authorizing Registration as the BIR Rulings cited in the said rulings are
well as a confirmation of her opinion be reversed and set aside.”
made as to the following issues:
1) APC is not liable for income tax PM Reyes:
either on the transfer of the Are liquidating dividends subject to income
properties (citing BIR ruling 039-02 tax?
dated Nov. 11, 2002) Yes. Where a corporation distributes all of its
property or assets in complete liquidation or
2) No documentary stamp tax (DST) is dissolution, the gain realized from the
due on the surrender and transaction by the stockholder, whether
cancellation of APC shares. individual or corporate, is taxable income or a
deductible loss (if the amount received by the
3) No DST is due on the transfer of stockholder in liquidation is less than the cost or
31
I`
properties other basis of the stock, the loss in the

transaction is deductible), as the case may be.
. Note: Previously, the CIR has ruled in BIR
4) Marmitz, Inc. shall realize capital RULING 039-02 [NOVEMBER 11, 2002] and
gain or loss from the transfer of other previous rulings that the transfer by a
properties. liquidating corporation of its remaining assets to
its stockholders and the receipt of the shares
surrendered by the shareholder are not subject
to income tax. However, in BIR RULING 479-11
[DECEMBER 5, 2011], the CIR reversed and
set aside the above-cited ruling and all previous
rulings to that effect. The rule now is that they
are subject to income tax.
BIR Note: In BIR RULING 479-11 [DECEMBER The transfer by the liquidating corporation of its
Ruling 5, 2011], the CIR reversed the ruling of this remaining assets to its stockholders is not
39-02 case. The rule now is that the transfer by a considered a sale of these assets. Thus, a
liquidating corporation of its remaining liquidating corporation does not realize gain or
assets to its stockholders and the receipt of loss in partial or complete liquidation.
the shares surrendered by the shareholder Conversely, neither is a liquidating corporation
are subject to income tax. subject to tax on its receipt of the shares
surrendered by its shareholders pursuant to a
All of the outstanding shares of TA Bank are complete or partial liquidation.
wholly owned by TMBC and its nominees.
TA is planning to decrease its authorized The tax treatment of liquidating dividends
capital stock, Under the plan, all of TA’s depends on the characterization of the income in
outstanding preferred and common shares the form of such dividends received by
shall be surrendered by TMBC and shareholders as a result of the dissolution of the
cancelled immediately upon approval by TA corporation in which they hold shares. The
stockholders. In exchange for the surrender, amounts distributed in the liquidation of a
TA shall transfer to TMBC both real and corporation shall be treated as payments in
personal, tangible and intangible properties exchange for stock or shares, and any gain or
listed. profit realized shall be taxed to the distributee as
other gains or profits. When the corporation was
WON TA shall be liable for income tax dissolved and in the process of complete
either on its receipt of the surrendered liquidation and its shareholders surrendered
shares, or its transfer of the distributed their stick to it and it paid the sums in question to
assets to TMBC as liquidating dividends them in exchange, a transaction took place,
 NO which was no different in its essence from a sale
of the same stock to a third party who paid
WON TMBC shall realize capital gain or therefor.
loss when TA distributed its assets as
liquidating dividends  YES
FROM WHATEVER SOURCE
32
I`
James v. James is a union official who embezzled in

ILLEGALLY OBTAINED INCOME IS TAXABLE
United excess of $738,000 during 1951-1954 from
Unlawful, as well as lawful, gains are
States his employer union and an insurance
comprehended within the term “gross income.”
(1961) company. He failed to report these amounts
There is an obvious intent on the part of
in his gross income in those years and was
Congress to tax income derived from both legal
convicted for willfully attempting to evade
and illegal sources to remove the incongruity of
the federal income tax due from the years
having gains of an honest laborer taxed and the
1951-1954. gains of the dishonest immune. Courts should
give a liberal construction to the broad
WON EMBEZZLED FUNDS ARE TO BE IN phraseology “gross income.”
THE “GROSS INCOME” OF THE
EMBEZZLER FOR THE YEAR IN WHICH
THE FUNDS ARE MISAPPROPRIATED 
YES
CIR v. BIR investigated the spouses internal In the case of income, for it to be taxable, there
Spouses revenue taxes for 2003 and prior and must be a gain realized by the taxpayer, which is
Manly determined that their ITRs were not excluded by law or treaty from taxation. The
(2014) underdeclared. government is allowed to resort to all evidence
or resources available to determine a taxpayer’s
Since the under declaration exceeded 30% income and to use methods to reconstruct his
of the reported or declared income, it was income.
considered prima facie evidence of fraud
with intent to evade payment of proper
taxes. Criminal cases were then filed EXPENDITURE METHOD
against them. A method commonly used by the government is
the expenditure method, which is a method of
WON RESPONDENTS WERE GUILTY OF reconstructing a taxpayer’s income by deducting
TAX EVASION  YES the aggregate yearly expenditures from the
declared yearly income. The theory of this
method is that when the amount of the money
that a taxpayer spends during a given year
exceeds his reported or declared income
AND the source of such money is
unexplained, it may be inferred that such
expenditures represent unreported or
undeclared income. This method was used in
this case.
Since the underdeclaration is more than 30% of

reported or declared income, the filing of criminal
charges was recommended. SC is moreover
convinced that there is probable cause to
indict spouses for tax evasion.
If you were able to purchase these things?

Where did it come from?
33
I`
RMC 16- Tax implications and recording of deposits/advances for expenses received by taxpayers not
2013 covered by RMC 89-2012
DEPOSITS/ADVANCES PART OF GROSS RECEIPTS

When cash deposits or advances are received by taxpayers other than GPP covered by RMC
89-2012 from the Client/Customer, a corresponding Official Receipt shall be issued. The
amount received shall be booked as income and shall form part of the Gross Receipts
and subject to VAT or Percentage Tax (Gross Receipt Tax), if applicable, and shall in turn
be deductible as expense by the Client/Customer provided that it is duly substantiated by
Official Receipts pursuant to Section 34(A)(1) of the Tax Code.
RMC 88- RMC 88-2012 issues clarifies the tax implications of income or gain derived by an employee
2012 from the exercise of STOCK OPTION PLANS.
In BIR Ruling No. 119-2012, it was ruled that any income or gain derived by the employees
from their exercise of stock options is considered as additional compensation subject to
Income Tax, and consequently, to withholding taxes on compensation. In the said ruling,
stock options were granted by domestic corporations as part of their compensation
plan. Under the plan employees were given the right to buy a specified number of shares
of a foreign corporation up to a specified time/period from the grant date, at a fixed price
regardless of the stock’s future market price. It was designed to reward employees and
the criteria for the reward was dependent on performance, outstanding business achievements,
and exemplary organization, technical or business accomplishments/demonstrated expertise
yielding significant effects on business/society. At the same time, all full-time and most part-
time employees were given one-time number of shares upon employment.
Any income or gain derived from stock option plans granted to managerial and
supervisory employees which qualify as fringe benefits is subject to fringe benefit tax
imposed under Section 33 of the NIRC.
The additional compensation or the taxable fringe benefit, is the difference of the book
value (BV)/ fair market value (FMV) of the shares, whichever is higher, at the time of
exercise of the stock option and the price fixed on the grant date. The option has value
only if, at the time of the exercise, the stock is worth more than the price fixed on the
grant date. The additional compensation or taxable fringe benefit arises whether the shares of
stocks involved are that of a domestic or foreign corporation.
If the shares to be issued at the exercise of the stock options come from the unissued
shares of stock of the issuing corporation, the original issuance of said shares is subject to
Documentary Stamp Tax (DST).
Unissued stock  DST

Secondary issuance  not traded -- CGT + SDT ; stock listed / traded – Stock transaction tax
SUBSEQUENT DISPOSITION OF SHARES

In the event that employees subsequently sell, barter, exchange or otherwise dispose of shares
of stock obtained from their exercise of the stock options, the tax treatment is as follows:
• If the shares involved are shares of stock in a domestic corporation not traded in the
34
I`
Stock Exchange, the gain, if any, is subject to Capital Gains Tax. Further, the sale or
transfer of the said shares is subject to the DST, upon execution of the deed transferring
ownership or rights thereto, or upon delivery, assignment or indorsement of such shares
in favor of another.
• If the shares involved are shares of stock listed and traded through the Local Stock
Exchange, the transaction is subject to stock transaction tax.
If the shares involved are shares of stock in a foreign corporation, the gain, if any, is subject to
ordinary Income Tax.
Summary:
This circular stated that any income or gain obtained by the employees from the exercise of
stock options is additional compensation subject to income tax and, consequently, to
withholding tax on compensation. It, however, clarified that the income or gain obtained by
employees in managerial or supervisory positions—which qualifies as a fringe benefit—is
subject to the fringe-benefit tax. The tax on compensation or fringe-benefit tax applies, whether
the shares of stock involved are those of a domestic corporation or a foreign one.
BIR Shell Companies requested to change its The taxpayer may choose the method of valuing
Ruling valuation method from the Weighted its inventory for any taxable year, and such
DA 128- Average Method (WAVE) to the First-In- method should be used in all subsequent years.
08 First-Out (FIFO) to conform with the Moreover, the CIR granted Shell’s request so
adoption by a new computerized system that the latter may be consistent with the
based on the Global Systems Application inventory system used by its parent company.
and Product Data Processing (GSAP) by its
parent company. Basically, if one wants to change its inventory
system, ask permission first and give valid
WON SHELL COMPANIES CAN SHIFT reasons.
ITS METHOD  YES
Considering that the purpose of Shell
Companies’ change in method is so that it can
best conform to its accounting practice as said
Cancellation/ Condonation of debt valuation will clearly reflect the income of the
said companies, the CIR allowed it.
1. Debt as a gift no service rendered
 Donation / Donor’s tax
2. X linisin kotse pag umuulan –

compensation for services and
hence forms part of income of Y , Y
not having to pay loan nevertheless
exchanged it to services, does not
really mean you are receiving it
literally in your hands, in which this
case
3. Lend to Corporation - If X lends to Y

and decides not to collect to Y but as
an additional given, X is a
35
I`
corporation: variation in tax

implication  construed as a
DIVIDEND , so Y’s receipt of the
amount which comes into the form of
cancellation of indebtedness 
receipt of dividends hence taxable
Candidate in Elections  not income, but

under Omnibus election candidate must
account all contributions
On Taxes Refunded formerly claimed as

DEDUCTION
Taxes – recoup as taxes claimed as
deductions, TP required to report taxes as
gross income
2020 – paid DST
DST not among those excluded as
deductions
Was claimed deductions
2021. – TP realized not subject to DST
purchase of shares traded in stock
exchanged
Claimed a claim for refund successful
TP must declare DST able to refund ;
balancing the equilibrium; when u claim
deductible expense (bumaba GI) now since
u refunded (para umakyat GI)
Exclusions
Exclusions are income, its only that the law expressly excludes them as being NOT part of income
All of these are income, but you reduce these income with exclusions =GROSS INCOME
EXCLUSIONS are exclusive – strictly construed against taxpayer !
List:
“Amount received by insured as a return of premium” (return OF capital  di naman talaga income
36
I`
Gifts on their own generate income  considered as income

i.e. car as gift  donor’s taxes paid, excluded
but when car used for grab  income generated as such  no longer excluded
Compensation for injuries / sickness  and naeexclude lang ay damages in relation to compensation for
injuries /sickness (note, Glenshaw)
Retirement benefits :
TAX CODE
 elements  not less than. 50 yrs old, 10 yrs worked, registered retirement plan
 terminal leave pay not taxable
Outside of Tax Code:

Q: What if there is a retirement plan in company, under labor code lang, (statutory provision) what is
tax treatment?
Still tax exempt, when reqs met  (1) you retire at 60 yrs old, (2) worked for 10 yrs, (3) no BIR registered
retirement plan
o If there is registered retirement plan – reference such as such tax agreement between
company and BIR how to tax employee
- When you retire at 60 yrs old, what you are receiving are payments receiving by employee for
severance in his employment which are beyond the control of the employee
o Outside of retirement, what’s common example of something u receive which is beyond
control of employee – separation pay due to authorized causes
Bayanihan 2 law  all retirement pay regardless of non-compliance with any of the things mentioned as
long as paid within the year are tax exempt – shelf life ; exemptions elements not applicable
Prizes and awards

o made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or
civic achievement
o but only if he was selected without any action on his part to enter the contest and
o he is not required to render substantial future services as a condition to receiving the prize
or award (strictly required and complied with)
o Ex. Raffle of car – not excluded ; Miss Universe ; no action to do anything proactively to win
the price
13th month pay – includes anything or everything else that u will receive – 90,000, de minimis na sobra
lagay mo na rin
CIR v. CA GCL Retirement Plan (GCL, for brevity) is REGISTERED REASONABLE PRIVATE
(1992) an employees' trust maintained by the BENEFIT PLAN IS EXEMPT FROM ALL
employer, GCL Inc., to provide retirement, TAXES
Reasonabl pension, disability and death benefits to its GCL Plan was qualified as exempt from income
e Private employees. tax by the CIR in accordance with Rep. Act No.
Benefit 4917 approved on 17 June 1967. This law
Plan The Plan was approved and qualified as specifically retirement benefits received by
exempt from income tax. GCL made officials and employees of private firms,
investments and earned therefrom interest whether individual or corporate, in
income from which was withheld the fifteen accordance with a reasonable private benefit
per centum (15%) final withholding tax plan maintained by the employer shall be
imposed. GCL filed several claims for exempt from all taxes and shall not be liable to
refund but these were denied. attachment, levy or seizure by or under any legal
37
I`
or equitable process whatsoever except to pay a

CIR argues that GCL is not exempt debt of the official or employee concerned to the
because the newer law (P.D. 1959) private benefit plan or that arising from liability
removed the exemptions. imposed in a criminal action.
GCL argues that they derive their This must be read with Section 56(b) (now 53[b])
exemption from Sec. 56(b) of the Tax of the Tax Code, "Sec. 56. Imposition of Tax. -
Code. (a) Application of tax. - The taxes imposed by
this Title upon individuals shall apply to the
SC held that GCL plan is exempt. Sec. 56 income of estates or of any kind of property held
(b), which provides for the exemption, in trust,
cannot be repealed by P.D. 1959 since the "(b) Exception. - The tax imposed by this Title
latter is a general law. shall not apply to employee's trust which
forms part of a pension, stock bonus, or
profit-sharing plan of an employer for the
WON THE GCL PLAN IS EXEMPT FROM benefit of some or all of his employees x x x"
THE FINAL WITHHOLDING TAX ON
INTEREST INCOME FROM MONEY P.D. 1959 is just a general law as compared to
PLACEMENTS AND PURCHASE OF Sec. 56(b) a specific law granting exemption
TREASURY BILLS REQUIRED BY PRES. from income tax to employees’ trust. It is
DECREE NO. 1959  YES significant to note that the GCL Plan was
qualified as exempt from income tax by the
CIR in accordance with R.A. 4917.
CIR v. CA Castaneda retired from the government TERMINAL LEAVE PAY NOT SUBJECT TO
(1991) service as Revenue Attache in the INCOME TAX
Philippine Embassy in London, England, The Court has already ruled that the terminal
Terminal on 10 December 1982. He received his leave pay received by a government official or
Leave Pay terminal leave pay, however, the CIR employee is not subject to withholding (income)
withheld approx. P12,000 from it because tax.
he claims that terminal leave pay forms part
of gross salary or income, hence, subject to In the recent case of Jesus N. Borromeo vs. The
income tax. Hon. Civil Service Commission, et al., G.R. No.
96032, 31 July 1991, the Court explained the
WON TERMINAL LEAVE PAY FORMS rationale behind the employee's entitlement to
PART OF GROSS SALARY OR INCOME an exemption from withholding (income) tax on
AND IS SUBJECT TO INCOME TAX  NO his terminal leave pay as follows:
. . . commutation of leave credits (terminal leave)
is applied for by an officer or employee who
retires, resigns or is separated from the
service through no fault of his own. In the
exercise of sound personnel policy, the
Government encourages unused leaves to be
accumulated. The Government recognizes that
for most public servants, retirement pay is
always less than generous if not meager and
scrimpy. Terminal leave payments are given not
only at the same time but also for the same
policy considerations governing retirement
38
I`
benefits.
Re: Atty. Bernardo Zialcita questioned the SC TERMINAL LEAVE PAY IS NOT TAXABLE
Requesto about the deductions made by the BIR on Commonwealth Act 186 states that retired
f Atty. his retirement benefits. The money value of officials and
Zialcita his accrued leave credits, or his terminal employees are entitled to the commutation of the
(1990) leave pay was subject to income tax. The unused vacation and sick leaves and that all
SC issued a resolution ordering the fiscal benefits granted under this Act shall be exempt
management and budget office to refund from all types of taxes. EO 1077 also provides
Atty. Zialcita and declared that henceforth that officers and employees who retired through
no withholding tax shall be deducted to any no fault of their own are entitled to the
office of this court from terminal leave pay commutation of all the accumulated vacation
benefits of all retirees. The CIR, as and sick leaves. Section 28(b)7(b) of the NIRC
intervenor-movant, filed an MR. states that any amount received by an officer or
employee as a consequence of separation
WON TERMINAL LEAVE PAY IS from service of the employer due to death,
TAXABLE  NO sickness, or for any cause beyond the
control of the said official or employee shall
be excluded from the gross income.
NOTE: COMPULSORY RETIREMENT 

CONSIDERED AS A CAUSE BEYOND
CONTROL
Atty. Zialcita reached the age of compulsory
retirement (65 years old), and the court
considers compulsory retirement as a cause
beyond the control.
Interconti Intercontinental Broadcasting Corporation RETIREMENT BENEFITS FROM AN
nental (IBC) employed 4 employees in various UNAPPROVED RETIREMENT PLAN IS
Broadcas positions. In 1996, the government TAXABLE
ting sequestered the station, including its For the retirement benefits to be exempt from
Corporati properties, funds, and other assets, and withholding tax, the taxpayer is burdened to
on v. took over its management and operations. prove the concurrence of the following:
Amarilla The 4 employees retired from the company 1. Reasonable private plan maintained by
(2006) and received, on staggered basis, their the employer
retirement benefits under the 1993 CBA. 2. The retiring official or employee has
been in the service of the same employer
A Php1,500 salary increase was then given for at least 10 years
to all employees, current and retired, 3. The retiring official or employee is not
effective July 1994. When the retirees less than 50 years of age at the time of
demanded their differentials, IBC refused his retirement
and instead informed then that it would be 4. The benefit had been availed of only
used to offset the tax due on their retirement once
benefits.
Respondents were qualified to retire optionally
IBC claims that under Sec. 21 of the NIRC, from their employment with IBC. However, there
the retirement benefits constitute income. is no evidence that the 1993 CBA had been
Although they are exempt under Sec. 28(b), approved or was ever presented to the BIR;
the law requires that such benefits received hence, the retirement benefits of
39
I`
be in accord with a reasonable retirement respondents are taxable.

plan duly registered with the BIR. Since its
retirement plan in the 1993 CBA was not Under Sec. 80 of the NIRC, IBC, as employer
approved by the BIR, their retirement was obliged to withhold the taxes on the benefits
benefits are not exempt. and remit the same to the BIR. However, the
Court agrees with respondents’ contention that
The employees, on the other hand, claim IBC did not withhold the taxes due on their
that they availed of the optional retirement retirement benefits because it had obliged itself
because of IBC’s inducement that there to pay the taxes due thereon. This was done to
would be no tax deductions. induce respondents to agree to avail the optional
retirement scheme.
WON THE RETIREMENT BENEFITS ARE
PART OF THEIR GROSS INCOME  YES Parties are free to enter into any contract
stipulation provided it is not illegal or contrary to
public morals. An agreement to pay the taxes
on the retirement benefits as an incentive to
prospective retirees and for them to avail of
the optional retirement scheme is not
contrary to law or to public morals. IBC had
agreed to shoulder such taxes to entice them to
voluntarily retire early, on its belief that this
would prove advantageous to it. Respondents
agreed and relied on the commitment of IBC.
For IBC to renege on its contract with
respondents simply because its new
management had found the same
disadvantageous would amount to a breach of
contract.
RMC 27- Circular was issued to revoke BIR Ruling Voluntary – not excluded
2011 No. 002-99, DA 184-04, DA 569-04, and DA Mandatory – excluded
087-06 which excludes contributions to The contributions referred to in Section 32(B)(7)
PAG-IBIG, GSIS, SSS, Life Insurance, Pre- (f) of the NIRC would cover only the
Need Plan in excess of the mandatory mandatory or compulsory contributions of
monthly contributions to the computation of the employees to SSS, GSIS, PhilHealth.
the gross income of the taxpayer.
The voluntary contributions in excess of
what the law allows are not excluded from the
gross income of the taxpayer and are not
exempt from income and withholding tax.
CIR v. Atlas entered into a Loan and Sales TWO SEPARATE CONTRACTS ARE
Mitsubish Contract with Mitsubishi Metal (a Japanese INVOLVED
i Metal Corp. licensed to do business in the Phils) The loan and sales contract between Mitsubishi
Corp. for the expansion of productive capacity of and Atlas does not contain any reference to
(1990) Atlas’ mines in Toledo, Cebu. Mitsubishi Eximbank whatsoever. The agreement is strictly
agreed to extend a $20 million loan to Atlas between Mitsubishi as creditor in the contract of
for the installation of a new concentrator for loan, and Atlas as the seller of the copper
copper production. Atlas in turn undertook concentrates. It cannot be said that Mitsubishi
to sell to Mitsubishi all the copper was a mere agent in said transaction.
40
I`
concentrates produced from the machine for

a period of 15 years. Eximbank had nothing to do with the sale of the
copper concentrates since all that Mitsubishi
Mitsubishi applied for loans with Eximbank stated in its loan application with the Eximbank
of Japan, as well as from a consortium of was that the amount being procured would be
Japanese banks, so it could loan the money used as a loan to and in consideration for
to Atlas. Pursuant to their contract, Atlas importing copper concentrates from Atlas.
made interest payments to Mitsubishi, but
15% withholding tax was withheld from Such statement of purpose could not have been
these payments and remitted to the intended for a contract of agency, and if it were
Government. Atlas filed claim for tax credit, the purpose, they would have specifically so
but the CIR did not act upon it. Atlas stated.
claimed Mitsubishi was a mere agent of
Eximbank, a foreign banking institution, and When Mitsubishi secured such loans, it was in
the interest income from the loans is its own independent capacity as a private entity
excluded from gross income, pursuant to and not as a conduit of the consortium of
Section 29 (b) (7) (A) of the tax code. Japanese banks or the Eximbank of Japan. The
transaction between Mitsubishi and
WON THE INTEREST INCOME FROM Eximbank of Japan was a distinct and
THE LOANS EXTENDED TO ATLAS BY separate contract from that entered into by
MITSUBISHI IS EXCLUDIBLE FROM Mitsubishi and Atlas.
GROSS INCOME TAXATION AND,
THEREFORE, EXEMPT FROM The interest income of the loan paid by Atlas to
WITHHOLDING TAX  NO Mitsubishi is entirely different from the interest
income paid by Mitsubishi to Eximbank of Japan.
What was the subject of the 15% withholding tax
is not the interest income paid by Mitsubishi to
Eximbank, but the interest income earned by
Mitsubishi from the loan to Atlas.
RA 9505 Dead letter law – weak imitation of 401K in US
- Pension plan, employer give pension plan and employee contributes as well,
in the contributory plan we will invest  will generate income  intent to fund
and to fuel the retirement [PERSONAL EQUITY AND RETIREMENT ACCOUNT]
- Tax credit equivalent to 5% of total PERA contribution – 100,000 contribution

annually – 5% of 100,000 (maximum if single, if married, separately 100,000,
OFW..)
- Participation of government is 2 fold: 1. Benefit to account to company, 2. Benefit

to employee
- DEAD LETTER -- Law required that there will be cooperation in financial

institution to offer PERA specific products, employee – employer – financial
institution (time deposits) – no specific products today
- Nuances – age limit, 55 xpn to xpn : medical emergency allowed to nevertless

withdraw
AN ACT ESTABLISHING A PROVIDENT PERSONAL SAVINGS PLAN, KNOWN AS THE

41
I`
PERSONAL EQUITY AND RETIREMENT ACCOUNT (PERA)
SECTION 1. Title. -- This Act shall be known as the "Personal Equity and Retirement Account
(PERA) Act of 2008".
SEC. 2. Declaration of Policy. -- It is declared the policy of the State to promote capital market
development and savings mobilization by establishing a legal and regulatory framework of
retirement plans for persons, comprised of voluntary personal savings and investments. The
State recognizes the potential contribution of PERA to long-term fiscal sustainability through
the, provision of long-term financing and reduction of social pension benefits.
SEC. 3. Definition of Terms. -- Unless the context requires otherwise, the following terms shall
have the following significance as used in this Act:
a. "Administrator" is an entity accredited by the Bureau of Internal Revenue (BIR), after pre-
qualification by the concerned Regulatory Authority. The Administrator shall be responsible for
overseeing the PERA, whose core functions shall include, but not limited to: reporting on
contributions made to the account, computing the values of investments, educating the
Contributor, enforcing PERA contributions and withdrawal limits, collecting appropriate taxes
and penalties for the government, securing BIR Income Tax Credit Certificates for the
Contributor, consolidating reports on all investments, income, expenses and withdrawals on the
account and ensuring that PERA contributions are invested in accordance with the prudential
guidelines set by the Regulatory Authorities.
b. "Contributor" is any person with the capacity to contract and possesses a tax identification
number. The Contributor establishes and makes contributions to a PERA.
c. "Custodian" is a separate and distinct entity unrelated to the Administrator, accredited by the
Bangko Sentral ng Pilipinas, providing services in connection with the custodianship of funds
and securities comprising the PERA investments. The Custodian shall be responsible for
receiving all funds in connection with the PERA, maintaining custody of all original securities,
evidence of deposits or other evidence of investment. The Custodian shall operate
independently from the Administrator. The Custodian is required to report to the Contributor
and the concerned Regulatory Authority at regular intervals all financial transactions and all
documents in its custody under a PERA.
d. "Early withdrawal" shall pertain to any withdrawal prior to the period of distribution as set
forth under Section 12 hereof.
e. "Investment Manager" is a. regulated person or entity authorized by a Contributor to make
investment decisions for his PERA. As such, it shall assume fiduciary duty and responsibility for
PERA investments. An Investment Manager shall act with utmost fidelity by observing policies
directed towards confidentiality, scrupulous care, safety and prudent management of PERA
funds.
f. "Personal Equity and Retirement Account (PERA)" refers to the voluntary retirement
account established by and for the .exclusive use and benefit of the Contributor for the
purpose of being invested solely in PERA investment products in the Philippines. The
Contributor shall retain the ownership, whether legal or beneficial, of funds placed
therein, including all earnings of such funds.
g. "PERA Investment Product" refers to a unit investment bust fund, mutual fund, entity
contract, insurance pension products, pre-need pension plan, shares of stock and other
securities listed and traded in a local exchange, exchange-traded bonds or any other
investment product or outlet which the concerned Regulatory Authority may allow for PERA
purposes: Provided, however, That to qualify as a PERA investment product under this Act, the
product must be non-speculative, readily marketable, and with a track record of regular income
payments to investors.
The concerned Regulatory Authority must first approve the product before being granted tax-
exempt privileges by the BIR.
h. "Regulatory Authority" refers to the Bangko Sentral ng Pilipinas (BSP) as regards banks,
other supervised financial institutions and trust entities, the Securities and Exchange
Commission (SEC) for investment companies, investment houses, stockbrokerages and pre-
42
I`
need plan companies, and the Office of the Insurance Commission (OIC) for insurance
companies.
i. "Overseas Filipino" refers to (1) an individual citizen of the Philippines who is working or
deriving income from abroad, including one who retained or reacquired his Philippine
citizenship under Republic Act No. 9225, otherwise known as the "Citizenship Retention and
Reacquisition Act of 2003"; or (2) the legitimate spouse, whether or not said spouse is of
Filipino ancestry, and the children of the Filipino citizen mentioned in item (1) hereof.
SEC. 4. Establishment of a PERA. -- A Contributor may create and maintain a maximum of
five (5) PERA, at any one time: Provided, That the Contributor shall designate and maintain
only one (1) Administrator for all his PERA.
The Contributor shall make all investment decisions pertaining to his PERA. However, he has
the option of appointing an Investment Manager, either in writing or in electronic form, to make
investment decisions on his behalf without prior consultation.
SEC. 5. Maximum Annual PERA Contributions. -- A Contributor may make an aggregate
maximum contribution of One hundred thousand pesos (P100,000.00) or its equivalent in any
convertible foreign currency at the prevailing rate at the time of the actual contribution, to
his/her PERA per year: Provided, That if the Contributor is married, each of the spouses shall
be entitled to make a maximum contribution of One hundred thousand pesos (P100,000.00) or
its equivalent in any convertible foreign currency per year to his/her respective PERA Provided,
further, That if the Contributor is an overseas Filipino, he shall be allowed to make maximum
contributions double the allowable maximum amount.
A Contributor has the option to contribute more than the maximum amount prescribed herein:
Provided, That the excess shall no longer be entitled to a tax credit of five percent (5%).
The Secretary of Finance may adjust the maximum contribution from time to time, taking into
consideration the present value of the said maximum contribution using the Consumer Price
Index as published by the National Statistics Office, fiscal position of the government and other
pertinent factors.
SEC. 6. Employer's Contribution. -- A private employer may contribute to its employee's
PERA to the extent of the amount allowable to the Contributor: Provided, however, That the
employer complies with the mandatory Social Security System (SSS) contribution and
retirement pay under the Labor Code of the Philippines. Such contribution shall be allowed as a
deduction from the employer's gross income. The Contributor, however, retains the prerogative
to make investment decisions pertaining to his PERA.
SEC. 7. Separate Asset. -- The PERA shall be kept separate from the other assets of an
Administrator/Custodian and shall not be part of the general assets of the
Administrator/Custodian for purposes of insolvency.
SEC. 8. Tax Treatment of Contributions. -- The Contributor shall be given an income tax
credit equivalent to five percent (5%) of the total PERA contribution: Provided, however, That in
no instance can there be any refund of the said tax credit arising from the PERA contributions.
If the Contributor is an overseas Filipino, he shall be entitled to claim tax credit from any tax
payable to the national government under the National Internal Revenue Code of 1997, as
amended.
SEC. 9. Tax Treatment of Investment Income. -- All income earned from the investments and
reinvestments of the maximum amount allowed herein is tax exempt.
SEC. 10. Tax Treatment of Distributions. -- All distributions in accordance with Section 12
(Distribution upon retirement/ death) hereof are tax exempt.
SEC. 11. Termination. -- Any premature termination shall be treated as an early withdrawal
under Section 13 hereof: Provided, That the penalties thereunder shall not apply if the entire
proceeds therefrom are immediately transferred to another PERA investment and/or another
Administrator.
SEC. 12. Distributions Upon Retirement/Death. -- Distributions may be made upon reaching
the age of fifty-five (55) years: Provided, That the Contributor has made contributions to the
PERA for at least five (5) years. The distribution shall be made in either lump sum or pension
for a definite period or lifetime pension, the choice of which shall be at the option of the
Contributor. The Contributor, however, has the option to continue the PERA. Complete
43
I`
distribution shall be made upon the death of the Contributor, irrespective of the age of the
Contributor at the time of his death.
SEC. 13. Penalty on Early Withdrawal. -- Any early withdrawal shall be subject to a penalty,
the amount of which would be determined by the Secretary of Finance and payable to the
government: Provided, That the amount of the penalty shall in no case be less than the tax
incentives enjoyed by the Contributor.
No early withdrawal penalty shall be imposed on any withdrawal of any funds for the following
purposes:
For payment of accident or illness-related hospitalization in excess of thirty (30) days; and
For payment to a Contributor who has been subsequently rendered permanently totally
disabled as defined under the Employees Compensation Law, Social Security Law and
Government Service Insurance System Law.
SEC. 14. Non-Assignability. -- No portion of the assets of a PERA may be assigned,
alienated, pledged, encumbered, attached, garnished, seized or levied upon. PERA assets
shall not be considered assets of the Contributor for purposes of insolvency and estate taxes.
SEC. 15. Rules and Regulations. -- Consistent with the policy of promoting transparency in
PERA investment and thereby affording protection to the Contributor, the Department of
Finance, the Bureau of Internal Revenue and the concerned Regulatory Authorities, with the
Bangko Sentral ng Pilipinas as lead agency, shall coordinate to establish uniform rules and
regulations pertaining to the following subject matters:
a. Qualification and disqualification standards for Administrators, Custodians and Investment
Managers, including directors and officers thereof;
b. Qualified and/or eligible PERA investment products;
c. Valuation standards for PERA investments;
d. Disclosure requirements on the terms and conditions of the PERA investments;
e. Minimum requirements imposed on the Administrators as regards inculcating financial
literacy in investors;
f. Ascertainment of client suitability for PERA products;
g. Fees to be charged by the Administrator, Custodian or Investment Manager shall always be
reasonable and approved by the concerned Regulatory Authority;
h. Record-keeping, reporting and audit requirement of Administrators and Custodians
pertaining to records for all contributions, earnings and total account balances; and
i. Other pertinent matters to be determined by the Regulatory Authorities.
SEC. 16. Administration of Tax Incentives. -- The BIR shall issue the implementing rules and
regulations regarding all aspects of tax administration relating to PERA. The BIR shall
coordinate the qualification standards of the Administrator with the Regulatory Authorities.
SEC. 17. Penalty. -- A fine of not less than Fifty thousand pesos (P50,000.00) nor more than
Two hundred thousand pesos (P200,000.00) or imprisonment of not less than six (6) years and
one (1) day to not more than twelve (12) years or both such fine and imprisonment, at the
discretion of the court, shall be imposed upon any person, association, partnership or
corporation, its officer, employee or agent, who, acting alone or in connivance with others,
shall:
a. Act as Administrator, Custodian or Investment Manager without being properly qualified or
without being granted prior accreditation by the concerned Regulatory Authority;
b . Invest the contribution without written or electronically authenticated authority from the
Contributor, or invest the contribution in contravention of the instructions of the Contributor;
c. Knowingly and willfully make any statement in any application, report, or document required
to be filed under this Act, which statement is false or misleading with respect to any material
fact:
d. Misappropriate or convert, to the prejudice of the Contributor, contributions to and
investments or income from the PERA;
e. By gross negligence, cause any loss, conversion, or misappropriation of the contributions to,
or investments from, the PERA or
f. Violate any provision of this Act or rules and regulations issued pursuant to this Act.
Notwithstanding the foregoing, any willful violation by the accredited Administrator, Custodian
44
I`
or Investment Manager of any of the provisions of this Act, or its implementing rules and
regulations, or other tern and conditions of the authority to act as Administrator, Custodian or
Investment Manager may be subject to the administrative sanctions provided for in applicable
laws.
The above penalties shall be without prejudice to whatever civil and criminal liability provided
for under applicable laws for the same act or omission.
SEC. 18. Abuse of the Tax Exemption and Privileges. -- Any person, natural or juridical, who
unduly avails of the tax exemption privileges herein granted, possibly by co-mingling PERA
accounts in an investment with other investments, when such person is not entitled hereto,
shall be subject to the penalties provided in Section 17 hereof. In addition, the offender shall
refund to the government double the amount of the tax exemptions and privileges enjoyed
under this Act, plus interest of twelve percent (12%) per year from the date of enjoyment of the
tax exemptions and privileges to the date of actual payment.
SEC. 19. Separability Clause. -- If any provision or part hereof is held invalid or
unconstitutional, the remainder of the law or the provision not otherwise affected shall remain
valid and subsisting.
SEC. 20. Repealing Clause. -- All laws, decrees, orders, rules and regulations or parts thereof
inconsistent with this Act are hereby amended or modified accordingly.
SEC. 21. Effectivity. -- This Act shall take effect fifteen (15) days following its publication in a
newspaper of general circulation: Provided, That the tax incentives granted hereunder shall
take effect on January 1, 2009.

RR 8-00 REVENUE REGULATIONS NO. 8-2000 issued November 22, 2000 amends specific provisions
(See full of RR No. 2- 98 and RR No. 3-98 with respect to the "De Minimis" Benefits, Additional
list of de Compensation Allowance (ACA), Representation and Transportation Allowance (RATA) and
minimis Personal Economic Relief Allowance (PERA). Said benefits/allowances received by employees
benefits in are not considered as items of income and, therefore, are not subject to income tax and,
the last consequently, to the withholding tax.
part)
Effective the Taxable Year 2000, ACA will be classified as part of the "Other Benefits" excluded
from one's gross compensation income, provided that the total amount of such benefits does
not exceed P 30,000. Items of "de minimis" benefits exempt from the fringe benefits tax are
enumerated in the Regulations.
RR-5- Further amends RR Nos. 2-98 and 3-98, as last amended by RR No. 5-2008, with respect to
2011 "De Minimis Benefits"
But take note that this was amended by RR-8-2012 as follows:

(e) Uniform and Clothing allowance not exceeding P5,000 per annum;
RR 17- implements the tax provisions of Republic Act No. 9505, otherwise known as the “Personal
2011 Equity and Retirement Account (PERA) Act of 2008”
The Qualified Employer’s Contribution to his/its employee’s PERA shall not form part of the
employee’s taxable gross income, hence, exempted from the withholding tax on income,
whether withholding tax on compensation or fringe benefits.
The employer can claim the actual amount of his/its Qualified Employer’s Contribution as a
deduction from his/its gross income, but only to the extent of the employer’s contribution that
would complete the maximum allowable PERA contribution of an employee. The Qualified
Employer’s Contribution allowable as deduction shall likewise be exempt from withholding tax
45
I`
on compensation, the provisions of Section 34(K) of the Tax Code notwithstanding.
For this purpose, the Administrator shall issue to the employer a certificate of the actual amount
of Qualified Employer’s Contributions
RR 8- Further amends RR 2-98, as last amended by RR 5-2008 and 5-2011, relative to the “De
2012 Minimis Benefit,” uniform and clothing allowance not exceeding P 5,000 per annum, which is
exempt from Income Tax on compensation as well as from fringe benefit tax.
RR 1- Amended specific provisions pertaining to de minimis and fringe benefit tax
2015 SECTION 1. Section 2.78.1 (A) (3) of RR 2-98, as last amended by RR 8- 2012, is hereby
further amended to read as follows:
"Sec. 2.78.1. Withholding Tax on Compensation Income. —

(3) Facilities and privileges of relatively small value. —
(k) Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total annual monetary value received from
both CBA and productivity incentive schemes combined do not exceed ten thousand pesos
(Php10,000.00) per employee per taxable year;
SECTION 2. Section 2.33 (C) of RR 3-98, as last amended by RR 8-2012, is hereby further
amended to read as follows:
"Sec. 2.33. Special Treatment of Fringe Benefits. — (C) Fringe Benefits Not Subject to Fringe
Benefit Tax. — (k) Benefits received by an employee by virtue of a collective bargaining
agreement (CBA) and productivity incentive schemes provided that the total annual monetary
value received from both CBA and productivity incentive schemes combined, do not exceed ten
thousand pesos (Php10,000.00) per employee per taxable year;
DE MINIMIS BENEFITS (As of August 21, 2019)

De minimis benefits are benefits of relatively small values provided by the employers to the employee on
top of the basic compensation intended for the general welfare of the employees. Being of relatively small
values, the same is not being considered as a taxable compensation.
For the employer, the amount of de minimis provided is a deductible salaries expense, while for the employee,
it would constitute as an additional salary that is not subject to withholding tax on compensation.
1. Monetized unused vacation leave credits of private employees not exceeding 10 days during the
year.
2. Monetized value of vacation and sick leave credits paid to government official and employees.
3. Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per
semester or P250 per month.
4. Rice subsidy of P2,000 or 1 sack of 50-kilogram rice per month amounting to not more than P2,000.
5. Uniform and clothing allowance not exceeding P6,000 per annum.
6. Actual medical assistance, e.g., medical allowance to cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000
per annum.
7. Laundry allowance not exceeding P300 per month.
8. Employees achievement awards, e.g. for length of service or safety achievement, which must be in
the form of tangible personal property other than cash or gift certificate, with an annual monetary value
46
I`
not exceeding P10,000 received by the employee under an established written plan which does not
discriminate in favor of highly paid employees;
9. Gifts made during Christmas and major anniversary celebrations not exceeding P5,000 per employee
per annum,
10. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic
minimum wage on a per region basis.
11. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total monetary value received from both CBA and
productivity incentive schemes combined do not exceed P10,000 per employee per taxable year.
All other benefits given by employers which are not included in the above enumeration shall not be considered
de minimis benefits, and hence, shall be subject to income tax as well as withholding tax on compensation
income.
Please note also of the limitations as to amount because it is material to qualify for exemptions.
If you provide more than the limitations, the amount in excess of the limit would be taxable and subject to
withholding tax on compensation, if the recipient employee is a rank-and-file, or fringe benefits tax
(FBT) of 35% if a supervisory or managerial employee. This is however subject to the rule on the
P90,000 amount for 13th month pay and other benefits where excess de minimis benefits may not be
taxable if the total of such excess plus the 13th month pay and other benefits is within the P90,000
limitation.
Ex. WAH – Work at Home Employee

- Connectivity allowance and mobility allowance, electricity allowance – very very small
- Not included in de minimis!!! EXCLUSIVE LIST- even if they are small amounts, furnished for healh
and safety of employees.
- All other benefits given by employers which are not included in the above enumeration shall not be
considered de minimis benefits, and hence, shall be subject to income tax as well as withholding tax
on compensation income.
4. Source of Income Rules
IDENTIFY WHAT TYPE OF INCOME

THEN SOURCE WHETHER IT WOULD BE
TAXABLE IN PH OR NOT
Is money INTEREST INCOME? = interest
Ex. INTEREST INCOME income must be assimilated to money lent! Must
Singapore bank lends to Philippine comply with definition of interest
borrower
- Loan Agreement – Singapore bank will If yes  where obligor resides?
lend 1M dollar to PH borrower ; subject
to 10% interest = 100,000
47
I`
- PH borrower asked to pay additional

charge of 10,000 Payable after 1 yr.
- PH entity pays Singapore bank
1,020,000. Foreign corporation
(resident or non-resident)
What portion/s of 1,020,000 taxable?
- P10,000 (Non-residence corporation
lends from PH borrower)  non
residence corp earned interest from PH
borrower  Interest income derived
from Philippine source
- P10,000 additional charge for
processing the loan = not taxable as Ph
sourced income  Not interest. Paid
for performance of service being
rendered.
- 1,000,000 LOAN AMOUNT Not
interest. This is return of capital,
hence not taxable
CIR v. Respondent Marubeni is a foreign corporation ONSHORE v. OFFSHORE
Marube organized under Japan laws and is registered Assuming it did not validly avail of the amnesty
ni to engage in business in the Philippines. under the two EOs, it is still not liable for the
Corpora Petitioner CIR assessed respondent for deficiency contractor’s tax because the income
tion deficient income, branch profit remittance, from the projects came from the “Offshore
(2001) contractor’s, and commercial broker’s taxes Portion” of the contracts. The manufacturing of
based on two contracts (with Philphos and the machines and equipment took place in
National Development Company) in the Japan (Offshore) while all the supplies for the
Philippines. projects were gathered and installed in the
Philippines (Onshore). They were already
WON MARUBENI IS LIABLE TO PAY THE finished products when shipped to the
INCOME, BRANCH PROFIT REMITTANCE, Philippines. Thus, they cannot be held liable for
AND CONTRACTOR’S TAXES  NO contractor’s tax.
FOREIGN CORPORATION CANNOT BE

TAXED FOR INCOME SOURCES OUTSIDE PH
The two contracts entered into by Marubeni
were divided in two parts – Onshore Portion and
Offshore Portion. Respondent is an independent
contractor (activity consists essentially of the
sale of all kinds of services for a fee) and thus
should pay contractor’s tax (tax imposed upon
the privilege of engaging in business; generally
in the nature of excise tax). However, all the
manufacturing and designing of the
machines and equipment took place in Japan
(Offshore) while all the supplies for the projects
were gathered and installed in the Philippines
(Onshore). They were already finished
products when shipped to the Philippines.
48
I`
Thus, not liable for contractor’s tax.
CIR v British Overseas Airway Corp, a British INCOME WAS DERIVED FROM PH, THUS,
BOAC Government-owned Corporation, was TAXABLE
(1987) assessed by the CIR for tax deficiencies. For the source of income to be considered as
Although it was not carrying passengers and coming from the Philippines, it is sufficient that
cargo to and from the Philippines since it did the income is derived from activity within the
Sale of not have landing rights granted to it and the Philippines. In BOAC’s case, the sale of
tickets right to operate by Civil Aeronautics Board, tickets in the Philippines is the activity that
in PH, it maintained a general sales agent (Warner produces the income. The ticket sales were
through Barnes and later on Qantas Airways) in the also made here in Philippine currency. The site
general Philippines which was responsible for of the source of payments is the Philippines.
agent selling BOAC tickets covering passengers The flow of wealth proceeded from, and
and cargoes. occurred within, Philippine territory, enjoying the
protection accorded by the Philippine
BOAC paid under protest such tax government.
deficiencies and tried to claim a refund which
was however denied by CIR. BOAC filed in the Further, the Court explained that gross
CTA assailing the assessment and praying for income includes transactions of any
a refund. CIR again assessed them for business carried on for gain or profile, or
deficiency income tax. The Tax Court reversed gains, profits, and income derived from any
the CIR and held that the proceeds of sales of source whatever.
BOAC passage tickets in the Philippines by
Warner Barnes and Company, Ltd., and later The passage documentations in this case were
by Qantas Airways, during the period in sold in the Philippines and the revenue
question, do not constitute BOAC income therefrom was derived from an activity regularly
from Philippine sources “since no service of pursued within the Philippines.
carriage of passengers or freight was
performed by BOAC within the Philippines”
Even if the BOAC tickets sold covered the
and, therefore, said income is not subject to
“transport of passengers and cargo to and from
Philippine income tax foreign cities,” it cannot alter the fact that income
from the sale of tickets was derived from the
WON THE REVENUE DERIVED BY BOAC Philippines.
FROM SALE OF TICKETS IN THE
PHILIPPINES FOR AIR TRANSPORTATION, THE TEST OF TAXABILITY IS THE
WHILE HAVING NO LANDING RIGHTS “SOURCE” AND THE SOURCE IS THAT
HERE, CONSTITUTE INCOME OF BOAC ACTIVITY WHICH PRODUCED THE INCOME
FROM PHILIPPINE SOURCES, AND,
ACCORDINGLY, TAXABLE  YES 3 parts of the contract
Engineering – service income (within PH) /

royalties (where IP exploited – where blue
prints made)
Procurement – sale of personal property

Where title of transfer takes place – takes
place outside PH
49
I`
Construction – taxable ;
Turnkey contract –
3Billion
1 Billion each – non-taxable
1 Billion each- non – taxable
1 billion each – structure - taxable
Commis Smith Kline has an underallocation of SEC. 37 of the NIRC states that “there shall be
sioner v. overhead expenses from the head office for deducted the expenses, losses, and other
CTA and the year 1971; this resulted in an income tax deductions properly apportioned or allocated
Smith overpayment. It then made a formal claim for thereto and a ratable part of any expenses,
Kline & refund. losses, or other deductions which cannot
French definitely be allocated to some item of class of
Oversea Without awaiting the action of the CIR, it filed a gross income. The remainder, if any, shall be
s (1984) petition for review with the CTA. CTA ruled in included in full as net income from sourced
favor of Smith Kline. within the Philippines.”
Income
from WON THE UNDERALLOCATION OF The Court held that the applicable law is Section
sources OVERHEAD EXPENSES MAY BE 37 of the old NIRC, which is reproduced in the
within CONSIDERED AS ADDITIONAL new NIRC of 1977. The law states that when it
comes to net income from sources in the
PH DEDUCTIBLE EXPENSES  YES
Philippines, from the taxable gross income shall
be deducted the expenses, losses and other
Allocation = Expense x PH gross deductions property apportioned AND a ratable
income/Worldwide gross income part of any expenses, losses or other deductions
which CANNOT definitely be allocated to some
Smith Kline and French Overseas Company is item or class of the gross income. The
a multinational firm from Philadelphia. remainder shall then be included as part of
the net income.
It paid its tax worth P511,247, but eventually it Just to clear out the example (example lang to
claimed for a REFUND that there was an ha para simple not the real figures in the case)
overpayment of P323,255.
Smith Kline argued that it failed to consider  Basta income from ALL sources = 180,000.
the share of the Philippine branch in the Income from Philippines = 36,000.
unallocated overhead expenses worth
P1,427,484. The CTA ruled in favor of the  Expenses = 78,000 divided into:
corporation so the CIR filed for the review of
the decision with the CA.  8,000 = expenses from Philippines
Issue/s: WON Smith Kline is entitled to a  40,000 = expenses NOT from Philippines
refund.  30,000 = expense! remainder di alam
Held: san galing – so yung ratable part niya
YES. In ruling against the CIR, the Court yung idededuct to get the net income
explained that expenses should be divided from the Philippines.
into 3 in computing for the taxable income:  Rate is 36,000( income w/n) 180,000
(1) that spent due to sources of income in the (income all sources)= 1/5
Philippines,  So 1/5 of 30,000 is 6,000.
(2) that NOT spent due to sources of income in o 6,000 plus the 8,000 (expense from
Philippines, and PH) (yung expenses from Philippines)
50
I`
(3) that which cannot be definitely allocated. = 14,000.

o So 36,000 – 14,000 = 22,000 which is
For the 3rd kind, the ratable share must be the taxable net income for the
obtained which must be deducted from the Philippine branch TY LORD!
taxable gross income. The rate between the
gross income from ALL sources and the From the foregoing provision, it is manifest that
gross income from sources within the where an expense is clearly related to the
Philippines will be used to obtain the ratable production PH-derived income or to PH
share which will be deducted from the taxable operations, that expense can be deducted
income. Since Smith Kline failed to deduct from the gross income acquired in the PH
the ratable share of the Philippine branch of
without resorting to appointment.
the unallocated overhead expenses from
the taxable gross income, it is entitled to a
refund. The overhead expenses incurred by the
parent company in connection with finance,
administration, and research and
development, all of which directly benefit its
branches all over the world, including the
PH, fall under a different category. There are
items which cannot be definitely allocated or
identified with the operations of the PH
branch. Under SEC. 37, Smith Kline can claim
as deduction a part of such expense upon the
ration of the local branch’s gross income to the
total gross income, worldwide, of the
multinational corporation.
Phil Petitioner, domestic corporation, entered into The reinsurance premiums were income created
Guarant reinsurance contracts with foreign from the undertaking of the foreign reinsurance
y v. CIR insurance companies not doing business in companies to reinsure Phil Guaranty, the
(1965) the PH. They agreed to cede to the foreign undertaking took place in the Philippines, so the
reinsurers a portion of the premiums of the insurance premiums came from sources
Gross underwritten insurance policies. The WITHIN THE PHILIPPINES, and hence,
income contracts were signed by petitioner in Manila subject to corporate income tax.
from and by the foreign insurers outside the PH. For
sources years 1953 and 1954, they ceded 1.5 million to PLACE OF ACTIVITY IS CONTROLLING
within the foreign reinsurers and it was excluded from In this case, SC said that the activity creating the
PH its gross income when it filed the ITR. It was income is performed or done in the Philippines.
assessed by the CIR for deficiency in the And the foreign insurer’s place of business
withholding tax on the ceded reinsurance should not be confused with the place of the
premiums. activity. What is controlling is not the place of
business but the place of activity that created
Petitioner Maintains that premiums are not the income.
income from sources within the Philippines
because:
 Foreign firms do not do business here
Do not do business here argument

WON REINSURANCE PREMIUMS ARE
INCOME FROM SOURCES WITHIN PH, AND
THEREFORE, SUBJECT TO TAX  YES
51
I`
Howden Commonwealth Insurance Co., a domestic Risk is in the PH!

& Co., corporation, contracted to cede
LTD v. reinsurance premiums to 32 British ACTIVITIES WERE UNDERTAKEN IN PH,
insurance companies not engaged in trade
CIR THUS, TAXABLE
or business in the Philippines. Pursuant to
(1965) the reinsurance contract, Commonwealth will YES. The source of an income is the property,
cede portions of the premiums it receives for activity or service that produced the income.
the insurances on the risks (fire, marine, etc.) it Reinsurance premiums remitted by domestic
has undertaken in the Philippines and in return insurance corporations to foreign
the British insurance companies will indemnify reinsurance companies are considered
Commonwealth in case of any liability incurred income of the latter derived from sources
by the latter. Howden & Co., Ltd. acted as a
within the Philippines because its source is
broker for the 32 British corporations.
the undertaking (activity) to indemnify
The reinsurance contracts were prepared and Commonwealth against liability. The
signed by the British reinsurers in England and undertaking took place in the Philippines. (Para
the same were sent to Manila where marami ka pa masabi, check other reasons of
Commonwealth signed them. (Contracts were the Court: Commonwealth,
perfected in the Philippines.) Commonwealth - its liabilities, and the risks it insured
remitted P798, 297.47 reinsurance premiums
are all in the Philippines;
to Howden. The former also paid Holden’s
P66,112.00 withholding income tax to the BIR. - the contracts were perfected the in
Invoking a ruling by the CIR, which purportedly the Philippines because they were
exempts from withholding tax the reinsurance last signed here;
premiums received by foreign insurance - there was a stipulation in the contract
companies not authorized to do business in the that Philippine laws shall govern the
Philippines, Howden filed a claim for refund agreement;
with the BIR. Howden further contends that
- What is being considered by the
the reinsurance premiums came from
sources outside the Philippines. In support Tax Code is “activity” not
to this argument, Howden alleges: “business,” place of business may
o Contracts were prepared and signed be abroad but its activities are
abroad. Situs lies outside the Philippines. being done here, hence taxable.)
o The foreign insurers are not engaged in
business in the Philippines. The premiums are “ACTIVITY” v “BUSINESS”
their income from their business, which are
 An activity may consist of a single act, while
conducted in England and, as such taxable in
business implies continuity of transactions.
England.
A corporation in the Philippines may earn
an income although such corporation
WON PORTION OF PREMIUMS EARNED conducts all its businesses abroad.
FROM INSURANCES LOCALLY  Section 24 of the Tax Code does not require
UNDERWRITTEN BY A DOMESTIC CORP, a foreign corporation to be engaged in
CEDED TO AND RECEIVED BY A NON- business in the Philippines in order for its
RESIDENT FOREIGN REINSURANCE income from sources within the Philippines
COMPANY, THRU A NON-RESIDENT to be taxable. It subjects foreign corporations
not doing business in the Philippines to tax for
FOREIGN BROKER, PURSUANT TO
income from sources within the Philippines.
REINSURANCE CONTRACTS SIGNED  If by source of income is meant the business
ABROAD BUT SIGNED BY THE DOMESTIC of the taxpayer, foreign corporations not
CORP IN PH, SUBJECT TO INCOME TAX  engaged in business in the Philippines would
YES be exempt from taxation on their income from
sources within the Philippines.
WON THE REINSURANCE PREMIUMS ARE
2) YES. Reinsurance premiums, being income
SUBJECT TO WITHHOLDING TAX  YES
52
I`
from sources within the Philippines, are subject

to withholding income tax by express provision
of law. Subsection (b) of Section 53 subjects to
withholding tax the following: interest, dividends,
rents, salaries, wages, premiums, xxx. The word
“premiums” is neither qualified nor defined by
the law itself, thus it should mean income and
should include all premiums constituting income,
whether they are insurance or reinsurance
premiums.
Since Section 53 subjects to withholding tax

various specified income, among them,
“premiums,” the generic connotation of each and
every word or phrase composing the
enumeration in Subsection (b) thereof is income.
Perforce, the word “premiums,” which is neither
qualified nor defined by the law itself, should
mean income and should include all premiums
constituting income, whether they be insurance
or reinsurance premiums. Reinsurance
premiums, therefore, are determinable and
periodical income: determinable, because they
can be calculated accurately on the basis of the
reinsurance contracts; periodical, inasmuch as
they were earned and remitted from time to time.
Philamli Petitioner PHILAMLIFE is a domestic

fe corporation who entered into a Management Under the Tax Code, rentals and royalties are
Insuran Services Agreement with American part of the gross income from sources within the
International Reinsurance Co., Inc. (AIRCO), a Philippines.
ce v.
non-resident foreign corporation with principal o The various management services
CTA place of business in Pembroke, Bermuda. It enumerated in the said Management Services
(1995) was agreed that AIRCO shall perform for Agreement will show that they can easily fall
PHILAMLIFE certain investment, marketing, under any of the expanded meaning of royalties.
education and training, accounting and From the heading 'Investments' to 'Personnel',
auditing, corporate and personnel services, the services call for the supply by the non-
AIRCO later merged with AIGI. resident foreign corporation of technical and
commercial information, knowledge, advice,
CIR issued in favor of Philamlife tax credit assistance or services in connection with
representing erroneous payment of withholding technical management or administration of an
tax at source on remittances to AIGI for insurance business — a commercial
services rendered abroad, but later cancelled undertaking.
the tax credit. On the basis of that issuance,
Philamlife filed a claim for refund of a - Therefore, the income derived for the
second erroneous tax payment. services performed by AIGI for
PHILAMLIFE under the said
WON COMPENSATION FOR ADVISORY management contract shall be
SERVICES ADMITTEDLY PERFORMED considered as income from services
ABROAD BY THE PERSONNEL OF A within the Philippines.
FOREIGN CORPORATION NOT DOING
53
I`
BUSINESS IN THE PHILIPPINES IS The test of taxability is the SOURCE , and the
SUBJECT TO PHILIPPINE WITHHOLDING source of an income is that ACTIVITY which
INCOME TAX  YES produced the income. It is not the presence
of any property from which one derives
ROYALTY v. SALE OF SERVICES rentals and royalties that is controlling, but
rather, as expressed under the expanded
Retention of proprietary interest on part of meaning of “royalties” in Section 37(a), it
creator? – ROYALTY; Blue prints – if you includes “royalties for the supply of scientific,
do not retain royalties it can be abused technical, industrial, or commercial knowledge,
(save intellectual property) or information; and the technical advice,
assistance or services rendered in connection
If creator part ways and does not retain
proprietary interest fully and unequivocally with the technical management and
to the purchaser –SALE OF SERVICES administration of any scientific, industrial or
(save taxes) commercial undertaking, venture, project or
scheme”.
The Contract falls under the expanded

meaning of royalties. The income derived for
the services performed by AIGI for Philamlife
under the Agreement shall be considered as
income from services within the Philippines.
CIR v. Juliane Baier-Nickel, a non-resident German, Pursuant to Sec 25 of NIRC, non-resident aliens,
Baier- is the president of Jubanitex, a domestic whether or not engaged in trade or business, are
Nickel corporation engaged in the manufacturing, subject to the Philippine income taxation on their
(2006) marketing and selling of embroidered textile income received from all sources in the
products. Philippines.
Through Jubanitex’s general manager, “Source” is not a place, it is an activity or

Marina Guzman, the company appointed property. As such, it has a situs or location, and
respondent as commission agent with 10% if that situs or location is within the United States
sales commission on all sales actually
the resulting income is taxable to nonresident
concluded and collected through her efforts.aliens and foreign corporations. The source of
an income is the property, activity or service
Respondent received P1,707,772. 64 as sales that produced the income. For the source of
commission from w/c Jubanitex deducted the income to be considered as coming from the
10% withholding tax of P170, 777.26 and Philippines, it is sufficient that the income is
remitted to BIR. derived from activity within the Philippines.
Respondent filed her income tax return but The respondent was not able to prove the fact
then claimed a refund from BIR for the P170K, that the services she rendered were performed
alleging this was mistakenly withheld by in Germany. The settled rule is that tax refunds
Jubanitex and that her sales commission are in the nature of tax exemptions and are
income was compensation for services construed strictly against the taxpayer. She
rendered in Germany not Philippines and failed to discharge the burden of proving that her
thus not taxable here. income was from sources outside the Philippines
and is exempt from application of our income tax
A argues that the income is not taxable as law and a right for a tax refund.
A does not reside in the Philippines and
54
I`
that the place of payment of the income is The default is income items are income from
outside the Philippines. Is A’s contention Philippine sources, as long as you prove that
correct? services are performed outside the PH. In this
case, did not sufficiently prove that they are
WON RESPONDENT’S SALES sources outside PH.
COMMISSION INCOME IS TAXABLE IN THE
PHILIPPINES  YES
Soriano Cia, petitioner, sold tractors to United Delivery to the carrier is delivery to the buyer
Cia v. Africa, Co. (Behn, Meyer & Co., Ltd. vs. Yangco, 38 Phil.,
CIR UAC hired Tex Taylor as inspector of the 602; 46 Am. Jur. 605). True that this rule yields
(1955) tractor before purchasing. The tractors were to evidence of a contrary intent between the
stored in US military bases in the Philippines. parties, but there is here no proof to show that
petitioner and its foreign buyer intended
BIR: Petitioner imported the tractors from the otherwise, that is, that delivery and the passing
army bases; that they were subsequently sold of title to its buyer should take place right in the
to its foreign buyer within the Philippines; and army bases where the tractors were located.
that title passed upon delivery to the carrier
f.a.s. Manila. On the contrary, petitioner itself has admitted
that Tex Taylor (who is now alleged to have
Petitioner: It did not import the 57 tractors in accepted delivery of the tractors in behalf of
question for the Foreign Liquidation the United Africa Co., Ltd.) has no power or
Commission because title to the same authority whatever to do so.
passed to its foreign buyer while the goods
were still at the foreign bases, and that they The Court noted that the sale of the tractors
passed Philippine territory merely in transit to was consummated in the Philippines for title
pier, Manila, where they were delivered f.a.s.; was passed to the foreign buyer at the pier of
hence its sale of the tractors was not domestic Manila;
and therefore not liable for the payment of hence the situs of the sale is Philippines and it is
sales tax. taxable in this country.
WON PETITIONER IS LIABLE FOR THE Soriano made delivery of the tractors at the pier
PAYMENT OF PERCENTAGE OR SALES in Manila. Hence, it was only at Manila that the
TAX ON ITS GROSS SALES OF THE goods were delivered, and title passed to the
TRACTORS TO THE UNITED AFRICA CO., buyer; and from their removal from the bases
LTD. UNDER SEC. 186 OF THE NIRC  YES until their delivery at shipside, title to the
tractors was in the seller.
Section 186. Percentage tax on sales of other
articles.—There is levied, assessed and
collected on every original sale, barter,
exchange, and similar transaction intended to
transfer ownership a tax equivalent to five per
centum of the gross selling price or gross
value in money of the articles so sold,
bartered, exchanged, or transferred, such tax
to be paid by the manufacturer, producer, or
importer.
Quill Quill is a Delaware corporation The Court said that North Dakota’s imposition of
Corp. v. with warehouses in Illinois, California, and the use tax did not constitute a breach of the
55
I`
North Georgia. Quill sells office equipment and Due Process Clause because the Quill
Dakota supplies; it solicits business through catalogs Corporation had sufficient contact with the
(1992) and flyers, advertisements in national State’s residents and benefited from the
periodicals, and telephone calls. state's tax revenue.
Quill maintained no offices or warehouses in Thus, so long as the commercial actor’s

North Dakota. None of its employees worked activity is purposefully directed towards
or resided in North Dakota. residents of the taxing State and the tax is
However, Quill's North Dakota customer base related to the benefits received from the
numbered approximately 3,000 patrons and State, the actor’s physical presence is not
accounted for nearly $1,000,000 in annual necessary to establish the nexus sufficient to
sales. The company filled these orders via impose the tax.
mail or common carrier from out-of-state
distribution centers. However, it found the use tax to be
unconstitutional because it interfered with
NORTH DAKOTA LAW: imposes a use tax on interstate commerce, rendering it a violation of
all property purchased for storage, use, or the Commerce Clause. Thus, a State whose
consumption within the state that requires only connection with the vendor is through
every “retailer” to collect the tax from its mail or common carrier lacks the nexus
customers and remit it to the state. required by the Commerce Clause to impose
the tax. Consequently, the Court reversed the
The statute defines a “retailer” as any person North Dakota Supreme Court's decision by ruling
who “engages in regular or systematic in favor of the Quill Corporation.
solicitation” of a consumer market in the state.
WON A VENDOR WHOSE ONLY

CONNECTION WITH A STATE IS THROUGH
COMMON CARRIER OR THE MAIL SYSTEM
IS FREE FROM PAYING USE TAX
BECAUSE THE VENDOR LACKS A
PROPER CONNECTION WITH THE TAXING
STATE AS REQUIRED BY THE DUE
PROCESS CLAUSE  NO
WON A VENDOR WHOSE ONLY

CONNECTION WITH A STATE IS THROUGH
A COMMON CARRIER OR U.S. MAIL IS
EXEMPT FROM USE TAX BECAUSE THE
VENDOR LACKS PROPER CONNECTION
WITH THE TAXING STATE AS REQUIRED
BY THE COMMERCE CLAUSE  YES
South Quill doctrine does not align in e-commerce Amazon – seller of property
Dakota - Intermediary amazon – seller of service
v.
Wayfair
Vodafon On February 2007, Vodafone International The government has no jurisdiction over
e Holdings B.V (Vodafone or VIH), a Dutch Vodafone’s purchase of mobile assets in India
Internati entity, had acquired 100 percent shares in as the transaction took place in Cayman
56
I`
onal CGP (Holdings) Limited (CGP), a Cayman Islands between HTIL & Vodafone.
Holding Islands company for USD 11.1 billion from
s v. Hutchinson Telecommunications Sale of CGP share by HTIL to Vodafone or
International Limited (HTIL).
Union of VIH does not amount to transfer of capital
India CGP [HEL Indian company] (Cayman Islands assets within the meaning of Section 2 (14) of
(2012) Co)  HTIL VODAFONE (Dutch the Income Tax Act and thereby all the rights
and entitlements that flow from shareholder
CGP, through various intermediate agreement etc. that form integral part of share of
companies or contractual arrangements CGP do not attract capital gains tax.
controlled 67% of Hutchison Essar Limited
(HEL), an Indian company. - NO. Charge to capital gains under
Section 9(1)(i) of the Act arises on
The acquisition resulted in Vodafone acquiring existence of three elements, viz, transfer,
control over CGP and its downstream existence of a capital asset and situation
subsidiaries including, ultimately, HEL. HEL of such asset in India. The legislature has
was a joint venture between the Hutchinson not used the words ‘indirect transfer’ in
group and the Essar group. It had obtained Section 9(1)(i) of the Act. If the word
telecom licenses to provide cellular telephony ‘indirect’ is read into Section 9(1)(i) of the
in different circles in India from November Act, then the phrase ‘capital asset situate
1994. On September 2007, the tax department in India’ would be rendered nugatory.
issued a show-cause notice to Vodafone to Section 9(1)(i) of the Act does not have
explain why tax was not withheld on ‘look through’ provisions, and it cannot be
payments made to HTIL in relation to the extended to cover indirect transfers of
above transaction. capital assets/ property situated in India.
The proposals contained in the Direct
The tax department contended that the Taxes Code Bill, 2010, on taxation of off-
transaction of transfer of shares in CGP shore share transactions indicate that
had the effect of indirect transfer of assets indirect transfers are not covered by
situated in India. Section 9(1)(i) of the Act. A legal fiction
has a limited scope and it cannot be
The tax authorities sought to tax capital gain expanded by giving purposive
arising from sale of share capital of CGP on interpretation, particularly if the result of
the ground that CGP had underlying Indian such interpretation is to transform the
Assets. concept of chargeability, which is also
there in Section 9(1)(i) of the Act.
WON THE INDIAN REVENUE AUTHORITIES Accordingly, the Supreme Court
HAD THE JURISDICTION TO TAX AN concluded that the transfer of the share in
OFFSHORE TRANSACTION OF TRANSFER CGP did not result in the transfer of a
OF SHARES BETWEEN TWO NON- capital asset situated in India, and gains
RESIDENT COMPANIES WHEREBY THE from such transfer could not be subject to
Indian tax.
CONTROLLING INTEREST OF AN INDIAN
- NO. The extinguishment of such rights
RESIDENT COMPANY IS ACQUIRED BY under the Share Purchase Agreement
VIRTUE OF THIS TRANSACTION  NO (SPA) resulted in a taxable transfer of a
capital asset situated in India. In this
HTIL – owns CGP sold CGP (Di crineate si context, the Supreme Court reiterated the
CGP para makaavoid) shares to VIH ‘look at’ principle enunciated in Ramsay
- Non-residental case, in which it was held that the Revenue
or the Court must look at a document or a
INDIA – under HTIL and CGP was HEL transaction in a context to which it properly
belongs. It is the task of the Revenue/ Court
Look at approach to ascertain the legal nature of the
Look through approach transaction and while doing so it has to look
at the entire transaction as a whole, and not
57
I`
adopt a dissecting approach. By applying

Toda approach the ‘look at’ test discussed above, the
Supreme Court held that extinguishment
took place because of the transfer of the
Voda phone Philippines
CGP share and not by virtue of various
clauses of SPA. The Supreme Court went
Vodafone International Holdings (VIH), a on to hold that where a structure has
corporation in the Netherlands, acquired a existed for a considerable length of time
controlling interest of CGP holdings, a and where the Court is satisfied that the
company in the Cayman Islands. transaction satisfies all the parameters of
‘participation in investment’, then in such a
By virtue of this controlling interest, VIH case, the Court need not go into questions
acquired a 52% stake in Hutchinson Essar such as de facto control vs. legal control,
Limited (HEL) 41 in India from Hutchinson legal rights vs. practical rights, etc in the
Telecom International Limited (HTIL). context of determining taxability. Under the
Indian Companies Act, 1956, the situs of
Simply stated, VIH acquired control over the shares would be where the company is
CGP and its subsidiaries, including HEL. incorporated and where its shares can be
The Indian tax authorities contended that transferred. In the present case, it was
the transfer of shares was subject to asserted that transfer of CGP shares were
income tax. VIH argues that the transfer of recorded in Cayman Island and this was not
shares took place outside the Indian taxing disputed by the tax authorities. Thus,
jurisdiction, and, hence, is not taxable. Supreme Court also rejected the argument
Which contention is correct? of the Revenue that since CGP was a mere
holding company, the situs of its share was
the Indian Supreme Court ruled that VIH had was situated in India where its underlying
no liability to withhold tax as the transaction assets were located.
was between two non- residents with no
taxable presence in India. Under Section 9(1)
of the Income Tax Act of India, all income
accruing or arising, whether directly orindirectly
through transfer of capital assets situated in
India shall be deemed to accrue or arise in
India.43The Supreme Court stated that the
section clearly applied to a transfer of capital
asset situated in India and could not be
expanded to cover indirect transfers of capital
assets or property situated in India. The words
“directly or indirectly” go with the income and
not with the transfer of a capital asset.44
RAMO SUBJECT: Audit Guidelines and Procedures on the Proper Determination of the Income Tax
1-95 Liability of Philippine Branches and Liaison Offices of Multi-National Enterprises (MNEs) Engaged
in Soliciting Orders, Purchaser, Service Contracts, Trading, Construction and Other Activities in
the Philippines
TO: All Internal Revenue Officers and Others Concerned
IV. GUIDELINES
1. The Philippine income tax due from soliciting orders, purchaser, service contracts, trading,
construction and other activities of the Philippine branches and liaison offices of MNEs will
58
I`
be ascertained using the following formula.
For solicitation and trading activities:

{(Worldwide Operating Sales to the Philippines attribution tax)}
{(Income X Worldwide Sales X rate X rate)}
For construction and other activities:

plus {(Net Income from construction and other activities X tax rate)}
2. In implementing the above formula, the following terms shall be construed to mean as
follows:
A. Worldwide (W/W) shall include head office accounts and those of branches located
in different countries but shall exclude subsidiary accounts.
B. W/W Operating Income shall include the Gross Income minus Selling General &
Administrative expenses. Operating Income does not include non- operating and
extraordinary items like interest expense, exchange profit/loss capital gains/losses
or other income/loss not related not related to operation.
C. Sales to the Philippines shall be defined as the aggregated amount of exports and
offshore transactions to the Philippines by the Head Office, all branches and liaison
offices and shall include the amount of indent transactions from which commissions
are generated. These shall also include imported materials and equipment of
construction projects undertaken in the Philippines, but shall exclude local service
income from construction projects or onshore income from local construction.
D. W/W Sales shall consist of domestic, export, import and offshore transactions
which include nor only principal transactions but also indent transactions from
which commissions are generated.
E. Attribution rate shall mean a rate of 75% to be applied against formula.
F. The tax rate to be applied shall be in accordance with Section 25(a) of the NIRC
which is 35%.
G. Net income on construction shall consist of local service income from construction
projects income from construction projects less the costs associated with local
construction projects including the cost of locally purchased materials equipment, if
any.
H. Net income on all other activities shall consist of income such as branches and
liaison offices of MNEs are engaged in, net of costs and expenses associated with
such income.
3. In the application of the formula, no offsetting of losses from one line of business to the
detriment of the other line of business shall be allowed. This would mean that the tax due
from each line of business shall be computed independently from the other line of
business.
RAMO ISSUED BY: Commissioner Bienvenido A. Tan, Jr.
4-86
SUBJECT: Audit Guidelines in the Allocation of Home Office Overhead Expenses Under Section
37(b) of the National Internal Revenue Code.
In order to avoid delay and conflict in the determination of Philippine sources taxable net income
59
I`
of foreign taxpayers for purposes of Philippine income tax, this Revenue Audit Memorandum is
issued.
1. Background
1.1 In computing net income from sources within the Philippines, Section 37(b) provides that from
the gross income from sources within the Philippines ". . . there shall be deducted the expenses,
losses and other deductions properly allocated thereto and a ratable part of any expenses,
interests and losses and other deductions effectively connected with the business or trade
conducted exclusively within the Philippines which cannot be definitely allocated to some items or
class of gross income . . . "
1.2 These deductions are difficult to verify because substantial amounts thereof are incurred in the
head office or elsewhere and the corresponding supporting documents and books of accounts are
not accessible to local taxing authorities.
1.3 Heretofore only an audit certificate is presented to substantiate the deductions incurred abroad
which are allocated and pro-rated to Philippine source gross income
1.4 In implementing the above provision of the National Internal Revenue Code, there is a need
for adequate and satisfactory proof and explanations in order that the claimed deductions of the
foreign taxpayer may be allowed for income tax purposes.
2. Audit Procedure
2.1 Functional analysis — At the start of investigation there should be a detailed examination of
the functions performed both by the Home Office and the Local Branch. For this purpose, an
organization and functional chart of the home office and local branch should be secured.
2.1.1 The functions should be determined and then listed. Who does what? What is required to do
it? Who needs whom for what?
2.1.2 After having listed the functions performed by each entity, the functions themselves must be
analyzed. Could anyone else perform these functions? How difficult are they? What skill,
equipment and processes are needed?
2.2 On the basis of the functional analysis, the claimed deduction properly allocable can now be
determined by applying the tests of (a) relevance (necessary) to the local branch and (b)
reasonable (ordinary) charges keeping always in mind the arm's length principle in transactions
between related parties.
2.3 As to the deductions which cannot be definitely allocated, the following are required:
2.3.1 Breakdown or Schedule of Home or Foreign Office expenses being pro-rated, together with
an explanation of the nature of each expense. Take note of deductions which are directly allocable
to income earned outside the Philippines.
2.3.2 Basis of pro-ration — (a) Determine if the basis and method of pro-ration are being applied
consistently from year to year. (b) Is the same amount of Home Office expenses being allocated
world-wide?
60
I`
3. In all instances, be on the lookout for:

a. Charges applicable to newly opened foreign branches but are being claimed as deductions by
the Philippine branch;
b. Functions are being performed for some branches but not for others, and yet no adjustments
are made on the allocation;
c. or any other scheme of over-allocating costs to the Philippine branch.
4. All pertinent provisions of these Audit Guidelines applicable in the investigations of subsidiaries
by multi-national companies should be observed by all internal revenue officers
concerned.
61
I`
5. Deductions
Business Expenses
RA 10028 Expanded Breastfeeding Promotion Act
Sections 3 &
14 The law provides that the expenses incurred by a private health and non-health facility,
establishment or institution, in complying with the provisions of this Act, shall be deductible
expenses for income tax purposes up to twice the actual amount incurred. Provided:
1. That the deduction shall apply for the taxable period when the expenses were incurred;
2. That all health and non-health facilities, establishments and institutions shall comply with
the provisions of this Act within six (6) months after its approval;
3. That such facilities, establishments or institutions shall secure a "Working Mother-Baby-
Friendly Certificate" from the Department of Health to be filed with the Bureau of Internal
Revenue, before they can avail of the incentive.
RA 8502 Jewelry Industry Development Act of 1998
The law provides for a deduction from taxable income of fifty percent (50%) of expenses incurred
in training schemes in connection with the Act and which shall be deductible during the financial
year the expenses were incurred.
RA 8525 Adopt-a-School Act of 1998
Sections 1
to 5 Adopt-a-School Program. – There is hereby established the "Adopt-a-School Program" which
will allow private entities to assist a public school, whether elementary, secondary, or tertiary,
preferably located in any of the twenty (20) poorest provinces identified by the Presidential
Council for Countryside Development or any other government agency tasked with identifying
the poorest provinces in, but not limited to, the following areas: staff and faculty development for
training and further education; construction of facilities; upgrading of existing facilities, provision
of books, publications and other instructional materials; and modernization of instructional
technologies.
The law provides expenses incurred by the adopting entity for the "Adopt-A-School
Program" shall be allowed an additional deduction from the gross income equivalent to fifty
percent (50%) of such expenses.
RA 7277 Magna Carta for Disabled Persons
Section 8
The law provides that sales discounts given to persons with disabilities shall be deductible from
gross income subject to certain conditions.
Other Republic Act 9999 (Free Legal Assistance RA No. 9994 (Expanded Senior Citizens Act)
Special Act) in RR 7-2010 [July 20, 2010]
Laws that
provide for The law provides for that a lawyer or The law provides that discounts given to senior
deductible professional partnerships rendering actual citizens on certain goods and services shall be
business free legal services as defined by the deductible from gross income. Also, private
expense Supreme Court, shall be entitled to an establishments employing senior citizens shall
allowable deduction from the gross income, be entitled to additional deductions from gross
the income equivalent to fifteen (15%) of the total
amount that could have been collected for the amount paid as salaries and wages to senior
actual free legal services rendered or up to citizens.
62
I`
ten percent (10%) of the gross income

derived from the actual performance of the
legal profession, whichever is lower.
CIR v. Isabela Cultural Corporation (ICC) was EXPENSES SHALL BE DEDUCTIBLE IN THE
Isabela assessed by the BIR for deficiency income YEAR IT WAS INCURRED
Cultural which arose from BIR’s disallowance of ICC’s The requisites for the deductability of ordinary
Corporation claimed expense deductions for and necessary trade, business, or professional
(2007) professional and security services billed to expenses, like expenses paid for legal and
auditing services, are:
and paid by ICC in 1986:
 the expense must be ordinary and
Accrual 1. SGV auditing services which was
necessary
method ; incurred in 1985  it must have been paid or incurred
claim to 2. Legal services of the law firm during the taxable year;
deduct on Bengzon incurred in 1984 and 1985  it must have been paid or incurred in
the time 3. Security Services of El Tigre incurred carrying on the trade or business of he
services was in 1986 taxpayer; and
rendered not  it must be supported by receipts,
when In 1984 and 1985, legal services were records, or other pertinent papers.
actually paid rendered, but paid by ICC in 1986. In 1985,
The requisite that it must have been paid or
audit services rendered but paid by ICC in
incurred during the taxable year is further
1986. Security services rendered in 1986,
qualified by Section 45 of the NIRC which states
paid in 1986. that: “the deduction provided for in this title shall
be take for the taxable year in which paid or
WON THE EXPENSE DEDUCTIONS OF accrued or paid or incurred, dependent upon the
THE ICC FOR PROFESSIONAL AND method of accounting upon the basis of which
the net income is computed...”
SECURITY SERVICES SHOULD BE
ALLOWED — NO FOR LAW FIRM AND ICC is using the accrual method of accounting.
AUDITING SERVICES; YES FOR RAMO No. 1-2000 provides that under the
SECURITY SERVICES accrual method, expenses not being claimed
as deductions in the current year when they
Doctrine: Professional services are are incurred cannot be claimed as deduction
deductible in the year when the
from the income of the succeeding year.
professional services are rendered, not in
the year they are billed. All events test
does not demand that the amount of ACCRUAL METHOD - relies upon the
income or liability be known absolutely, taxpayers right to receive amounts or its
only that a taxpayer has at his disposal obligation to pay them, in opposition to actual
the information necessary to compute the receipt or payment, which characterizes the cash
amount with reasonable accuracy. method of accounting ; Amounts of income
accrue where the right to receive them
become fixed, where there is created an
enforceable liability.
The accrual of income and expense is permitted

when the all events test has been met. This test
63
I`
requires:
1. fixing of a right to income or liability to
pay; and
2. the availability of the reasonable
accurate determination of such income
or liability.
However, all events test does not demand

that the amount of income or liability be
known absolutely, only that a taxpayer has at
his disposal the information necessary to
compute the amount with reasonable
accuracy.
In this case, ICC could have exercised

reasonable diligence in ascertaining the
expenses for professional services. The
expenses for security services should be allowed
since it was incurred in 1986.
In the instant case, the expenses for legal

services pertain to the 1984 and 1985 legal and
retainer fees of the law firm Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson, and
for reimbursement of the expenses of said firm in
connection with ICCs tax problems for the year
1984. As testified by the Treasurer of ICC, the
firm has been its counsel since the 1960s. ICC
can be expected to have reasonably known the
retainer fees charged by the firm as well as the
compensation for its legal services.
ING Bank v. ING was assessed of Taxpayers with pending tax cases may avail
CIR deficiency documentary stamp tax (1996- themselves of the tax amnesty program under
(2015) 1997), deficiency onshore tax (1996), RA 9480.
and deficiency withholding tax for
Withholding compensation of personal services (1996- However, it is still liable for deficiency
taxes must 1997) withholding tax. In addition, an expense,
be paid first by the BIR as affirmed by the CTA. whether the same is paid or payable, shall be
to claim allowed as deduction only if it’s shown that
deduction as While the case was pending in the SC, ING the tax required to be deducted and withheld
to income filed a manifestation stating that it availed was paid to the BIR.
like bonuses of the government’s tax amnesty program
under RA 9480 with respect to its deficiency Every form of compensation for personal
documentary stamp tax and deficiency services, including BONUSES, is subject to
onshore tax liabilities. income tax, and consequently, to withholding
tax. The law and implementing regulations
CTA disallowed deduction on deficiency require the employer to deduct and pay the
withholding tax for bonus given in the income tax on compensation paid to its
years 1996-1997. employees, either actually or constructively.
64
I`
Petitioner ING Bank insists, however, that the Every person required to deduct and withhold
bonus accruals in 1996 and 1997 were not the tax from the compensation of an employee is
yet subject to withholding tax because these liable for the payment of such tax whether or not
bonuses were actually distributed only in the collected from the employee. In this case, ING
succeeding years of their accrual (i.e., in
1997 and 1998) when the amounts were already recognized a definite liability on its
finally determined. part considering that it had deducted as
business expense from its gross income the
WON ING BANK MAY AVAIL ITSELF OF accrued bonuses due to its employees. In this
THE TAX AMNESTY  YES sense, there was already a constructive payment
for income tax purposes as these accrued
WON ING BANK IS LIABLE FOR bonuses were already allotted or made available
DEFICIENCY WITHHOLDING TAX ON to its officers and employees.
ACCRUED BONUSES FOR THE TAXABLE
YEARS 1996 AND 1997  YES In resolving this issue, this court considered the
nature of the accounting method employed
by the withholding agent, which was the
Doctrine: To deduct compensation for accrual method, wherein it was the right to
personal services, including bonuses, receive income, and not the actual receipt,
(which are subject to income tax) the that determined when to report the amount
employer must withhold the tax due first, as part of the taxpayer's gross income. The
for the employer to validly claim them as taxpayer could not claim that there was "no duty
deductions. Petitioner ING Bank accrued or to withhold and remit income taxes as yet
recorded the bonuses as deductible expense because the loan contract was not yet due and
in its books. Therefore, its obligation to demandable." Petitioner, "[h]aving written- off the
withhold the related withholding tax due from amounts as business expense in its books, had
the deductions for accrued bonuses arose at taken advantage of the benefit provided in the
the time of accrual and not at the time of law allowing for deductions from gross income.
actual payment.
CIR v. General Foods filed its ITR for fiscal year “REASONABLENESS OF ADVERTISING
General ending Feb 28, 1985 where it claimed as EXPENSE”
Foods deduction, among other business expenses,
(2003) the amount of about 9.46 million pesos for To be deductible from gross income as found in
Sec. 34 (A) (1), the expense must comply with
media advertising for “Tang.”
the following requisites.
Ad expenses a) The expense must be ordinary and
CIR disallowed 50% of the deduction, and necessary;
assessed Gen Foods deficiency income b) It must have been paid or incurred
taxes. during the taxable year;
General Foods appealed to the CTA but it c) It must have been paid or incurred in
was dismissed on the ground that such carrying on the trade or business of the
taxpayer; and
expenditure was incurred to create or
d) It must be supported by receipts,
maintain some form of good will for the records or other pertinent papers.
taxpayer’s trade or business and not an
ordinary expense. CA reversed CIR and CTA The Court quotes the Commissioner in citing
decision. U.S. Jurisprudence for the advertising expense
to be considered as ordinary it must meet the
WON THE SUBJECT MEDIA following conditions:
1) “reasonableness” of the amount
ADVERTISING EXPENSE FOR “TANG”
incurred and
65
I`
INCURRED BY THE RESPONDENT 2) the amount incurred must not be a

CORPORATION WAS AN ORDINARY AND capital outlay to create “goodwill” for the
NECESSARY EXPENSE FULLY product and/or private respondent’s
business.
DEDUCTIBLE UNDER THE NIRC  NO,
it’s a capital expenditure. Things to be considered for the reasonableness
of an advertising expense:
- type and size of business in which
The question the Court has to resolve is TP is engaged in,
whether it is a capital expenditure or an
- volume and amount of net
ordinary expense.
earnings,
The difference between the two is: - nature of expenditure itself,
 Ordinary expense is a deductible in - intent of taxpayer,
this year’s income statement. - general economic conditions.
 Capital expenditure shall be
amortized(deducted) over a In this case, the said that the claim for media
reasonable period expense was ½ of its total claim for marketing
 The formula to compute for taxes is expenses. It is inordinately large. The
 Income – Expenses = Taxable company does not really fully exhaust money
Income * Tax Rate = Tax to be paid paid out if it’s a capital expenditure in one
 Let us say the expenses is 100 pesos. year. In the second kind, I pay out money
If it is an ordinary expense. I can today, which would lead to more buyer’s in
deduct the 100 pesos from my the future.
income. The larger expense, there
would be less taxable income, Even when necessary, it cannot be
therefore less taxes to be paid. considered an ordinary expense deductible
 If it is a capital expenditure, I can only under Section 29(a)(1)(A) of the NIRC.
deduct a certain portion of it over a
period of time. Let us say I could only
deduct 20 pesos this year, then 20 Two kinds of advertising:
pesos next year until I have no more (1) to stimulate the current sale of
to deduct. merchandise; or
(2) to stimulate the future sale of
CURRENT SALES v. FUTURE SALES merchandise
Subscribe now at end of the year – current 1 type – ordinary business expense under
st
sales NIRC
Coco martin – SMART – da best ka- current 2nd type - include the creation or maintenance of
sales some form of goodwill for the TP’s trade or
business. The subject advertising expense was
of the 2nd kind. The amount was staggering, and
it was admitted that the expense was incurred in
order to protect respondent corporations
brand franchise.
Protection of brand franchise is analogous to

maintenance of goodwill or title to one’s property
 this is a capital expenditure which should
be spread out over reasonable period of time.
CIR v. Lancaster is a domestic corporation SC ruled that the cancellation and withdrawal of
Lancaster engaged in the production of tobacco. the deficiency tax assessment was proper.
66
I`
(2017)
BIR issued a LOA authorizing its revenue The general rule is that taxable income shall be
Crop year officers to examine Lancaster’s books of computed upon the basis of taxpayer’s annual
basis – Oct accounts and other accounting records accounting period (fiscal year or calendar year).
1 – sept 30 for all internal revenue taxes due from The deductions provided in NIRC shall be
following taxable year 1998 to an unspecified date. taken for the taxable year in which ‘paid or
year accrued’ or ‘paid or incurred’ dependent
(6 month After the examination, the BIR issued a PAN upon the method of accounting upon the
timing which states that Lancaster did an basis of which the net income is computed.
difference) OVERSTATEMENT OF ITS PURCHASES
for the fiscal year April 1998 to March 1999; NIRC enumerated methods of accounting the
and cited the disallowance of purchases law expressly recognizes. Any of these methods
of tobacco from farmers may be employed by any taxpayer so long as it
- for the months of February and reflects its income properly and method is used
March 1998 as deductions regularly.
against income for the FY April
1998 to March 1999. As such, other methods are approved by CIR
even when not expressly mentioned in NIRC
Lancaster: as long as it would correctly reflect the
- contending that it had used an taxpayer’s income. One such method is the
entire “tobacco cropping “crop method of accounting.” Lancaster, as a
season” to determine its total business engaged in the production and
purchases covering a one-year marketing of tobacco, is justified in adopting the
period from October 1 to crop method. Considering that the crop year of
September 30 of the following Lancaster starts from October up to September
year; of the following year, it follows that ALL of its
- that it has been adopting the 6- expenses in the crop production made within the
month timing difference to crop year Oct-Sept 1998, including the Feb and
conform to the matching March 1998 purchases, are rightfully deductible
concept. for income tax purposes in the year when the
- It also argued that the February gross income from the crops are realized.
and March 1998 purchases should
have been allowed! The matching concept, one of the GAAP,
- concluded that they correctly directs that the expenses are to be reported
posted the subject purchases in in the same period that related revenues are
the fiscal year ending March earned. It attempts to match revenue with
1999 as it was the only in this expenses that helped earned it.
year that the gross income from
the crop was realized DOCTRINE:
Lancaster received from the BIR a FAN, CROP YEAR BASIS - is a method applicable
which assessed it a deficiency income tax of only to farmers engaged in the production of
P11,496,770.18, as a consequence of the crops, which take more than a year from the time
disallowance of purchases claimed for the FY of planting to the process of gathering and
March 31, 1999. Lancaster filed a petition for disposal. This method enjoins the recognition of
review before CTA Division. CTA Division the expense (or the deduction of the cost) of
granted the petition filed by Lancaster. crop production in the year that the crops are
CTA En Banc affirmed. sold (when income is realized).
67
I`
WON THE CANCELLATION AND

WITHDRAWAL OF THE DEFICIENCY TAX
ASSESSMENT WAS PROPER  YES
Aguinaldo Aguinaldo is a domestic corp engaged in the PROFIT FROM SALE OF MUNTINLUPA LAND
Industries manufacture of fishing nets (tax-exempt IS TAXABLE
Corp. v. CIR industry) and manufacture of furniture. Each It must be stressed however that at the
(1982) business is handled by different divisions, administrative level, the petitioner implicitly
with separate books of accounts. Aguinaldo admitted that the profit it derived from the sale of
acquired a parcel of land in Muntinlupa as its Muntinlupa land, a capital asset, was a
site of the fishing net factory. When it found a taxable gain — which was precisely the
more suitable land in Marikina Heights, it sold reason why for tax purposes the petitioner
the Muntinlupa land and derived profit from deducted therefrom the questioned bonus to
the sale which was entered in the books of its corporate officers as a supposed item of
the fishing nets division as miscellaneous expense incurred for the sale of the said
income to distinguish it from its tax-exempt land.
income.
Up to the CA decision, Aguinaldo had always
Petitioner filed 2 separate ITRs. implicitly admitted that the disputed capital gain
was taxable, although subject to the deduction of
After investigation, BIR found out that the the bonus paid to its officers.
fishing nets division deducted from its
gross income the additional renumeration BONUS GIVEN TO OFFICERS IS TAXABLE !
paid to the officers of petitioner. This It cannot be deemed a deductible expense for
amount was said to be taken from the net tax purposes, even if the sale could be a
profit of an isolated transaction (sale of transaction for carrying on the trade or business
the Muntinlupa land – capital asset) not in of the petitioner. The sale was effected through
the course of or carrying on of petitioner’s a BROKER who was paid a commission for his
trade or business. services. There is no evidence of any service
actually rendered by petitioner’s officers,
WON THE PROFIT DERIVED FROM THE which could be the basis of bonus grant.
SALE OF THE MUNTINLUPA LAND IS
TAXABLE FOR IT IS TAX-EXEMPT TEST FOR DEDUCTIBILITY OF
INCOME CONSIDERING THAT ITS FISH COMPENSATION/REASONABLE
NETS DIVISION ENJOYS TAX EXEMPTION ALLOWANCES
Whenever a controversy arises on the
AS A NEW AND NECESSARY INDUSTRY
deductibility, for purposes of income tax, of
 YES , IT IS TAXABLE, ISOLATED certain items for alleged compensation of
TRANSACTION officers of the taxpayer, two (2) questions
become material, namely:
WON THE BONUS GIVEN TO THE (a) Have personal services been ACTUALLY
OFFICERS ARE ORDINARY AND RENDERED by said officers?
NECESSARY EXPENSES THAT ARE (b) if yes  what is the REASONABLE
allowance' therefor. SC said that extraordinary
DEDUCTIBLE FOR INCOME TAX
and unusual amounts paid by petitioner to these
PURPOSES  NO ACTUAL SERVICE directors in the guise and form of compensation
RENDERED for their supposed service without any relation to
the measure of their actual services, cannot be
regarded as ordinary and necessary expenses.
(ALHAMBRA CASE)
68
I`
Doctrine: Bonuses given to corporate officers out

of sale of corporate land are not deductible as an
ordinary business expense in the absence of
showing what ROLE said officers performed to
effectuate the sale. The taxpayer must show that
personal services had been rendered and that
amount was reasonable.
Atlas CIR assessed against Atlas deficiency The expenditure paid for services carrying on the
Consolidate income taxes for 1957 and 1958. Atlas selling campaign in an effort to sell Atlas’
d Mining v. contends that the amount paid in 1958 as additional capital stock is not an ordinary
CIR (1981) annual public relations expenses is a expense.
deductible expense from gross income.
Expense for The Court sustains the ruling of the CTA that the
public Since it paid the services of a public relations expenditure of P25,523.14 paid to P.K. Macker &
relations firm, it made an ordinary and necessary Co. as compensation for services carrying on the
selling campaign in an effort to sell Atlas'
officer to business expense in order to compete with
additional capital stock of P3,325,000 is not an
sell its other corporation also interested in the ordinary hence is not deductible from Atlas gross
capital stock investment market in the US. The aim was to income in 1958 because expenses relating to
create a favorable image and goodwill to gain recapitalization and reorganization of the
or maintain their patronage. corporation, the cost of obtaining stock
subscription, promotion expenses, and
(1) Transfer agent's fee; commission or fees paid for the sale of stock
(2) U.S. stock listing expenses; reorganization are capital expenditures.
(3) Stockholders relation service fee; and
(4) Suit expenses. Capital expenditures such as :
- recapitalization and reorganization
WON ATLAS CAN CLAIM THE AMOUNT expenses,
PAID FOR THE SERVICES OF A PUBLIC - the cost of obtaining stock
RELATIONS FIRM AS A DEDUCTION  subscription,
NO promotion expenses and
- commission or fees paid for the sale
of stock organization are not
deductible.
Ordinarily, an expense will be considered

“necessary” where the expenditure is
appropriate and helpful in the development of
the taxpayer’s business.
It is “ordinary” when it connotes a payment

which is normal in relation to the business of the
taxpayer and the surrounding circumstances.
The term “ordinary” does not require that the

payments be habitual or normal in the sense that
the same taxpayer will have to make them often;
the payment may be unique or non-recurring to
69
I`
the particular taxpayer affected.

Zamora v. Mariano Zamora, owner of the Bay View Only half should be deductible. Mrs. Mariano did
CIR Hotel and Farmacia Zamora, Manila, filed his not present receipt to support the deduction.
(1963) income tax returns for the years 1951 and
1952. The CIR found that he claimed Representation expenses fall under the
deductions which were not allowable. The category of business expenses which are
CTA ruled that only half of the promotion allowable deductions from gross income, if they
expenses of petitioner should be allowed as a meet the conditions prescribed by law,
deduction. Mrs. Mariano in her application particularly section 30 (a) [1], of the Tax Code;
for dollar allocation said that her trip to that to be deductible, said business expenses
the U.S. was for both business and must be ordinary and necessary expenses
medical purposes. paid or incurred in carrying on any trade or
business; that those expenses must also meet
WON CTA ERRED IN DISALLOWING THE the further test of reasonableness in amount;
CLAIMED PROMOTION EXPENSES that accordingly, it is not possible to determine
INCURRED BY PETITIONER’S WIFE FOR the actual amount covered by supporting papers
PROMOTION OF THE BAY VIEW HOTEL and the amount without supporting papers, the
 NO court should determine from all available
data, the amount properly deductible as
representation expenses.
C.M. Hoskins owns 99.6% of the stocks of The case before us is similar to previous cases
Hoskins & Petitioner corporation. Hoskins also receives of disallowances as deductible items of officers’
Co. v. CIR a 50% share of the sales commissions extra fees, bonuses and commissions, upheld by
(1969) earned by petitioner, besides his monthly this Court as not being within the purview of
salary of P3,750.00 amounting to an annual ordinary and necessary expenses and not
compensation of P45,000.00 and an annual passing the test of reasonable compensation.
salary bonus of P40,000.00, plus free use of
the company car and receipt of other similar TEST OF REASONABLE COMPENSATION
allowances and benefits. The total amount “It is a general rule that bonuses to employees
received is P99,977.91. made in good faith and as additional
compensation for the services actually rendered
WON PAYMENT TO HOSKINS OF THE by the employees are deductible, provided such
SUM P99,977.91 AS 50% SHARE OF payments, when added to the stipulated salaries,
SUPERVISION FEES CAN BE TREATED do not exceed a reasonable compensation for
AS DEDUCTIBLE ORDINARY AND the services rendered.”
NECESSARY EXPENSE  NO
Basta sinasabi ni Petitioner corporation is ELEMENTS OF THE TEST OF REASONABLE
that its payment to its principal stockholder is COMPENSATION
an ordinary and necessary expense that 1. the payment of the bonuses is in fact
could be deducted. BIR does not agree. Yan compensation;
‘yong issue. 2. it must be for personal services actually
rendered; and
3. the bonuses, when added to the salaries,
are ‘reasonable’ . . . when measured by
the amount and quality of the services
performed with relation to the business of
the particular taxpayer.
70
I`
There is no fixed test for determining the

reasonableness of a given bonus as
compensation. In determining whether the
particular salary or compensation payment is
reasonable, the situation must be considered as
whole. Petitioner’s case fails to pass the test.
Calanoc v. : EXPENSES WERE EXCESSIVE AND NOT
CIR Calanoc put up a boxing and wrestling JUSTIFIED, THUS, NOT DEDUCTIBLE
(1961) exhibition for a charitable purpose. The funds
raised for the match would go to the orphans
Calanoc denied having received the stadium fee
and children of the Child Welfare Workers
Club. Before the match, he applied for P1,000, which was not included in the receipts.
exemption from the payment of amusement And that even if he did, he could not be made to
tax from the CIR, since the proceeds were for pay almost seven times the amount as
a charitable purpose. The CIR said his amusement tax. Evidence was submitted,
exemption would depend on his compliance however, that the said stadium fee of P1,000,
with the requirements of the law. was paid by the O-SO Beverages directly to the
stadium management for advertisement
The CIR found that the gross sales
privileges on the day of the exhibition. Since the
generated by the exhibition amounted to
fee was paid by the concessionaire, Calanoc
P26,553.00;
had no right to include the P1,000 stadium
the expenditures incurred was P25,157.62;
fee among the items of his expenses. It
and the net profit was only P1,375.30.
results, therefore, that P1,000 went into
Calanoc’s pocket unaccounted. Furthermore he
Upon examination of the receipts, the CIR
admitted that he could not justify the other
also found the following items of
expenses, such as those for police
expenditures: (a) P461.65 for police
protection and gifts. He claims further that the
protection; (b) P460.00 for gifts; (c)
accountant who prepared the statement of
P1,880.05 for parties; and (d) several items
receipts was already dead and could no longer
for representation. Calanoc remitted to SWC
be questioned on the items contained in said
P1,375.30 only. Based on its findings, the
statement. Most of the items of expenditures
CIR assessed Calanoc an amusement tax of
contained in the statement submitted to the
P7,378.57.
CIR were either exorbitant or not supported
by receipts.
WON THE EXPENSES CAN BE ALLOWED
AS DEDUCTIONS  NO The payment of P461.65 for police protection
was illegal as it was a consideration given by
NO, he is not exempt. After the match, the Calanoc to the police for the performance by the
CIR denied his exemption from amusement
latter of the functions required of them to be
tax on the admission fees to his exhibition.
Although the purpose of his exhibition was for rendered by law. The expenditures of P460 for
charity, the court found out that: gifts, P1,880.05 for parties, and other items for
representation were rather excessive,
1. proceeds of the exhibition conducted considering that the purpose of the exhibition
for charitable purposes was not was for a charitable cause.
substantial (only P1.3K+)
2. his expenses for gifts, parties and
other items for representation were
rather excessive.
3. The payment for police protection was
illegal.
71
I`
4. The stadium fee of P1K was not

accounted for.
Although he included it in his list of

expenses, he denied receiving money for
it (thus implying it was paid for by him and
thus a legit expense). It was later found
out to have been paid for by a separate
company directly to the stadium for
advertising privileges and none of it came
from him.
Kuenzle & Bonuses to employees made in good faith and

Striffe v. CIR Kuenzle & Streiff Corp claimed as as additional compensation for the services
(1959) deductions bonuses it gave to its non- actually rendered by the employees are
resident president and vice-president and
deductible, provided such payments, when
the bonuses it gave to its resident officers
and employees. The company gave its added to the stipulated salaries, do not
resident officers and employees much exceed a reasonable compensation for the
more. The deductions for bonuses given services rendered. The condition precedents to
to resident officers and employees were the deduction of bonuses to employees are:
disallowed for being excessive and for no 1. the payment of the bonuses is in fact
special reason. Is the disallowance compensation (YES);
proper?
2. it must be for personal services actually
It would depend on the nature, extent, and rendered (YES);
quality of the services actually rendered by 3. bonuses, when added to the salaries, are
the resident officers and employees. In ‘reasonable’ ... when measured by the
KUENZLE & STREIFF, INC. VS. amount and quality of the services
COLLECTOR OF INTERNAL REVENUE performed with relation to the business of
[OCTOBER 20, 1959], the Supreme Court the particular taxpayer (NO)
held that the bonuses to its resident officers
and employees were reasonable taking into
There is no fixed test for determining the
account the situation at the time when the
reasonableness of a given bonus as
services were rendered: unsettling conditions
compensation. This depends upon many factors,
after the war, the imposition of controls on
exports and imports, and he use of foreign
one of them being the amount and quality of the
exchange which resulted in diminution of the
services performed with relation to the business.
amount of business. Other tests suggested are:
1. payment must be made in good faith;
WON THE BONUSES IN QUESTION WERE
2. the character of the taxpayer’s business,
REASONABLE AND JUST TO BE
3. the volume and amount of its net earnings,
ALLOWED AS DEDUCTIONS  NO
4. its locality,
5. the type and extent of the services rendered,
6.the salary policy of the corporation;
7. the size of the particular business;
8. the employees’ qualifications and
contributions to the business venture; and
9. general economic conditions. However, in
determining whether the particular salary or
compensation payment is reasonable, the
72
I`
situation must be considered as a whole.
In this case, no evidence nor has petitioner

ever made the claim that all or some of the
officers were gifted with some special talent,
or had undergone some extraordinary
training, or had accomplished any particular
task, that contributed materially to the
success of petitioner’s business during the
taxable years in question;
all the other employees received no pay

increase in the said years; the bonuses were
paid despite the fact that it had suffered net
losses for 3 years.
Furthermore the corporation cannot use the

excuse that it is salary paid to an employee
because the CIR does not question the basic
salaries paid by petitioner to the officers and
employees, but disallowed only the bonuses
paid to petitioner’s top officers at the end of the
taxable years in question.
Pilmico- The law, thus, intends for Sections 29 and 238 of
Mauri Foods Pilmico-Mauri Foods Corporation, the 1977 NIRC to be read together, and not for
Corp v. CIR domestic corp engaged in trade and business one provision to be accorded preference over
in the Philippines, was assessed deficiency the other.
income tax pertaining to books in 1996! After
its protest, CIR reduced the tax assessed It is undisputed that among the evidence
adduced by PMFC on it behalf are the official
. In their appeal before the CTA, the CTA receipts of alleged purchases of raw materials.
allowed certain deductions but did not Thus, the CTA cannot be faulted for making
include a portion of the claimed total references to the same, and for applying Section
business expenses deductions because 238 of the 1977 NIRC in rendering its judgment.
of PMFC’s failure to support it with Required or not, the official receipts were
required invoices. submitted by PMFC as evidence. Inevitably, the
said receipts were subjected to scrutiny, and the
The CA’s legal basis to disallow the CTA exhaustively explained why it had found
deductions was Sec. 238, of the NIRC which them wanting.
imposed a responsibility upon the purchaser
to keep and preserve the original copy of the Let it, however, be noted that in Atlas, the Court
invoice or receipt for a period of three years likewise declared that:y
from the close of the taxable year in which
such invoice or receipt was issued. In addition, not only must the taxpayer meet
- There were discrepancies in the the business test, he must substantially
name of the sellers and prove by evidence or records the deductions
purchasers indicated claimed under the law, otherwise, the same
- They failed to substantiate the will be disallowed. The mere allegation of the
requirement as to receipts taxpayer that an item of expense is ordinary and
enabling them to deduct raw necessary does not justify its deduction.
material expenses
73
I`
PMFC claims that there is violation of due It is, thus, clear that Section 29 of the 1977 NIRC
process - both pertain to the alleged does not exempt the taxpayer from
omission of due process of law by the CTA substantiating claims for deductions. While
since in its rulings, it invoked Section 238 of official receipts are not the only pieces of
the 1977 NIRC, while in the proceedings evidence which can prove deductible
below, expenses, if presented, they shall be
the CIR's tax deficiency assessments issued subjected to examination.
against PMFC were instead anchored on
Section 34 of the 1997 NIRC. PMFC submitted official receipts as among its
evidence, and the CTA doubted their veracity.
PMFC comes before the SC asserting that PMFC was, however, unable to persuasively
in determining the deductibility of the explain and prove through other documents the
purchase of raw materials from gross discrepancies in the said receipts. Consequently,
income: the CTA disallowed the deductions claimed, and
- Section 29 of the 1977 NIRC is in its ruling, invoked Section 238 of the 1977
the applicable provision. NIRC considering that official receipts are
- According to the said section, for matters provided for in the said section.
the deduction to be allowed, the
expenses must be (a) both COHAN RULE
ordinary and necessary; (b) - Cannot use previous expenses
incurred in carrying on a trade or
substantiation for present expenses
business; and (c) paid or incurred
within the taxable year. substantiation
- PMFC, thus, claims that prior to
the promulgation of the 1997 Intention to manufacture shabu, rent and
NIRC, the law does not require utilities paid for an expensive house for
the production of official manufacturing
receipts to prove an expense.
Income = illegal income
- Section 29 imposes less stringent
requirements and the presentation Expenses = legal expenses
of official receipts as evidence of Are all those income taxable? / are all those
the claimed deductions expenses deductible?
dispensable.
- PMFC further posits that the

mandatory nature of the
submission of official receipts as
proof is a mere innovation in the
1997 NIRC, which cannot be
applied retroactively.
WHETHER THE NATURE OF EVIDENCE

REQUIRED TO PROVE AN ORDINARY
EXPENSE LIKE RAW MATERIALS IS
GOVERNED BY SECTION 29 OF THE 1977
NATIONAL INTERNAL REVENUE CODE
(NIRC) AND NOT BY SECTION 238 AS
FOUND BY THE CTA? –NO. Sections 29
and 238 of the 1977 NIRC to be read
together, and not for one provision to be
accorded preference over the other.
RR 10- 2002 Q: IS THERE A CEILING ON CEILING ON EAR EXPENSES

ENTERTAINMENT, AMUSEMENT AND There shall be allowed a deduction from gross
74
I`
RECREATIONAL (EAR) EXPENSES? income for entertainment, amusement and

recreation expense in an amount equivalent to
A: Yes. RR 10-2002 (JULY 10, 2002) the actual entertainment, amusement and
provides that: recreation expense paid or incurred within the
1. Sellers of goods or properties – 0.5% taxable year by the taxpayer, but in no case
of their net sales as representation shall such deduction exceed:
expenses a. 0.50% of net sales for taxpayers
2. Sellers of services – 1% of their net engaged in sale of goods or properties
revenues as representation expenses. b. 1% of net revenue for taxpayers engaged
However, when supporting documents reflect in sale of services, including exercise of
a lower amount, then such lower amount profession and use or lease of properties
shall be used. However, if the taxpayer is deriving income
from both sale of goods/properties and
G/P  .5& of net SALES services, the allowable entertainment,
Service  1% of net REVENUES amusement and recreation expense shall be
If both G/P/Service  apportionment formula determined based on an apportionment
formula.
APPORTIONMENT FORMULA
Net Sales/Net Revenue x Actual
Expense
Total Net Sales and Net
Revenue
RR 1-2009 RR 1-2009 prescribes the rules and regulations to implement RA No. 9442, An Act Amending RA
No. 7277, Otherwise Known as the Magna Carta for Persons with Disability, relative to the tax
privileges of persons with disability and tax incentives for establishments granting sales discount.
Section 3 provides for the establishments where a PWD may claim 20% discount relative to
sale of goods or services for their exclusive use or enjoyment.
Section 4 provides for the availment by establishments of sales discounts as deduction from their
gross income.
Rules:
1. Deducted from gross income after deducting the cost of goods sold or service;
2. Deduction from gross income for the same taxable year that the discount is granted;
3. Only the sales exclusively used, consumed or enjoyed by the PWD shall be eligible for
the deductible sales discount;
4. The gross selling price and the sales discount must be separately indicated in the sales
invoice or official receipt issued by the establishment;
5. Only the actual amount of the sales discount granted (not exceeding 20% of the gross
selling price) can be deducted from the gross income;
The business establishment is required to keep separate and accurate records of sales
RR 7-2010 RR No.7-2010 provides that establishments granting discounts to Senior Citizens can deduct
such discounts from their gross income for the same taxable year. The discounts granted by the
seller of qualified goods and services. shall be treated as an ordinary and necessary expenses
deductible from the gross income of the seller falling under the category of itemized deductions,
and can only be claimed if the seller does not opt for the Optional Standard Deduction during the
75
I`
taxable quarter/year. (See #5 for conditions for the deduction)
It also provides that private establishments employing Senior Citizens shall be entitled to
additional deduction from their gross income equivalent to 15% of the total amount paid as
salaries and wages to Senior Citizen.
Interest (as amended by RA 9337)

Examples:
“Not related tax payers” enumeration
Examples:
X owns A 100% X owns B 100% ; loan is not
between A and B, but between A and B, X
parent ni A and B, naghiraman A and B, will
interest expense will be paid borrowing between
A and B deductible? NOT deductible
Interest arbitrage
- Pinahiram to corp B ; loan extended
to corp B  interest income  no
arbitrage ; 30 %
Interest income must be subject to final tax
Paper Paper Industries claimed as deductions Paper Industries is entitled to its claimed
Industri against gross income interest payments on deduction on income tax for interest payments
es loans for the purchase of machinery and on loans for, among other things, the purchase
Corpora equipment in 1977. The CIR disallowed the of machinery and equipment actually used in the
tion v. deduction on the ground that because the registered operations of Paper Industries. Under
CA loans had been incurred for the purchase of sayo hahaha p. 30 of the 1977 Tax Code, the
(1995) machinery and equipment, the interest general is that the amount of interest paid within
payments on the said loans should have the taxable year on indebtedness (interest
been capitalized instead and claimed as a expenses) may be deducted from gross income.
depreciation deduction taking into account the This certainly includes interest paid under loans
76
I`
adjusted basis of the machinery and equipment incurred in connection with the carrying on of the
(original acquisition cost plus interest charges) business of the taxpayer.
over the useful life of such assets. Both the CTA
and the CA sustained the position of PICOP and Such interest payments were legally due and
held that the interest deduction claimed by demandable under the terms of such loans, and
PICOP was proper and allowable. In the instant in fact paid by Paper Industries during the tax
petition, the CIR insists on its original position. year.
WON PICOP IS ENTITLED TO DEDUCTIONS The Tax Code is also silent which deduction of
ON INCOME TAX FOR THE INTEREST ON interest should apply (deduction against gross
THE LOANS IT PROCURED FOR THE income OR depreciation deduction) and thus
PURCHASE OF MACHINERY AND PICOP has the right to elect, but not entitled to
EQUIPMENT  YES both deductions at the same time.
CIR v. Respondent conveyed by way of gifts to her 4 Under the law, for interest to be deductible, it
Vda. De children real property. CIR appraised the real must be shown that
Prieto property donated for gift tax purposes and - there be an indebtedness,
(1960) assessed donor’s gift tax, interest, and - that there should be interest upon it,
compromise thereon. Of the total sum paid was and
total interest on account of delinquency. - that what is claimed as an interest
deduction should have been paid or
This amount was claimed as deduction in the accrued within the year.
ITR but was disallowed and even assessed - It is here conceded that the interest
deficiency income tax and interest, surcharge, paid by respondent was in
and compromise for the late payment. consequence of the late payment of
her donor’s tax, and the same was
WON THE INTEREST ON DELINQUENCY IS paid within the year it is sought to be
DEDUCTIBLE  YES declared. The only question to be
determined, as stated by the parties,
is whether or not such interest was
paid upon an indebtedness within the
contemplation of section 30 (b) (1) of
the Tax Code. The interest paid by
respondent for the late payment of
her donor’s tax is deductible from
her gross income under Sec. 30
(b).
In conclusion, we are of the opinion and so hold

that although interest payment for delinquent
taxes is not deductible as tax under Section
30(c) of the Tax Code and section 80 of the
Income Tax Regulations, the taxpayer is not
precluded thereby from claiming said interest
payment as deduction under section 30(b) of the
same Code.
RR 13- REQUIREMENTS FOR THE DEDUCTIBILITY OF INTEREST EXPENSE FROM THE GROSS
2000 INCOME OF A CORPORATION OR AN INDIVIDUAL ENGAGED IN TRADE, BUSINESS, OR IN
THE PRACTICE OF PROFESSION
77
I`
The following are the requisites for the deductibility of interest expense from gross income:
1. There must be an indebtedness;
2. There should be an interest expense paid or incurred upon such indebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the taxpayer’s trade, business or profession;
5. The interest expense must have been paid or incurred during the taxable year;
6. The interest must have been stipulated in writing;
7. The interest must be legally due;
8. The interest payment arrangement must not be between related taxpayers;
1. Members of the family
2. An individual and a corp – where more than 50% of outstanding stock of the
corporation is owned by the individual
3. 2 corps – where more than 50% of outstanding stock of the corporation is owned by
the individual
4. Between grantor and fiduciary of any trust
5. Between fiduciary of a trust and the fiduciary of another trust if the same person is
the grantor with respect to trust
6. Between fiduciary of a trust and a beneficiary
9. The interest must not be incurred to finance petroleum operations; and
10. In case of interest incurred to acquire property used in trade, business, or exercise of
profession, the same was not treated as a capital expenditure.
BIR Pursuant to Section 34(B) of the Tax Code of 1997, the amount of interest expense paid or incurred
Ruling by a taxpayer within a taxable year on indebtedness in connection with his trade, business or
006-00 exercise of profession shall be allowed as a deduction from his gross income, the said interest
expense, however, shall be reduced if the taxpayer has derived certain interest income which
Interest had been subjected to final withholding tax.
arbitrage The said reduction shall be equal to the percentages of the interest income earned depending on
the year when the interest income was earned. This limitation shall apply regardless of whether or
not a tax arbitrage scheme was entered into by the taxpayer or regardless of the date of the interest
bearing loan and the date when the investment was made, for as long as, during the taxable year,
there is an interest expense incurred on one side and an interest income earned on the other
side, which interest income had been subjected to final withholding tax.
Taxes
CIR v. The respondents, V. E. Lednicky and Maria An alien resident’s right to deduct income taxes
Lednick Valero Lednicky, are husband and wife, he paid to foreign government from the
y respectively, both American citizens residing taxpayer's gross income is given only as an
(1964) in the Philippines, and have derived all their alternative or substitute to his right to claim a tax
income from Philippine sources for the taxable credit for such foreign income taxes under
years in question. The respondents Lednickys section 30 (c) (3) and (4)f. In effect, unless the
filed an amended income tax return for 1956. alien resident has a right to claim such tax credit
The amendment consists in a claimed if he so chooses, he is precluded from deducting
deduction of P205,939.24 paid in 1956 to the the foreign income taxes from his gross income.
United States government as federal income This is to prevent the taxpayer from claiming
78
I`
tax for 1956. Simultaneously with the filing of twice the benefits of his payment of foreign
the amended return, the respondents requested taxes, by deduction from gross income
the refund of P112,437.90, which was (subs. c-1) and by tax credit (subs. c- 3).
disallowed by the BIR.
Finally, to allow an alien resident to deduct from
WON A US CITIZEN RESIDING IN THE PH, his gross income whatever taxes he pays to his
WHO DERIVES INCOME WHOLLY FROM own government amounts to conferring on the
SOURCES WITHIN THE PH, MAY DEDUCT latter the power to reduce the tax income of the
FROM HIS GROSS INCOME THE INCOME Philippine government simply by increasing the
TAXES HE HAS PAID TO THE US FOR THE tax rates on the alien resident. Everytime the
TAXABLE YEAR  NO rate of taxation imposed upon an alien resident
is increased by his own government, his
deduction from Philippine taxes would
correspondingly increase, and the proceeds for
the Philippines diminished, thereby
subordinating our own taxes to those levied by a
foreign government. Such a result is
incompatible with the status of the Philippines as
an independent and sovereign state
BIR A Co., a VAT-registered domestic corporation, Under Section 112 (A) of the Tax Code,
Ruling enters into VAT zero-rated transactions in the unutilized creditable input taxes attributable
123-13 ordinary course of its business. Since its to VAT zero-rated sales can only be
transactions do not result in any output VAT recovered through the application for refund
liability, A Co. is not able to apply or utilize its or tax credit.
input VAT on purchases from various suppliers.
Nowhere in the Tax Code can a specific
A Co. intended to file a claim for refund or tax provision be found expressly providing for
credit of its unutilized input VAT but was not another mode of recovery of unutilized input
able to do so due to the expiration of the two- VAT, such as through outright deduction or
year period to file the claim. expense for income tax purposes.
WON A CO. CAN EXPENSE OUTRIGHT THE

UNUTILIZED INPUT VAT AFTER THE
EXPIRATION OF THE 2-YEAR PERIOD TO
FILE A CLAIM FOR REFUND  NO
Losses
Tambun BIR issued several assessment notices and The rule that tax deductions, being in the nature
ting demand letters assessing Tambunting for of tax exemptions, are to be construed in
79
I`
Pawnsh deficiency percentage tax and income tax. strictissimi juris against the taxpayer is well
op v. Tambunting filed an administrative protest and settled. Corollary to this rule is the principle that
CIR later a petition for review because of the BIR’s when a taxpayer claims a deduction, he must
(2013) inaction. point to some specific provision of the statute in
which that deduction is authorized and must be
Tambunting argues that the CTA should have able to prove that he is entitled to the deduction
allowed its deductions because the CTA had which the law allows. An item of expenditure,
allowed deductions for ordinary and necessary therefore, must fall squarely within the language
expenses on the basis of cash vouchers issued of the law in order to be deductible A mere
by the taxpayer or certifications issued by the averment that the taxpayer has incurred a loss
payees evidencing receipt of interest on loans does not automatically warrant a deduction from
as well as agreements relating to the imposition its gross income.
of interest; that it had thus shown beyond doubt
that it had incurred the losses in its auction As the CTA En Banc held, Tambunting did not
sales. properly prove that it had incurred losses.
The subasta books it presented were not the
Petitioner submits that based on the “subasta” proper evidence of such losses from the
books, it was able to show beyond doubt that it auctions because they did not reflect the true
incurred the amount of losses on auction sale amounts of the proceeds of the auctions due to
claimed as deduction from its gross income for certain items having been left unsold after the
the taxable year 1997. auctions.
WON PETITIONERS SHOULD BE ALLOWED

TO HAVE FURTHER DEDUCTIONS  NO
RR 12- SUBSTANTIATION REQUIREMENTS FOR LOSSES ARISING FROM CASUALTY, ROBBERY,
77 THEFT OR EMBEZZLEMENT
This Revenue Regulation provides for the substantiation requirements for losses arising from
casualty, robbery, theft, or embezzlement. Loss from fires, storms or other casualty, robbery,
theft, and embezzlement is allowed as deduction for the taxable year in which the loss is
sustained. There are 2 requirements for substantiation:
1. declaration of loss filed with the CIR or his deputies;
2. proof of the elements of loss claimed, the actual nature and occurrence of the event and the
amount of the loss.
Taxpayer claiming deduction shall file a sworn declaration of loss with the nearest RDO within 45
days from occurrence. Declaration of loss is subject to verification and is not sufficient proof of
loss. It must be accompanied with evidence gathered immediately after the event causing the
loss. The amount is limited to the difference of the value of the property immediately before
the casualty and its value immediately after. This shall not exceed the cost or other adjusted
basis of the property or depreciated cost in case it is used in business, reduced by any insurance or
compensation received.
FORMULA FOR COMPUTATION

Value Before - Value After - Insurance Received = Deductible Loss
RMO 31- REQUIREMENTS FOR THE FILING OF CLAIMS OF CASUALTY LOSS

80
I`
2009
1. Sworn declaration of loss – file within 45 days after the event, stating: (a) time and nature of
the event that gave rise to the losses (b) description and location of the damaged property
(c) items needed to compute the loss such as the cost or other basis of the property,
depreciation allowed, value of the property before and after the event and cost of repair.
Such declaration must also be supported by the following documents: (a) the financial
statement for the year immediately preceding the event (b) copies of the insurance policies,
if any, for the property.
2. Proof of the elements of the loss claimed such as: (a) photographs of the property before
and after the typhoon (b) documentary evidence to determine the cost or value of the
damage properties such as cancelled checks, vouchers, etc (c) insurance policy if there is
any (d) police report in case of robbery/ theft/ looting.
Failure to report a theft or robbery to the police may be held against the taxpayer, but a mere police
report is not conclusive proof of the loss. All documents and other evidence shall be subject to
verification by the concerned Bureau office, kept by the taxpayer as part of his tax records and be
made available to revenue officers upon audit and declaration of loss.
REQUISITES FOR DEDUCTIBILITY

1. A taxpayer engaged in trade or business may claim, as business deductions, casualty
losses incurred for properties actually used in the business that were damaged and reported
as losses in the declaration with the BIR
2. Properties reported as casualty losses must have been properly reported as part of the
taxpayer’s assets in the accounting records and financial statements in the year immediately
preceding the occurrence of the loss, with the costs of acquisition clearly established and
recorded
3. For recovery through insurance claims, it shall be covered by RR NO. 12-77. The amount of
loss shall be compensated by insurance coverage should not be claimed as a deductible
loss
4. The deduction of assets as capital losses must be properly recorded in accounting reports
with the adjustment of the applicable accounts
5. The restoration of the damaged property, or the acquisition of new property to replace it,
must be properly recorded and recognized as: (a) repairs expense (b) capitalized asset. The
nature of the transaction, value of the amounts involved and other factors shall be taken into
account.
BIR Porcelana Mariwasa, Inc. (PMI) had existing US The annual increase in value of an asset is not
Ruling dollar loans from Noritake and Toyota. In 1989, taxable income because such increase has not
206-90 the parties agreed to convert the dollar yet been realized. The increase in value could
denominated loans into pesos at the prevailing only be taxed when a disposition of the
Forex exchange rate on June 1989. The agreement property occurred which was of such a
Losses was submitted to the Central Bank in 1990. nature as to constitute a realization of such
gain. The same conclusion obtains as to losses.
WON THE FOREIGN EXCHANGE LOSS The annual decline in the value of the property is
INCURRED IS DEDUCTIBLE LOSS FOR THE not normally allowable as a deduction. Hence, to
YEAR 1990  NO be allowable, the loss must be realized. When
foreign currency acquired in connection with a
transaction in the regular course of business is
81
I`
disposed, ordinary gain or loss results from the

fluctuations. The loss is deductible only for
the year it is actually sustained.
BIR Query on whether foreign exchange losses The annual increase in value of an asset is not
Ruling which have accrued by reason of devaluation taxable income because the increase is not yet
144-85 are deductible for income tax purposes. When realized. The increase in value could only be
the losses arose from matured but unremitted taxed when there is a disposition of the
Forex principal payments on loans affected by debt property which would constitute a realization
Losses restructuring program in the Philippines. of that gain (there is severance of gain from the
original capital invested in the property). Same
conclusion obtains as to losses. The annual
decrease in value is not allowable as a loss. To
be allowed as a deduction, loss must be
realized.
Bad Debts
Philex Philex entered into an agreement with Baguio ADVANCES NOT CONSIDERED AS “DEBTS”
Mining Gold for the former to manage and operate the The advances were not “debts” of Baguio Gold
Corp. v. latter’s mining claim. In the course of managing to petitioner inasmuch as the latter was under no
CIR and operating the project, Philex made unconditional obligation to return the same to the
(2008) advances of cash and property; however, the former under the “Power of Attorney.” As for the
mine suffered continuing losses over the years amounts that petitioner paid as guarantor to
which resulted to Philex’s withdrawal as Baguio Gold’s creditors, we find no reason to
manager of the mine and eventual cessation of depart from the tax court’s factual finding that
operations. Baguio Gold’s debts were not yet due and
demandable at the time that petitioner paid the
In its ITR, Philex deducted from its gross same. Verily, petitioner pre-paid Baguio Gold’s
income the loss on settlement of receivables outstanding loans to its bank creditors and this
from Baguio against reserves and conclusion is supported by the evidence on
allowances. BIR, however, disallowed the record.
amount as deduction for bad debt and assessed
deficiency income tax. In sum, petitioner cannot claim the advances as
a bad debt deduction from its gross income.
WON THE LOSS ON SETTLEMENT AND Deductions for income tax purposes partake of
RECEIVABLES MAY BE CONSIDERED BAD the nature of tax exemptions and are strictly
DEBT  NO construed against the taxpayer, who must prove
by convincing evidence that he is entitled to the
deduction claimed. In this case, petitioner failed
to substantiate its assertion that the
advances were subsisting debts of Baguio
Gold that could be deducted from its gross
income. Consequently, it could not claim the
advances as a valid bad debt deduction.
Philippi PRC was assessed to pay a deficiency tax for PRC was not able to support its contention. A
ne 1985. PRC protested that the amounts are bad taxpayer has to prove that he exerted diligent
Refining debts and interest expense which are allowable efforts to collect the debts by:
Compan and legal deductions. It was elevated to the CA 1. sending statement of accounts;
y v. CA but was dismissed for failing to satisfy the 2. sending collection letters
82
I`
(1996) requirements of worthlessness of a debt. 3. giving the account to a lawyer for

collection; and
WON BAD DEBTS ARE MET TO BE 4. filing a collection case in court
DEDUCTIBLE AS ASSESSED BY THE CA  The only evidentiary support given by PRC was
NO the explanation posited by its financial
adviser/accountant.
Herman Petitioner-taxpayer Fernandez Hermanos The CTA did not err, the court agrees with its
os v. questions the tax deficiency assessed by the decision. PMM was still in operation during the
CIR CIR during 1950 to 1954 and 1957. The time they decided to write-off the advances as
(1969) contention was that the “loan”/advances it bad debts. We sustain the government’s position
extended to its subsidiary company, Palawan that these advances were INVESTMENTS and
Advance Manganese Mines Inc. (PMM) should be not loans considering that they were
s were considered as a bad debt and should be extended when the capital of PMM was only
investme deducted to its income tax return. The loan P100,000 and PMM was to pay 15% of its net
nt and was extended during 1945-1952, in the amount profits, and did not pertain as payments for the
not a of 353,134.25 PHP, all of which were written off advances.
loan because petitioner company did not expect to
recover said amounts. The CTA did not consider
the advances as bad debts since PMM was still
in operation when petitioner gave the advances.
WON THE CTA ERRED IN NOT

RECOGNIZING THE WRITE-OFF IN 1951 AS
A BAD DEBT AND DEDUCTIBLE IN
PETITIONER’S INCOME TAX  NO
RR 5-99 REQUISITES FOR VALID DEDUCTION OF BAD DEBTS
Implements Section 34(E) of the Tax Code of 1997 relative to the requirements for deductibility of
bad debts from gross income of a corporation or an individual engaged in trade or business or a
professional engaged in the practice of his profession.
The requisites for valid deduction of bad debts from gross income are:
a. there must be an existing indebtedness due to the taxpayer which must be valid and legally
demandable;
b. the same must be connected with the taxpayer's trade, business or practice of profession;
c. the same must not be sustained in a transaction entered into between related parties
enumerated under Section 36(B) of the Tax Code of 1997;
d. the same must be actually charged off the books of accounts of the taxpayer as of the end
of the taxable year; and
e. the same must be actually ascertained to be worthless and uncollectible as of the end of the
taxable year.
The recovery of bad debts previously allowed as deduction in the preceding year or years will be
included as part of the taxpayer's gross income in the year of such recovery to the extent of the
income tax benefit of said deduction.
Depreciation
Basilan Basilan Estates, Inc. claimed deductions for the The income tax law does not authorize the
83
I`
v. CIR depreciation of its assets on the basis of their depreciation of an asset beyond its
(1967) acquisition cost. As of January 1, 1950 it acquisition cost. Hence, a deduction over and
changed the depreciable value of said assets by above such cost cannot be claimed and allowed.
increasing it to conform with the increase in cost The reason is that deductions from gross income
for their replacement. Accordingly, from 1950 to are privileges, not matters of right. They are not
1953 it deducted from gross income the created by implication but upon clear expression
value of depreciation computed on the in the law.
reappraised value. CIR disallowed the
deductions claimed by petitioner, consequently The recovery, free of income tax, of an amount
assessing the latter of deficiency income taxes. more than the invested capital in an asset will
transgress the underlying purpose of a
WON THE DEPRECIATION SHALL BE depreciation allowance. For then what the
DETERMINED ON THE ACQUISITION COST taxpayer would recover will be, not only the
RATHER THAN THE REAPPRAISED VALUE acquisition cost, but also some profit. Recovery
OF ASSETS  YES in due time thru depreciation of investment made
is the philosophy behind depreciation allowance;
the idea of profit on the investment made has
never been the underlying reason for the
allowance of a deduction for depreciation.
Limpan Limpan Investment Corp is a domestic Petitioner admitted through witness that it indeed
Investm corporation engaged in the business of leasing had undeclared income. Thus, it has become
ent real properties. Among its real properties are incumbent upon them to prove their excuses by
Corpora lots and buildings in Manila and Pasay City clear and convincing evidence, which it has
tion v. acquired from Isabelo Lim and his mother. After failed to do. With regard the 1957 rent deposited
CIR filing tax returns for 1956, 1957, the examiners with the court, and withdrawn only in 1958, the
(1966) of BIR discovered that the corporation has court viewed the corporation as having
understated its rental incomes by 20k and 81k constructively received said rents. The non-
during said years as well as claimed excessive collection was the petitioner’s fault since it
depreciation amounting to 20k and 16k. The refused to accept the rent, and not due to
CIR demanded payment for deficiency tax and nonpayment of lessees. Hence, although the
surcharge. Petitioners argue that these amounts corporation did not actually receive the rent, it is
were either deposited with the court by the deemed to have constructively received them.
tenants or have yet to be received.
Furthermore, it has been declared that
WON THERE WAS UNDECLARED INCOME  depreciation is a question of fact and is not
YES measured by theoretical yardstick, but should be
determined by a consideration of actual facts,
WON THE DEPRECIATION CLAIMED BY and the findings of the Tax Court in this respect
PETITIONER WAS EXCESSIVE  YES should not be disturbed when not shown to be
arbitrary or in abuse of discretion, and petitioner
has not shown any arbitrariness or abuse of
discretion in the part of the Tax Court in finding
that petitioner claimed excessive depreciation in
its returns.
It appearing that the Tax Court applied rates of

depreciation in accordance with Bulletin “F” of
the U.S. Federal Internal Revenue Service,
84
I`
which this Court pronounced as having strong

persuasive effect in this jurisdiction, for having
been the result of scientific studies and
observation for a long period in the United
States, after whose Income Tax Law ours is
patterned, the foregoing error is devoid of merit.
RR 12- RULES ON THE DEDUCTIBILITY OF DEPRECIATION EXPENSES AS IT RELATES TO
2012 PURCHASE OF VEHICLES AND OTHER EXPENSES RELATED THERETO, AND INPUT TAXES
ALLOWED THEREFOR
1. No deduction from gross income for depreciation shall be allowed unless the taxpayer
substantiates the purchase with sufficient evidence, such as official receipts or other
adequate records which contain the following among other
a. specific motor vehicle identification number, chassis number or other registrable
identification numbers of the vehicle
b. the total price of the specific vehicle subject of depreciation
c. direct connection or relation of the vehicle
to the development, management, operation and/or conduct of the trade or business or
profession of the taxpayers
2. Only 1 vehicle for land transport is allowed for the use of an official or employee (not
exceeding 2.4M) c. No depreciation shall be allowed for yachts, helicopters, airplanes,
aircrafts and land vehicles which exceed the above threshold amount
3. All maintenance expenses on account of non- depreciable vehicles for taxation purposes are
disallowed in its entirety
4. The input taxes on the purchase of non-depreciable vehicles and all input taxes on
maintenance expenses incurred thereon are likewise disallowed for taxation purposes.
Depletion
Consoli The Company, Consolidated Mines, Inc., is a For the Mine Cost, the evidence presented by
dated domestic corporation engaged in mining. It had the Company is insufficient to prove the cost
Mines, filed its income tax returns for 1951, 1952, 1953 of development that it alleges. Thus, the
Inc. v. and 1956. In 1957 examiners of the BIR original figure assessed by the Commissioner
CTA investigated the income tax returns filed by the stands. For the Ore Deposit, the geological
(1974) Company because its auditor, Felipe Ollada report appears clear enough; the estimated float
claimed the refund of the sum of P107,472.00 of 200,000 tons consisting of pieces of ore that
representing alleged overpayments of income had broken loose and become detached by
taxes for the year 1951. After the investigation erosion from their original position could hardly
the examiners reported that the depletion and be viewed as still forming part of the total
depreciation expenses had been estimated ore deposit. Having already been
overcharged and that the Company had broken up into numerous small pieces and
overstated its claim for depletion. In view of practically rendered useless for mining
said reports, the Commissioner of Internal purposes, the same could not appreciably
Revenue sent the Company a letter of demand increase the ore potentials of the Company’s
requiring it to pay certain deficiency income mines. Thus, the Court modifies the original
taxes. figure assessed by the petitioner and by the
85
I`
respondent. The rate of depletion per ton of the

WON THE CTA USED THE CORRECT RATE ore deposit mined and sold by the Company is
OF MINE DEPLETION  NO P0.6196 per ton.
WON THE DISALLOWANCE BY THE CTA The Company failed to itemize and/or
FOR THE DEPRECIATION CHARGES substantiate with definite proof that the
CLAIMED BY THE COMPANY AS Commissioner’s own method of determining
DEDUCTIONS FROM ITS GROSS INCOME IS depreciation is unreasonable or inaccurate.
CORRECT  YES
Charitable and Other Contributions

RA 9500 University of the Philippines Charter of 2008
Section
25 SEC. 25. Tax Exemptions. - The provisions of any general or special law to the contrary
notwithstanding:
a) All revenues and assets of the University of the Philippines used for educational purposes or
in support thereof shall be exempt from all taxes and duties;
b) Gifts and donations of real and personal properties of all kinds shall be exempt from the
donor's tax and the same shall be considered as allowable deductions from the gross
income of the donor, in accordance with the provisions of the National Internal Revenue
Code of 1997, as amended: Provided, That the allowable deductions shall be equivalent to
150 percent of the value of such donation. Valuation of assistance other than money shall
be based on the acquisition cost of the property. Such valuation shall take into consideration
the depreciated value of property in case said property has been used;
c) Importation of economic, technical, vocational, scientific, philosophical, historical and cultural
books, supplies and materials duly certified by the Board, including scientific and
educational computer and software equipment, shall be exempt from customs duties;
d) The University shall only pay 0% value-added tax for all transactions subject to this tax; and
e) All academic awards shall be exempt from taxes
RA 9521 National Book Development Trust Fund Act
Section
3 SEC. 3. The National Book Development Trust Fund. - A National Book Development Trust
Fund, hereafter referred to as the Fund, is hereby established exclusively for the support and
promotion of Filipino authorship especially in science and technology and in subject areas wherein
locally authored books are either few or nonexistent. The Fund shall be subject to the following;
a) The contribution to the Fund shall be sourced from the following:
1) The amount of Fifty million pesos (P50,000,000.00) shall be allotted in the annual
General Appropriation Act (GAA) for the next five (5) years starting from the
enactment of this law;
2) The amount of Fifty million pesos (P50,000,000.00) shall be taken from the Philippine
Amusement and Gaming Corporation (PAGCOR) fund at Five million pesos
(P5,000,000.00) per month for ten (10) months;
3) Another amount of Fifty million pesos (P50,000,000.00) shall be taken from the
Philippine Charity Sweepstakes Office (PCSO) at Five million pesos (P5,000,000.00)
per month for ten (10) months;
b) Only the interest drawn from the Fund from sources cited in Section 3 (a1), (a2) and (a3)
86
I`
shall be awarded as grants to promote Filipino authorship and to support the completion of
local manuscripts or research works for publication;
c) The grants can be awarded only after one (1) year from the organization of the Fund, and
the grants shall be awarded equitably among the regions.
d) Government corporations are hereby authorized to give grants to the Fund at their
discretion;
e) The private portion of the Fund shall be raised from donations and other conveyances
including funds, materials, property and services, by gratuitous title;
f) Contributions to the Fund shall be exempt from the donor's tax and the same shall be
considered as allowable deductions from the gross income of the donor, in accordance with
the provisions of the National Internal Revenue Code of 1997, as amended: Provided, That
the allowable deductions shall be equivalent to one hundred fifty percent (150%) of the value
of such donation;
g) The National Book Development Board(NBDB) shall be the administrator of the Fund;
h) For the sound and judicious management of the Fund, the NBDB shall appoint a
government financial institution, with sound track record on fund management, as portfolio
manager of the Fund, subject to guidelines promulgated by the NBDB; and
i) The NBDB shall prepare the implementing guidelines and decision-making mechanisms,
subject to the following:
1) No part of the seed capital of the Fun, including earnings thereof, shall be used to
underwrite overhead expenses for the administration; and
2) There shall be an external auditor to perform an annual audit of the Fund's
performance.
BIR Conservation International, an international Sec. 34(H) of the Tax Code of 1997, which talks
Ruling organization with home offices abroad, applied of Charitable and Other Contributions,
19-01 for certification with Philippine Council for NGO specifically mentions “accredited domestic
Certification (PCNC) to be granted status as a corporation or associations” and “non-
donee institution, but since its members are government organizations.” On the other hand,
based overseas, fundamental issues regarding subparagraph (2)(c) of the same Section of the
governance cannot be fully addressed by the Tax Code defines a “nongovernment
BIR’s evaluation process. organization” to mean a non-profit domestic
corporation.
WON INTERNATIONAL ORGANIZATIONS
WITH HOME OFFICES BASED ABROAD ARE Revenue Regulation No. 13-98 was issued to
QUALIFIED TO BE GRANTED DONEE implement Sec. 34(H), and it provides that a
INSTITUTION STATUS  NO non-stock, non-profit corporation or organization
must be created or organized under Philippine
Laws and that an NGO must be a non-profit
domestic corporation.
The BIR opines that a foreign corporation, like

Conservative International, whether resident or
non-resident, cannot be accredited as donee
institution.
Research and Development

3M 3M Phil. is a subsidiary of 3M-St. Paul, a non- Central Bank Circular No. 393: Regulations
Philippi resident foreign corporation. 3M Phil. is the Governing Royalties/Rentals provides that
87
I`
nes, Inc. exclusive importer, manufacturer, wholesaler, royalties hall be paid only on commodities
v. CIR and distributor in the PH of all products of 3M- manufactured by the licensee under the royalty
(1988) St. Paul. To enable it to manufacture, package, agreement; and that the royalty/rental contracts
market, sell, and install the highly specialized involving manufacturing royalty shall not exceed
products of its parent company, 3M Phil. entered 5% of the wholesale price of the commodities
with 3M-St. Paul a Service Information and manufactured under the royalty agreement.
Technical Assistance Agreement and Patent Clearly, no royalty is payable on the
and Trademark License Agreement, under wholesale price of finished products
which 3M Phil. agreed to pay a technical service imported.
of 3% and a royalty of 2% of its net sales. In its
deductions for 1974, the CIR only allowed Although the NIRC allows payments of royalty to
deductions for royalties and technical be deducted from gross income as business
service fees for locally manufactured goods; expenses, CB Circular No. 393 defines which
deductions for finished products imported were royalty payments are proper. Hence, improper
disallowed. The improper deduction was treated payments of royalty are not deductible as
by the CIR as disguised dividend or income. legitimate business expenses.
WON THE ENTIRE AMOUNT OF ROYALTIES

AND TECHNICAL SERVICE FEES PAID TO
3M-ST. PAUL MAY BE CLAIMED AS
DEDUCTION FOR BUSINESS EXPENSES 
NO
Additional Requirements for Deductibility
RMO 38- GUIDELINES TO BE OBSERVED BY THE REVENUE OFFICERS FOR THE ALLOWANCE OR
83 DISALLOWANCE OF ITEMS OF DEDUCTIONS REFERRED TO IN SECTION 30(1)
An amount claimed as deductions on which a tax is supposed to have been withheld under Section
54 and 93 shall be allowed if in the course of his audit/investigation, the examiner discovers that:
1. No withholding of creditable or final tax was made but payee reported the income and the
withholding agent/taxpayer pays during the original audit and investigation the surcharges,
interest and penalties incident to the failure to withhold the tax
2. No withholding of creditable or final tax was made and recipient- payee failed to report the
income on due date thereof, but the withholding agent pays during the original audit and
investigation the amount supposed to have been withheld, inclusive of surcharges, interest
and penalties incident to his failure to withhold
3. Withholding agent erroneously underwithheld the tax but pays during the original audit and
investigation the difference in the amount supposed to have been withheld, inclusive of
surcharges, interest and penalties incident to such error
Items of deductions disallowed due to non-compliance with Section 30(1), the deficiency income tax
assessment for which had been issued before the effectivity of the Revenue may be allowed upon
payment not later than May 15, 1984 of the withholding tax required and supposed to have been
withheld and/or surcharges, interest and penalties. However, no refund or credit arising from such
re-allowance of a previously disallowed deduction shall be granted.
RR 12- SEC 2.58.5 OF RR 2-98 IS AMENDED
2013
Sec. 2.58.5. Requirements for Deductibility. — Any income payment which is otherwise deductible
under the Code shall be allowed as a deduction from the payor’s gross income only if it is shown
that the income tax required to be withheld has been paid to the Bureau in accordance with Secs.
88
I`
57 and 58 of the Code.
No deduction will also be allowed notwithstanding payments of withholding tax at the time of the
audit investigation or reinvestigation/reconsideration in cases no withholding of tax was made in
accordance with Secs. 57 and 58 of the Code.
Disallowance of expense
1. Confirming through acceptable evidence / proof that the landlord ddnt report the
income, in the form of rental payment
2. Pay the 5% withholding and take that up as an additional cost and must pay
surcharge
Net effect: if I were to claim deductible expense, impact is 30,000 allowed to claim as deductible
expense
Remit withholding taxes
89
I`
Optional Standard Deduction
RR 2- The GPP is not a taxable entity for income tax purposes since it is only acting as a “pass-
2010 through” entity where its income is ultimately taxed to the partners comprising it.
The individual partner can still claim deductions incurred or paid by him that contributed to the
earning of the income taxable to him. The following rules shall govern:
a. If the GPP availed of the itemized deduction its net income, the partners may still claim
itemized deduction from said share, provided, that, in claiming itemized deductions, the
partner is precluded from claiming the same expenses already claimed by the GPP. If the
GPP availed of itemized deduction, the partners are not allowed to claim the OSD from their
90
I`
share in the net income because the OSD is a proxy for all the items of deductions allowed
in arriving at taxable income.
b. If the GPP avails of OSD, the partners can no longer claim further deduction from their share
in the said net income for the ff. reasons:
1. The partners’ distributive share in the GPP is treated as his gross income not his
gross sales/receipts and the 40% OSD allowed to individuals is specifically
mandated to be deducted not from his gross income but from his gross
sales/receipts; and
2. The OSD being in lieu of the itemized deductions allowed in computing taxable
income as defined under Section 31 of the NIRC, it will answer for both the items of
deduction allowed to the GPP and its partners.
c. Since one-layer of Income Tax is imposed on the income of the GPP and the individual
partners where the law had placed the statutory incidence of the tax in the hands of the
latter, the type of deduction chosen by the GPP must be the same type of deduction that can
be availed of the by partners.
1. i) If the GPP claims itemized deductions, all items of deduction allowed can be
claimed both at the level of the GPP and at the level of the partner in order to
determine the taxable income.
2. ii) If the GPP opt to claim the OSD, the individual partners are deemed to have
availed also fo the OSD because the OSD is in lieu of the itemized deductions that
can be claimed in computing taxable income.
d. If the partner also derives other gross income from trade, business, or practice of profession
apart and distinct from his share in the net income of the GPP, the deduction that he can
claim from his other gross income would follow the same deduction availed of from his
partnership income as explained in the foregoing rules. Provided that if the GPP opts for the
OSD, the individual partner may still claim 40% of its gross income from trade, business, or
practice of profession, but not to include his share from the net income of the GPP .
The taxpayer should signify his intention in the return to claim OSD, otherwise he is considered to
have availed of itemized deductions. Once election is made, it shall be irrevocable for the taxable
year for which the return is made. Any taxpayer who is required by fails to file the quarterly ITR for
the 1st Quarter shall be considered as having availed of the itemized deductions option.
An individual taxpayer who is entitled and has claimed the OSD shall not be required to submit his
return with financial statements otherwise required in the NIRC. But he must keep such records
pertaining to his gross sales or gross receipts. In the case of a corporation, it is still required to
submit its financial statements when it files its annual return and keep such records pertaining to its
gross income.
RR 16- IMPLEMENTING THE PROVISIONS OF SECTION 34 (L) OF THE TAX CODE, AS AMENDED BY
2008 SEC. 3 OF RA 9504, DEALING ON THE OPTIONAL STANDARD DEDUCTION ALLOWED TO
Section INDIVIDUALS AND CORPORATIONS IN COMPUTING THEIR TAXABLE INCOME
s 1 to 7
The following may be allowed to claim OSD in lieu of the itemized deductions (i.e., items of ordinary
and necessary expenses allowed under Sections 34 (A) to (J) and (M), Section 37, other special
laws, if applicable):
1. Individuals
i. Resident Citizen
ii. Non-resident Citizen
iii. Resident Alien
91
I`
iv. Taxable Estates and Trust
The OSD allowed to individual taxpayers shall be a maximum of forty percent (40%) of gross sales
or gross receipts during the taxable year.
2. Corporations
i. Domestic Corporation
ii. Resident Foreign Corporation
Corporate taxpayers subject to tax under Section 27(A) and 28(A)(1) of the Code, as amended, the
OSD allowed shall be in an amount not exceeding forty percent (40%) of their gross income.
NOLCO
Excess of deductions over gross income
GROSS INCOME
- Less deduction
= net taxable income
Presumed gross income in excess; the deductible expenses are more than income = operating at a
92
I`
net operating loss operation
Paper Picop entered into a merger agreement with the

To allow the deduction claimed by Picop would
Industri Rustan Pulp and Paper Mills, Inc. (RPPM) and
be to permit one corporation or enterprise,
es Rustan Manufacturing Corporation (RMC).
Picop, to benefit from the operating losses
Corpora Under this agreement, the rights, properties,
accumulated by another corporation or
tion v. privileges, powers and franchises of RPPM and
enterprise, RPPM. RA 5186 introduced the
CA RMC were to be transferred, assigned and
carry-over of net operating losses as a very
(1995) conveyed to Picop as the surviving corporation.
special incentive to be granted only to registered
The CIR disallowed all the deductions
pioneer enterprises and only with respect to their
claimed on the basis of RPPM’s losses,
registered operations. The statutory purpose
apparently on two (2) grounds. Firstly, the
here may be seen to be the encouragement of
previous losses were incurred by “another
the establishment and continued operation of
taxpayer,” RPPM, and not by Picop in
pioneer industries by allowing the registered
connection with Picop’s own registered
enterprise to accumulate its operating losses
operations. The CIR took the view that Picop,
which may be expected during the early years of
RPPM and RMC were merged into one (1)
the enterprise and to permit the enterprise to
corporate personality only on 12 January 1978,
offset such losses against income earned by it in
upon approval of the merger agreement by the
later years after successful establishment and
BOI. regular operations. We consider that the
statutory purpose can be served only if the
WON THE NOLCO OF RPPM CAN BE accumulated operating losses are carried
CLAIMED BY PICOP AFTER THE MERGER over and charged off against income
BETWEEN THE COMPANIES  NO subsequently earned and accumulated by the
same enterprise engaged in the same
registered operations.
It is thus clear that under our law, and

outside the special realm of BOI-registered
enterprises, there is no such thing as a carry-
over of net operating loss. To the contrary,
losses must be deducted against current
income in the taxable year when such losses
were incurred. Moreover, such losses may be
charged off only against income earned in
the same taxable year when the losses were
incurred.
RR 14- IMPLEMENTS CERTAIN PROVISIONS IN THE TAX CODE RELATIVE TO THE ALLOWANCE
01 OF NOLCO AS DEDUCTION FROM GROSS INCOME
Only net operating losses accumulated by a qualified taxpayer beginning January 1, 1998 may be
carried over as a deduction from gross income to the next three (3) immediately succeeding
taxable years following the year of such loss.
For mines other than oil and gas wells, a net operating loss (realized without the benefit of
incentives provided for under the Omnibus Investments Code of 1997) incurred in any of its first ten
(10) years of operation may be carried over as a deduction from taxable income for the next five (5)
years immediately following the year of such loss.
93
I`
Any individual, including estates and trusts, engaged in trade or business or in the exercise
of profession, and domestic and resident foreign corporations are entitled to deduct NOLCO
from gross income.
X NRA,
X NRFC
Those who are not entitled to claim deduction of NOLCO are:
1) Offshore Banking Unit of a foreign banking corporation, and Foreign Currency Deposit
Unit of a domestic or foreign banking corporation, duly authorized as such by the Bangko
Sentral ng Pilpinas; 2) enterprises registered with the Board of Investments (BOI), with
respect to its BOI-registered activity enjoying the Income Tax Holiday incentive;
3) enterprises registered with the Philippine Economic Zone Authority (PEZA), with respect
to its PEZA-registered business activity;
4) enterprises registered under the Bases Conversion and Development Act of 1992;
5) foreign corporations engaged in international shipping or air carriage business in the
Philippines; and
6) any person, natural or juridical, enjoying exemption from income tax, pursuant to the
provisions of the Code or any special law, with respect to its operation during the period for
which the aforesaid exemption is applicable.
An individual who claims the 10% optional standard deduction shall not simultaneously
claim deduction of the NOLCO, provided that the three-year reglementary period shall continue to
run notwithstanding the fact that the said individual availed of the 10% optional standard
deduction during the said period.
In the case of corporations, the three-year reglementary period on the carry-over of NOLCO shall
also continue to run notwithstanding the fact that it has paid its income tax under the “Minimum
Corporate Income Tax” computation. NOLCO shall be availed of on a “first-in, first-out” basis.
BIR This involves a letter requesting for a Pursuant to the Section 34 (D) (3) of the Tax
Ruling confirmation on the matter of the application of Code and considering that the consolidation of
30-00 tax implications of a proposed integration plan the operations of the Group Companies under a
affecting several companies. The boards of single management structure is for a bonafide
directors of Republic, Fortune, Zeus and Iligan business purpose, and there is no
(Group) approved a proposal to integrate their substantial change of ownership, the net
cement business operations and activities. operating loss carry-over of Republic, Fortune,
MPCC and Iligan are preserved and may be
The proposed integration consists of the carried over and claimed as a deduction from
consolidation in Republic of the investments in their respective gross income for purposes of
shares by several companies including the computing the income tax using the normal
“Group” by exchanging such investments with income tax rate and without prejudice to the
new shares being original issuances, of applicability of the rule on the Minimum
Republic, based on the Share Swap Ratios Corporate Income Tax (MCIT).
approved by the Boards of Republic, Fortunes,
Zeus and Iligan. To simplify, they wanted to
transfer their respective Fortune, Zeus and
Iligan shares to Republic in exchange for
Republic shares. The letter requests, among
others, (pertinent to the topic assigned), that it
be confirmed that the net operating losses of
94
I`
each of Republic, Fortune, MPCC and Iligan

are preserved after the proposed share swap
and may be carried over and claimed as a
deduction from their respective gross
income, pursuant to Section 34(D)(3) of the Tax
Code, because there is no substantial
change in the ownership of either Republic
or Fortune or MPCC or Iligan.
WON THE NET OPERATING LOSSES OF

EACH OF REPUBLIC, FORTUNE, MPCC AND
ILIGAN ARE PRESERVED AFTER THE
PROPOSED SHARE SWAP AND MAY BE
CARRIED OVER AND CLAIMED AS A
DEDUCTION FROM THEIR RESPECTIVE
GROSS INCOME, PURSUANT TO SECTION
34(D)(3) OF THE TAX CODE, BECAUSE
THERE IS NO SUBSTANTIAL CHANGE IN
THE OWNERSHIP OF EITHER REPUBLIC OR
FORTUNE OR MPC OR ILIGAN  YES
Non-Deductible Expenses
 Include the related parties

Straddling assets –
Ex. Car – used for grab and personal purposes ; for the benefit of your family ; but there are
expenses that would redound to your business
In US – proportional test , in certain situations 50% - 50 %
- Specific identification in the Philippines as the test
Esso ESSO deducted from its gross income for 1959, In ruling for the CIR, the Court provided that they
Standar as part of its ordinary and necessary business are neither taxes nor necessary expenses.
95
I`
d expenses, the amount it had spent for drilling Margin fees are not taxes because they are
Eastern and exploration of its petroleum concessions. not imposed as a revenue measure but as a
v. CIR The CIR disallowed the claim on the ground that police measure whose proceeds are applied to
(1989) the expenses should be capitalized and might strengthen the country’s international reserves.
be written off as a loss only when a “dry hole” Thus, the fee was imposed by the State in the
should result. Hence, ESSO filed an amended exercise of its POLICE POWER and NOT
return where it asked for the refund of P323,270 taxation power. Neither are they necessary and
by reason of its abandonment, as dry holes, of ordinary business expenses. Hence, not
several of its oil wells. It also claimed as deductible.
ordinary and necessary expenses in the
same return amount representing margin An expense is considered necessary where the
fees it had paid to the Central Bank on its profit expenditure is helpful in the development of the
remittances to its New York Office. taxpayer’s business. It is ordinary when it
connotes a payment which is normal in relation
WON THE MARGIN FEES ARE TAXES OR to the business of the taxpayer and the
NECESSARY EXPENSES WHICH ARE surrounding circumstances. The expenditure
DEDUCTIBLE FROM ITS GROSS INCOME  being ordinary and necessary is determined
NO based on its nature – the extent and
permanency of the work accomplished by the
expenditure. In this case, ESSO was unable to
show that the remittance to the head office of
part of its profits was made in furtherance of its
own trade or business. It merely presumed that
all corporate expenses are necessary and
appropriate in the absence of a showing that
they are illegal or ultra vires; which is erroneous.
Claims for deductions are a matter of legislative
grace and do not turn on mere equitable
considerations.
RR 2 SECTION 119. Personal, living, and family expenses. — Personal, living, and family expenses
Section are NOT DEDUCTIBLE.
119-122 2. Insurance paid on a dwelling owned and occupied by a taxpayer is a personal
expense and not deductible.
3. Premiums paid for life insurance by the insured are not deductible.
4. In the case of a professional man who rents a property for residential purposes,
but incidentally receives his clients, patients, or callers in connection with his
professional work (his place of business being elsewhere), no part of the rent is
deductible as a business expense.
 If however, he uses part of the house for his office, such portion of the rent as
is properly attributable to such office is deductible.
5. Where the father is legally entitled to the services of his minor children, any
allowances which he gives them, whether said to be in consideration of services
or otherwise, are not allowable deductions in his return of income
6. Alimony, and an allowance paid under a separation agreement are not
deductible from gross income.
SECTION 120. Capital expenditures. — No deduction from gross income may be made:
3. For any amounts paid out for new buildings or for permanent improvements or
96
I`
betterments made to increase the value of the taxpayer's property, or

4. For any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance for depreciation or depletion or
other allowance is or has been made.
5. Amounts expended for securing a copyright and plates, which remain the
property of the person making the payments, are investments of capital.
6. The cost of defending or perfecting title to property constitutes a part of the cost
of the property and is not a deductible expense.
7. The amount expended for architect's services is part of the cost of the building.
8. Commissions paid in purchasing securities are a part of the cost of such
securities. Commissions paid in selling securities are an offset against the selling
price.
9. Expenses of the administration of an estate , such as court costs, attorney's fees,
and executor's commissions, are chargeable against the "corpus" of the estate and
are not allowable deductions.
10. Amounts to be assessed and paid under an agreement between bondholders or
shareholders of a corporation, to be used in a reorganization of the corporation,
are investments of capital and not deductible for any purpose in return of income.
11. In the case of a corporation, expenses for organization, such as incorporation
fees, attorney's fees and accountants' charges, are ordinarily capital
expenditures; but where such expenditures are limited to purely incidental expenses,
a taxpayer may charge such items against income in the year in which they are
incurred. A holding company which guarantees dividends at a specified rate on the
stock of a subsidiary corporation for the purpose of securing new capital for the
subsidiary and increasing the value of its stockholdings in the subsidiary may not
deduct amounts paid in carrying out this guaranty in computing its net income, but
such payments may be added to the cost of its stock in the subsidiary.
SECTION 121. Premiums on life insurance of employees. — Any amounts paid for premiums
on any life insurance policy covering the life of an officer or employee or of any person
financially interested in the business of the taxpayer when the taxpayer is directly or indirectly a
beneficiary under such policy are not deductible.
SECTION 122. Losses from sales or exchanges of property. — No deduction is allowed in

respect of losses from sales or exchanges of property, directly or indirectly —
a) Between members of a family. As used in Section 31, the family of an individual shall
include only his brothers and sisters (whether by the whole or half blood), spouse,
ancestors, and lineal descendants;
b) Except in the case of distributions in liquidation, between an individual and a corporation
more than fifty per centum in value of the outstanding stock of which is owned, directly or
indirectly, by or for such individual;
c) Except in the case of distributions in liquidation, between two corporations more than 50 per
cent in value of the outstanding stock of each of which is owned, directly or indirectly, by or
for the same individual, if either one of such corporations with respect to the taxable year of
the corporation preceding the date of the sale
or exchange was, under the law applicable to such taxable year, a personal holding
company or a foreign personal holding company;
d) Between a grantor and a fiduciary of any trust;
97
I`
e) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a
grantor with respect to each trust; or
f) Between a fiduciary of a trust and a beneficiary of such trust. (Section 32 of the Code).
6. Individuals
Passive Income
98
I`
-Compensation – borne out of employer-employee relationship

- Self-employment – own business, sari sari store, professional being paid as such
Ex. If you are an architect, compensated by Ayala land, but compensation that it is employed in
Ayala – purely compensation income
To fall as professional – generating income of outside of emrel
Mixed income earner
8% tax deduction of 250,000 if purely self-employed  if mixed, no tax deduction of 250,000
Partners of GPP – because there is an assumption that they have claimed deduction at the level
of GPP
BMBE – assets less than 3M who are exempt from VAT and income tax
99
I`
** force to be subject to graduated rates
Last bullet – automatically converted to pay based on graduated rates – payments made under
8% option will be allowed as tax credits – necessarily you will be taxed based on graduated rates
NRA-ETB – subject to same tax for 3 types of individuals (RC, NRC, RA)
- 8% etc
- 100,000 > = ___ ; < 100,000 = ___
- Dividend (**
Ex.
Mr X invested in Corp Y. Corp Y pays cash dividends what are the tax implications?
 Identify individual TP type?
 What is corp Y?
 Where the income is coming from?
 Ex. NRA-ETB receiving non PH source income from NRFC (income not generated more
than 50%); if from domestic corporation (20%)
FCDU treatment
NRC – FCDU is exempt
RC and RA = 15%
Preferential income tax rate NO LONGER STANDS

Presidential veto and BIR Advisory
RC, RA
ROHQs, OBUs, petroleum service contractors
100
I`
PASSIVE INCOME
101
I`
Prizes
- Is it income
- Complete dominion
PERO Is it part of gross income? (if excluded for charitable etc)
- If less than 10k – not subject to tax – if part of gross income, it will be included in your
GI
Specific type of income – impose tax rates

Not there, but nevertheless income – considered as forming part of your gross income
Interest income rom FCDU deposits

- If I were to lend to somebody not to deposit money, and I would to generate interest
income,
- Tax not exempt – said income becomes part of gross income and taxed as such
Cash and property dividends

Distributed to domestic corporations -
From non-resident foreign corporation – no tax rate as passive income but takes part of gross
income
102
I`
Applicable for all the 5 types of individual taxpayers and all 3 types of corporations
Capital gains from sale of shares of stock not traded in the stock  Sec 39. China Bank
case
- Shares of stock are capital assets. Any transaction that deals with them gives rise to
capital gains.
- The only instance where shares of stock are ordinary assets is when shares of stock
are listed AND if transacted by dealer in securities
Capital gains from Real property
- Selling to INDIVIDUALS - ALL real property  land, building machineries
- Selling to CORPORATIONS  land and building considered as capital assets
Capital assets DEFINITION – relates to real property ;

Not used in business – capital assets
If used in business – ordinary assets
Tax base x tax rate

- Tax based for shares of stock  NET CAPITAL GAIN
- Tax base for selling Gross Selling Price / FMV (presumed gain), whichever is
higher
103
I`
Ex.
X purchases for 1 M, 3 yrs ago, decides to sell for 5 million, this time today FMV is at 3 m.
 Purchased at 1
 Wanting to sell at 5
 FMV of 3 M
Property sold:
Shares  5 million (GSP) – 1 million = 4 million (NET CAPITAL GAIN) x 6%
RP  5 million x 6% = GSP (5 million) / FMW (3 million ) whichever is higher
Ex. (MIGHT ASK IN EXAM)

 X is an individual. He owns shares of stock (100% of Y corporation). Y corporation’s only
asset is a piece of land in his hand is capital asset. Z corporation approaches X and wants
to buy the land.
o Purchased at 1M
o Wanting to sell at 5 M
o FMV of 3 M
 Would it be more favorable from X’s perspective that X would sell shares of stock to Y, or
sell real property to Z? in both scenario, Z will own share of stock in Y, in turn real property.
Or Z will own directly the real property when Y sells land to Z.
Sell to GOCCs  impose the rule, or determining actual gain 1:12:05

5M
Get gain of 5 M – 1 M = 4 M (forms part of gross income subject to tax
Escrow shit
RR 01- RR 1-2011 defines the tax treatment of income earnings and money remittances of an Overseas
2011 Contract Worker (OCW) or Overseas Filipino Worker (OFW).
An OCW or OFW’s income arising out of his overseas employment is exempt from income tax.
However, if an OCW or OFW has income earnings from business activities or properties within the
Philippines, such income earnings are subject to PH income tax as follows:
For Passive Income [Section 24(B)]:

i. 20% Final Tax on Interest Income from any currency bank deposit and yield or any
monetary benefit from deposit substitutes and from trust funds and similar arrangements;
ii. 20% Final Tax on any royalties;
iii. 10% Final Tax on any royalty related on books, as well as literary works and musical
compositions;
iv. 20% Final Tax on prizes (except prizes amounting to P 10,000 or less which shall be
subject to regular Income Tax rate of 5 -32%) and other winnings (except Philippine
Charity Sweepstakes and Lotto Winnings);
v. Exemption from 7.5% Final Tax on interest income from a depository bank under the
expanded foreign currency deposit system upon presentation of proof of non-residency
such as Overseas Employment Certificate (OEC) or Seaman's Book. However, if the
account is jointly in the name of the overseas contract worker or a Filipino seaman, and
an individual (spouse or dependent) who is living in the Philippines, 50% of the interest
104
I`
income from such bank deposit will be treated as exempt while the other 50% shall be
subject to a Final Withholding Tax of 7.5%;
vi. 10% Final Tax on cash or property dividends
vii. 5%/10% Final Tax on net capital gains realized on sale, barter, exchange or other
disposition of shares of stock in a domestic corporation (except shares sold or disposed of
through the stock exchange);
viii. 6% Final Tax on capital gains from the sale, exchange or other disposition of real property
located in the Philippines classified as capital assets based on gross selling price or
current fair market value, whichever is higher; and
ix. 5%/12%/20% Final Tax on interest income from long-term deposits 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, which was pre-terminated by the holder
before the 5th year.
RR 14- Proper Tax Treatment of Interest Income Earnings on Financial Instruments and Other Related
2012 Transactions
Interest income derived from long term deposits or investment certificates – exempt from
income tax provided that depositor or investor is an individual citizen (resident or non-resident), a
resident alien or NRA-ETB; long term deposit should be under the name of the individual; in the
form of savings, common, or individual trust funds, deposit substitutes, investment management
accounts, and other investments evidenced by certificates prescribed by BSP, issued by banks
only, maturity period of not less than 5 years, must be in denominations of 10k, should not be
terminated by investor before the 5th year
Interest income derived from depository bank under expanded foreign currency deposit
system – subject to final withholding tax of 7.5% if income is received by citizens, RA, domestic
corporations and resident foreign corporation, income of non-residents whether individuals or
corporations, shall be exempt from income tax.
*Check the entirety of the RR, ALL provisions are important

RR-08-
2018
Capital Gains Tax

SMI-ED SMI-ED is a PEZA-registered corp, ASSETS INVOLVED ARE CAPITAL ASSETS
Philipp constructed buildings and purchased The properties involved in this case include
ines machineries and equipment. However, it failed petitioner’s buildings, equipment, and
Techn to commence operations and was temporarily machineries. They are not among the exclusions
ology closed. It sold its buildings and some of its enumerated in Section 39(A)(1) of the National
v. CIR installed machineries and equipment to Internal Revenue Code of 1997. None of the
105
I`
(2014) Ibiden, another PEZA-registered enterprise. properties were used in petitioner’s trade or
SMI-ED was then dissolved. ordinary course of business because
petitioner never commenced operations.
In its ITR, SMI-ED subjected the entire gross They were not part of the inventory. None of
sales of its properties to 5% final tax on PEZA them were stocks in trade. Based on the
registered corps. SMI-ED later on filed an definition of capital assets under Section 39 of
administrative claim for refund alleging that it the National Internal Revenue Code of 1997,
was erroneously paid. they are capital assets.
WON PETITIONER IS ENTITLED TO Since they are capital assets, does it mean
BENEFITS GIVEN TO PEZA-REGISTERED that they are subject to CGT ? NO.
ENTERPRISE – NO
There is a difference between individual and
Petitioner is not entitled to benefits given to corporate CGT on the sale of real properties.
PEZA-registered enterprises, including the 5%  Individuals are taxed on capital gains
preferential tax rate under Republic Act No. from the sale of all real properties
7916 or the Special Economic Zone Act of located in the Philippines and
1995. This is because it never began its classified as capital assets.
operation.  Domestic corporations – the CGT is
imposed only on the presumed gain
Essentially, the purpose of Republic Act No. realized from the sale of lands and/or
7916 is to promote development and buildings.
encourage investments and business activities
that will generate employment. Giving fiscal Therefore, only the presumed gain from the
incentives to businesses is one of the means sale of petitioner’s buildings may be
devised to achieve this purpose. It comes with subjected to the 6% capital gains tax.
the expectation that persons who will avail
these incentives will contribute to the The income from the sale of petitioner’s
purpose’s achievement. Hence, to avail the machineries and equipment is subject to the
fiscal incentives under Republic Act No. 7916, provisions on normal corporate income tax.
the law did not say that mere PEZA registration
is sufficient. HOWEVER
WON PROPERTIES MAY BE SUBJECTED In addition, since more than a decade have
TO CGT – YES lapsed, the BIR can no longer assess petitioner
for deficiency CGT, if later found to be liable in
excess of the amount claimed for refund. The
BIR is ordered to refund SMI-Ed the amount of
5% final tax paid to the BIR, less the 6% CGT on
the sale of its land and building. Because of the
lapse of the prescriptive period, any CGT
accrued from the sale of its land and building
that is in excess of the 5% final tax paid may no
longer be recovered.
Supre Supreme Transliner obtained a loan from BPI REDEMPTION PRICE DOES NOT INCLUDE
me with a 714- sqm lot as collateral. Because of CGT
Transli non-payment of the loan, the mortgage was There is no legal basis for the inclusion of
ner v. extrajudicially foreclosed and lot was sold to this charge in the redemption price.
106
I`
BPI the bank as the highest bidder. Before the

(2011) expiration of the 1-year redemption period, the
The term sale in Section 24(a)(17) of the NIRC
mortgagors notified the bank of their intention
includes pacto de retro and other forms of
to redeem the property. The mortgagors then
conditional sale. These include mortgage
filed a complaint against the bank to recover
foreclosure sales (judicial and extrajudicial). In a
unlawful and excessive charges, but the bank
foreclosure sale, there is no actual transfer of
asserted that the redemption price is valid,
the mortgaged real property until after the
legal, and in accordance with documents duly
expiration of the one- year redemption period
signed by the mortgagors. as provided in Act No. 3135 and title thereto
is consolidated in the name of the mortgagee
WON THE FORECLOSING MORTGAGEE in case of non-redemption
SHOULD PAY CGT UPON THE EXECUTION
OF THE CERTIFICATE OF SALE, AND IF . The issuance of the Certificate of Sale does
PAID BY THE MORTGAGEE, WHETHER not by itself transfer ownership.
THE SAME SHOULD BE SHOULDERED BY
THE REDEMPTIONER – NO Considering that herein Supreme Transliner
exercised their right of redemption before the
expiration of the statutory one-year period, BPI
Fanily savings is not liable to pay the capital
gains tax due on the extrajudicial foreclosure
sale.
RR No. 4-99 Sec. 3. Capital Gains Tax

(1) in case the mortgagor exercises his right of
redemption within one year from the issuance of
the certificate of sale, no capital gains tax shall
be imposed because no capital gains has been
derived by the mortgagor and no sale or transfer
of real property was realized.
There was no actual transfer of title from the

owners-mortgagors to the foreclosing bank.
Hence, the inclusion of the said charge in the
total redemption price was unwarranted and the
corresponding amount paid by the petitioners-
mortgagors should be returned to them.
DPWH Petitioner Republic of the Philippines, represented by the DPWH, filed a Complaint for
v. expropriation against respondent Soriano, the registered owner of a parcel of land. RTC ruled that
Sorian the Republic should pay the consequential damages including taxes for the transfer of the
o property (including CGT and DST).
(2015)
Petitioner is alleging that CGT must be paid by the Respondent as the “seller”.
Seller
is the W/N CGT SHOULD BE PAID BY THE SELLER – YES
one CGT due on the sale of real property is a liability for the account of the seller, not the buyer,
liable who generally would shoulder the tax. Accordingly, the BIR, in its BIR Ruling No. 476-2013,
for constituted the DPWH as a withholding agent to withhold the six percent (6%) final withholding tax
CGT in the expropriation of real property for infrastructure projects. As far as the government is
107
I`
concerned the CGT remains a liability of the seller (respondent) since it is a tax on the seller's gain
from the sale of the real estate.
RR 8- REVENUE REGULATIONS NO. 8-98 issued September 2, 1998 amends pertinent portions of
98 Revenue Regulations Nos. 11-96 and 2-98 relative to the tax treatment of the sale, transfer or
exchange of real property.
Specifically, the Capital Gains Tax (CGT) Return will be filed by the seller within 30 days
following each sale or disposition of real property.
Payment of the CGT will be made to an Authorized Agent Bank (AAB) located within the
Revenue District Office (RDO) having jurisdiction over the place where the property being
transferred is located.
Creditable withholding taxes, on the other hand, deducted and withheld by the withholding
agent/buyer on the sale, transfer or exchange of real property classified as ordinary asset
will be paid by the withholding agent/buyer upon filing of the return with the AAB located
within the RDO having jurisdiction over the place where the property being transferred is
located. Payment will have to be done within 10 days following the end of the month in which the
transaction occurred, provided, however, that taxes withheld in December will be filed on or before
January 25 of the following year.
RR 4- RR 4-99 amends Revenue Memorandum Order No. 6-92 relative to the payment of CGT and DST
99 on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance
companies.
Where the right of redemption of the mortgagor exists, the certificate of title of the
mortgagor will not be cancelled yet even if the property had already been subjected to
foreclosure sale. Instead, only a brief memorandum will be annotated at the back of the
certificate of title, and the cancellation of the title and the subsequent issuance of a new title in
favor of the purchaser/highest bidder depends on whether the mortgagor will redeem or not the
mortgaged property within one year from the issuance of the certificate of sale.
108
I`
Thus, no transfer of title to the highest bidder can be effected yet until and after the lapse of the
one-year period from the issuance of the said certificate of sale. In case the mortgagor
exercises his right of redemption within one year from the issuance of the certificate of
sale, no CGT will be imposed because no capital gains has been derived by the mortgagor
and no sale or transfer of real property was realized.
In case of non-redemption, the CGT on the foreclosure sale shall become due based on the bid
price of the highest bidder, but only upon the expiration of the one-year period of redemption, and
will be paid within 30 days from the expiration of the said one-year redemption period.
The corresponding DST will be levied, collected and paid by the person making, signing, issuing,
accepting or transferring the real property wherever the document is made, signed, issued,
accepted or transferred where the property is situated in the Philippines.
RR 13- REVENUE REGULATIONS NO. 13-99 prescribes the regulations for the exemption of a citizen or
99 a resident alien individual from the payment of the 6% Capital Gains Tax on the sale, exchange or
disposition of his principal residence.
CGT
exempt 7. In order for a person to be exempted from the payment of the tax, he should
on submit, together with the required documents, a Sworn Declaration of his intent to avail of
princip the tax exemption to the Revenue District Office having jurisdiction over the location of his
al principal residence within (30) days from the date of the sale, exchange or disposition of the
residen principal residence.
ce 8. The proceeds from the sale, exchange or disposition of the principal residence
must be fully utilized in acquiring or constructing the new principal residence within
eighteen (18) calendar months from the date of the sale, exchange or disposition. In case
the entire proceeds of the sale is not utilized for the purchase or construction of a new
principal residence, the Capital Gains Tax will be computed based on the formula specified in
the Regulations.
9. If the seller fails to utilize the proceeds of sale or disposition in full or in part within
the 18-month reglementary period, his right of exemption from the Capital Gains Tax did not
arise on the extent of the unutilized amount, in which event, the tax due thereon will
immediately become due and demandable on the 31st day after the date of the sale,
exchange or disposition of the principal residence.
10. If the individual taxpayer's principal residence is disposed in exchange for a
condominium unit, the disposition of the taxpayer's principal residence will not be subjected
to the Capital Gains Tax herein prescribed, provided that the said condominium unit received
in the exchange will be used by the taxpayer-transferor as his new principal residence.
RR 14- REVENUE REGULATIONS NO. 14-2000 issued December 29, 2000 amends Sections 3(2), 3 and
2000 6 of RR No. 13-99 relative to the sale, exchange or disposition by a natural person of his "principal
residence".
The residential address shown in the latest income tax return filed by the vendor/transferor
immediately preceding the date of sale of said real property shall be treated, for purposes of these
Regulations, as a conclusive presumption about his true residential address, the certification of
the Barangay Chairman, or Building Administrator (in case of condominium unit), to the contrary
notwithstanding, in accordance with the doctrine of admission against interest or the principle of
estoppel.
109
I`
The seller/transferor's compliance with the preliminary conditions for exemption from the 6%
capital gains tax under Sec. 3(1) and (2) of the Regulations will be sufficient basis for the RDO to
approve and issue the Certificate Authorizing Registration (CAR) or Tax Clearance Certificate
(TCC) of the principal residence sold, exchanged or disposed by the aforesaid taxpayer. Said CAR
or TCC shall state that the said sale, exchange or disposition of the taxpayer's principal residence
is exempt from capital gains tax pursuant to Sec. 24 (D)(2) of the Tax Code, but subject to
compliance with the post-reporting requirements imposed under Sec. 3(3) of the Regulations.
RR 06- This revenue regulation was promulgated to harmonize and consolidate the rules relative to the
2008 imposition of tax for the sale, barter, exchange or other disposition of shares of stock of
domestic corporations that are listed and traded through the Local Stock Exchange or
disposition of shares through Initial Public Offering (IPO) or disposition of shares through the
Local Stock Exchange.
Some definitions: (for other definitions, check the regulation)

1. Local stock exchange (LSE) - refers to any domestic organization, association, or group
of persons, whether incorporated or unincorporated, licensed or unlicensed, which
constitutes, maintains, or provides a marketplace or facilities for bringing together
purchasers and sellers of stocks, and includes the market place and the market facilities
maintained by such exchange. “Exchange” is an organized domestic marketplace or facility
that brings together buyers and sellers and executes trades of securities and/or
commodities, duly registered with the Securities and Exchange Commission.
2. Initial Public Offering - a public offering f shares of stock made for the first time in the
Local Stock Exchange.
3. Primary Offering - original sale made to the investing public by the issuer corporation of
its unissued Shares of Stock.
4. Secondary Offering - an offer for sale to the investing public by existing shareholders f
their securities which is conducted during an IPO or follow-on/follow-through offering.
5. Follow-on/Follow-through Offering of Shares - offering of shares tot he investing public
subsequent to an IPO.
6. Shares Listed and Traded Through the LSE - for purposes of these Regulations, 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.
7. Net Capital Gain - excess of the gains from sales or exchanges of capital assets over
losses from such sales or exchanges.
8. Closely-held Corporation - means corporation at least fifty percent (50%) in value of the
outstanding capital stock or at least fifty percent (50%) of the total combined voting power
of all classes of stock entitled to vote is owned directly or indirectly by or for not more than
twenty (20) individuals. (For the rules in determining whether Corp is considered closely-
held corp, check the regulation)
Sec. 3. Persons liable to the tax:

1. Individual taxpayers whether its zen or alien;
2. Corporate taxpayer, whether domestic or foreign; and
3. Other taxpayers not falling under (a) and (b) above, such as estate, trust, trust funds and
pensio funds, among others
Sec. 4 Persons not liable to the tax:
1. Dealers in securities (merchant of stocks or certificates)
2. Investor in shares of stock in a mutual fund company, as defined in Section 22 (BB) of
110
I`
the Tax Code, as amended, and Sec. 2(s) of these Regulations, in connection
with the gains realized by said investor upon redemption of said shares of stock
in a mutual fund company ; and
3. All other persons, whether natural or juridical, who are specifically exempt from national
internal revenue taxes under existing investment incentives and other special laws.
Sec. 5. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK LISTED AND TRADED

THROUGH THE LOCAL STOCK EXCHANGE. — There shall be levied, assessed and collected
on every sale, barter, exchange or other disposition of Shares of Stock Listed and Traded
through the Local Stock Exchange other than the sale by a dealer of securities, under the
following rules:
A. Tax Rate.— A stock transaction tax at the rate of 1/2 of 1% based on the amount
determined in subsection (b) hereunder.
B. Tax Base. — Gross selling price or gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed which shall be assumed and paid by the seller
or transferor through the remittance of the stock transaction tax by the seller or transferor’s
broker.
SEC.6. SALE, BARTER OR EXCHANGE, OR ISSUANCE OF SHARES OF STOCK

THROUGH IPO. — There shall be levied, assessed and collected on every sale, barter,
exchange or other disposition through IPO of shares of stock in closely held corporations, under
the following rules:
A. Tax Rates. — A tax at the rates provided hereunder shall be imposed based on
subsection (b) in accordance with the proportion of shares of stock sold, bartered,
exchanged or otherwise disposed to the total outstanding shares of stock after the listing in
the Local Stock Exchange:
Proportion of Disposed Shares to Outstanding Tax Rate

Shares
Up to 25% 4%
Over 25% but not over 33 ⅓% 2%
Over 33 ⅓% 1%
B. Tax Base. — Gross selling price or gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed of.
Sec. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A

LOCAL STOCK EXCHANGE.
A. Tax Rate. — Afinal tax at the rates prescribed below is hereby imposed on the sale,
barter or exchange of shares of stock not traded through the LSE.
Amount of Capital Gain Tax Rate
Not over P100k 5%
On any amount in excess of 10%
111
I`
P100k
B. Tax Base. The tax imposed in Subsection (a) above shall be upon the net capital gains
realized during the taxable year from the sale, barter, exchange or disposition of shares of
stock, except shares sold or disposed of through the Local Stock Exchange which is
covered by the provisions of Secs. 5 and 6 above.
Determination of Gain or Loss from Sale or Disposition of Shares of Stock. The gain from
the sale or other disposition of shares of stock shall be the excess of the amount realized
therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess
of the basis or adjusted basis for determining loss over the amount realized. The amount realized
from the sale or other disposition of property shall be the sum of money received plus the fair
market value of the property (other than money) received, if any.
Basis for Determining Gain or Loss from Sale or Disposition of Shares of Stock - Gain or
loss from the sale, barter or exchange of property, for a valuable consideration, shall be
determined by deducting from the amount of consideration contracted to be paid, the
vendor/transferor’s basis for the property sold or disposed plus expenses of sale/disposition, if
any.
If the property is acquired by purchase, the basis is the cost of such property. The cost
basis for determining the capital gains or losses for shares of stock acquired through purchase
shall be governed by the following rules:
1. If the shares of stock can be identified, then the cost shall be the actual purchase price
plus all costs of acquisition, such as commissions, documentary stamp taxes, transfer fees,
etc.
2. If the shares of stock cannot be properly identified, then the cost to be assigned shall be
computed on the basis of the first- in first-out (FIFO) method.
3. If books of accounts are maintained by the seller where every transaction of a particular
stock is recorded, then the moving average method shall be applied rather than the FIFO
method.
4. In general, stock dividend received shall be assigned with a cost basis which shall be
determined by allocating the cost of the original shares of stock to the total number shares
held after receipt of stock dividends (i.e., the original shares plus the shares of stock
received as stock dividends).
Limitation of Capital Losses - For sale, barter, exchange or other forms of disposition of shares
of stock subject to the 5%/10% capital gains tax on the net capital gain during the taxable year,
the capital losses realized from this type of transaction during the taxable year are deductible only
to the extent of capital gains from the same type of transaction during the same period. If the
transferor of the shares is an individual, the rule on holding period and capital loss carry-over will
not apply.
Shares of Stock Becoming Worthless - Losses from shares of stock, held as capital asset,
which have become worthless during the taxable year shall be treated as capital loss as of the end
of the year. However, this loss is not deductible against the capital gains realized from the sale,
barter, exchange or other forms of disposition of shares of stock during the taxable year, but must
be claimed against other capital gains to the extent provided for under Section 34 of the Tax
112
I`
Code, as amended. For the 5% and 10% net capital gains tax to apply, there must be an actual
disposition of shares of stock held as capital asset, and the capital gain and capital loss used as
the basis in determining net capital gain, must be derived and incurred respectively, from a sale,
barter, exchange or other disposition of shares of stock.
Sec. 8. Taxation of Surrender of Shares by the Investor Upon Dissolution of the

Corporation and Liquidation of Assets and Liabilities of Said Corporation. Upon surrender
by the investor of the shares in exchange for cash and property distributed by the issuing
corporation upon its dissolution and liquidation of all assets and liabilities, the investor shall
recognize either capital gain or capital loss upon such surrender of shares computed by
comparing the cash and fair market value of property received against the cost of the investment
in shares. The difference between the sum of the cash and the fair market value of property
received and the cost of the investment in shares shall represent the capital gain or capital loss
from the investment, whichever is applicable. If the investor is an individual, the rule on holding
period shall apply and the percentage of taxable capital gain or deductible capital loss shall
depend on the number of months or years the shares are held by the investor. Section 39 of the
Tax Code, as amended, shall herein apply in all possible situations.
The capital gain or loss derived therefrom shall be subject to the regular income tax rates imposed
under the Tax Code, as amended, on individual taxpayers or to the corporate income tax rate, in
case of corporations.
Sec. 9. Taxation of Shares Redeemed for Cancellation or Retirement. When preferred shares
are redeemed at a time when the issuing corporation is still in its “going-concern” and is not
contemplating in dissolving or liquidating its assets and liabilities, capital gain or capital loss upon
redemption shall be recognized on the basis of the difference between the amount/value received
at the time of redemption and the cost of the preferred shares. Similarly, the capital gain or loss
derived shall be subject to the regular income tax rates imposed under the Tax Code, as
amended, on individual taxpayers or to the corporate income tax rate, in case of corporations.
This section, however, does not cover situations where a corporation voluntarily buys back its
own shares, in which it becomes treasury shares. Otherwise, if the shares are not listed and
traded through the Local Stock Exchange, it is subject to the 5% and 10% net capital gains tax.
Tax on Shares of Stock Not Traded through the LSE: Persons deriving capital gains from the
sale or exchange of listed shares of stock not traded through the LSE shall file a return within 30
days after each transaction and a final consolidated return of all transactions.
RR No. Amended certain provisions of RR 6-2008 prescribing rules on the taxation of sale, barter,
6-2013 exchange, or other disposition of shares of stock held as capital assets.
Fair market value of the shares of stock shall be:
In case of shares of stock not listed and traded in the local stock exchanges, the value of the
shares of stock at the time of sale shall be the fair market value. In determining the value of the
shares, the Adjusted Net Asset Method shall be used 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. The appraised value of real property at the time of sale shall be the higher
of--
113
I`
1. The fair market value as determined by the Commissione, or

2. The fair market value as shown in the schedule of value fixed by the Provincial and City
Assessors, or
3. The fair market value as determined by the Independent Appraiser
RMC In order to transfer shares of stock not traded in the Stock Exchange, it is necessary to secure a
37- Certificate Authorizing Registration (CAR).
2012
The receipts of payment of tax should be filed with and recorded by the Secretary of the
Corporation.
BIR Jamie Avila requests exemption from payment No donation had taken place when the spouses
Ruling of donor’s tax on the transfer of the title of their adjudicated to themselves separately the
DA house and lot to Atty. Ferrer (counsel) by virtue properties which belong to their community
029-08 of Court decision declaring his marriage null property/conjugal partnership as a consequence
and void. of the liquidation of partnership. The parties
merely segregated and adjudicated for their own
PM Reyes: individual and separate ownership the properties
If title to property is transferred to one spouse which, from the celebration of their marriage,
as a result of a court decision in an annulment rightfully belong to them equally. In the instant
case, is the transfer subject to capital gains case, since the parties merely appropriated to
tax? themselves their respective shares in the
No. In BIR Ruling DA-029-08 [JANUARY 23, community property, particularly, the wife
2008], title to a house and lot was transferred waiving all her right and share to the husband
to the husband by virtue of a decision of the over their house and lot, such appropriation of
court declaring his marriage with his wife null the properties covered by the MOA is not
and void. In BIR Ruling DA 287-07 [MAY 8, subject to donor's tax as there is no donative
2007], title to a condominium unit was intent in this case.
transferred to the wife as a result of an
agreement to distribute communal property Moreover, the transfer of the title of the subject
executed in the course of annulment property to Jaime Avila is not also subject to
proceedings. In both BIR Rulings, the CIR held capital gains tax, as such transfer is equivalent
that the transfer of the title of the subject to a conveyance but without monetary
properties are not subject to capital gains tax, consideration, made in accordance with the
as such transfers are equivalent to a Court's Decision granting parties agreement for
conveyance but without monetary the distribution of communal property (BIR
consideration, made in accordance with the Ruling No. DA-092-01 dated May 6, 2001).
Court's Decision granting parties agreement Neither is the said transfer subject to
for the distribution of communal property. documentary stamp tax since the monetary
consideration in the conveyance of said
condominium unit from which the tax shall be
based is wanting.
BIR Puyat Jacinto & Santos Law Officers sent a Based on BIR Ruling DA 435-00, no donation
Ruling letter requesting a ruling that the transfer of takes place when former spouses appropriate to
114
I`
DA title to a condominium unit pursuant to an themselves the properties which belong to their
287-07 agreement to distribute communal property community property as a consequence of the
from one spouse to another, which was liquidation of the partnership.
executed in the course of proceedings for the
annulment of the spouses’ marriage and which The parties merely segregated and adjudicated
was later approved by the court, for their own individual and separate ownership
the properties which, from the celebration of
is not subject to donor’s tax, capital gains tax, their marriage, rightfully belong to them equally.
or documentary stamp tax. Since the parties merely appropriated their
respective shares in the community property,
such appropriation of the properties covered by
the Agreement on distribution is not subject to
donor’s tax.
The transfer of the condominium unit is not

subject to capital gains tax, as such transfer is
equivalent to a conveyance but without any
monetary consideration, made in compliance
with the court’s decision granting the parties’
agreement for the distribution of communal
property. Neither is the transfer subject to DST
since the monetary consideration in the
conveyance from which the tax shall be based is
wanting.
OCWs/Senior Citizens/Disabled/Employees of Foreign Governments
RA SEC. 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:
9257, (c) exemption from the payment of individual income taxes:
Sectio
n 4(c)
Provided, That their annual taxable income does not exceed the poverty level as determined by
the National Economic and Development Authority (NEDA) for that year;
M.E. ME Holding Corp filed its ITR claiming the 20% The SC affirmed the decision of the CTA and the
Holdin sales discount it granted to qualified senior CA in that the sales discount should indeed
gs citizens. be claimed as a tax credit and not as a
Corpor deduction. The SC likewise affirmed that the
ation v. cash slips were the best evidence under the
CIR & ME filed the return under protest as BIR circumstances thus amounts not supported by
CTA treated the discount as a deduction following these were not considered in the claim.
(2008) RR 2-94. ME contends, however, that the
discount should be treated as a tax credit as SC took ME’s side when it held that the sales
provided by RA 7432. The CTA agreed with discount granted should be based on the actual
ME that the law is unequivocal that the discount and not on the acquisition cost of the
discount should be claimed as a tax credit, and medicine as it held in Bicolandia Drug
that the law prevails over the administrative Corporation (formerly Elmas Drug Corporation)
issuance. However, the CTA approved the v. CIR. However, the SC did not grant the claim
refund for a lesser amount as it limited this to as a refund as, again, RA 7432 provided for a
only those that were supported by cash slips. tax credit and not a refund. ME was entitled to a
115
I`
tax credit for the amount based on the actual

WON THE 20% SALES DISCOUNT MUST BE discount supported by cash slips.
TREATED AS TAX CREDIT? – YES
DOCTRINE: RA 7432, the applicable law, is
unequivocal that the 20% sales discount to
senior citizens be claimed by an
establishment owner as a tax credit. RR 2-94
that considers the discount as a mere
deduction clashes with RA 7432 is deemed a
nullity.
In Bicolandia Drug Corporation (formerly Elmas

Drug Corporation) v. CIR, the Court interpreted
the term "cost" found in Sec 4 (a) of RA 7432 as
referring to the amount of the 20% discount
extended by a private establishment to senior
citizens in their purchase of medicines.
The Court categorically said that it is the

Government that should fully shoulder the
cost of the sales discount granted to senior
citizens.
Manila Petitioners assail the constitutionality of The 20% senior citizen discount is an exercise of
Memor Section 4 of Republic Act (RA) No. 7432, as police power.
ial v. amended by RA 9257, and the implementing The 20% discount is intended to improve the
DSWD rules and regulations issued by the DSWD and welfare of senior citizens who, at their age,
(2013) DOF insofar as these allow business are less likely to be gainfully employed, more
establishments to claim the 20% discount prone to illnesses and other disabilities, and,
given to senior citizens as a tax deduction. thus, in need of subsidy in purchasing basic
Petitioners posit that the tax deduction schemecommodities.
contravenes Article III, Section 9 of the
Constitution, which provides that: "private It may not be amiss to mention also that the
property shall not be taken for public use discount serves to honor senior citizens who
without just compensation." presumably spent the productive years of their
lives on contributing to the development and
IS THE 20% DISCOUNT VALID? – YES progress of the nation. This distinct cultural
Filipino practice of honoring the elderly is an
The validity of the 20% senior citizen discount integral part of this law. As to its nature and
and tax deduction scheme under RA 9257 has effects, the 20% discount is a regulation
already been settled in CARLOS affecting the ability of private establishments
SUPERDRUG CORPORATION and the Court to price their products and services relative
finds no compelling reason to overturn, modify, to a special class of individuals, senior
or abandon the ruling in the same. citizens, for which the Constitution affords
preferential concern.
In turn, this affects the amount of profits or

income/gross sales that a private establishment
can derive from senior citizens. The subject
116
I`
regulation may be said to be similar to, but

with substantial distinctions from, price
control or rate of return on investment
control laws which are traditionally regarded
as police power measures. The 20% discount
may be properly viewed as belonging to the
category of price regulatory measures which
affect the profitability of establishments
subjected thereto
DOCTRINE:
Thus, even if the current law, through its tax
deduction scheme (which abandoned the tax
credit scheme under the previous law), does not
provide for a peso for peso reimbursement of
the 20% discount given by private
establishments, no constitutional infirmity
obtains because, being a valid exercise of
police power, payment of just compensation
is not warranted.
RR 1- IRR of RA 9442 or An Act Amending RA 7277, Otherwise Known as the Magna Carta for Persons
2009 with Disability
PWDs entitled to 20% discount on the following:
1. hotels and similar lodging establishments and restaurants
2. sports and recreation centers
3. theaters, cinema houses, concert halls, circuses, carnivals, and other similar places of
culture, leisure and amusement
4. all drugstores regarding the purchase of medicine
5. medical and dental privileges in government and private facilities
6. domestic air and sea transportation except promotional fare
7. land transportation privileges
Establishments granting sales discounts to PWDs on their sale of goods or services shall be
entitled to deduct said sales discounts from their gross income subject to the following conditions:
1. the sales discount shall be deducted from gross income after deducting the cost of goods
sold or cost of service
2. the cost of the sales discount shall be allowed as a deduction from gross income on the
same taxable year as the discount was given
3. only that portion of the gross sales exclusively used, consumed, and enjoyed by the PWD
shall be eligible for the discount
4. the gross selling price and sales discount must be separately indicated in the sales invoice
or official receipt
5. only the actual amount of the sales discount granted or a sales discount not exceeding
20% of the gross selling price or gross receipt can be deducted from gross income
6. the business establishment is required to keep separate and accurate records of sales
RR 7- Implements the tax privileges provisions of RA No. 9994, otherwise known as the "Expanded
2010 Senior Citizens Act of 2010", and prescribes the guidelines for the availment thereof
117
I`
Qualified Senior citizens deriving returnable income during the taxable year, whether from
compensation or otherwise are required to file their ITR and pay the tax as they file the return.
However, if the returnable income of a SC is in the nature of compensation income but he qualifies
as a minimum wage earner under RA9504, he shall be exempt from income tax on the said
compensation income subject to the rules applicable to minimum wage earners. If the aggregate
amount of gross income earned by the SC during the taxable year does not exceed the amount of
his personal exemptions, he shall be exempt from IT and shall not be required to file an ITR.
RR 1- (Partially discussed above)
2011 B) Business Taxes:
An OCW or OFW may be subjected to 12% Value Added Tax (VAT) if in the course of his trade or
business, he sells, barters exchanges, leases goods or properties, renders services in the
Philippines or imports goods into the Philippines pursuant to Sections 106 to 108 of the National
Internal Revenue Code of 1997, as amended. However, if gross annual sales and/or receipts do
not exceed the amount of one million five hundred thousand pesos (P1,500,000) and he opted not
to register as a VAT taxpayer, he shall be liable to pay instead 3% percentage tax of his gross
quarterly sales or receipts.
C) Other Taxes and Fees:

Section 35 of Republic Act No. 8042 otherwise known as the "Migrant Workers and Overseas
Filipinos Act of 1995," as amended by Sec 22 of Republic Act No. 10022, provides that all migrant
workers shall be exempt from the payment of travel tax and airport-fee upon proper showing of
proof entitlement (i.e. Overseas Employment Certificate [OEC]) issued by the POEA.
The remittances of all OCWs or OFWs, upon showing of the OEC or valid Overseas Workers
Welfare Administration (OWWA) Membership Certificate by the OCWs or OFW beneficiary or
recipient, shall be exempt from the payment of documentary stamp tax (DST) as imposed under
Section 181 of the National Internal Revenue Code of 1997, as amended. For this purpose, in
addition to the original copy, a duplicate copy or a certified true copy of the valid proof of
entitlement referred to above shall be secured by the OCW or OFW from the POEA or OWWA,
which shall be held and used by his/her beneficiary in the availment of the DST exemption.
In case of OCWs or OFWs whose remittances are sent through the banking system, credited to
beneficiaries or recipient's account in the Philippines and withdrawn through an automatic teller
machine (ATM), it shall be the responsibility of the OCW or OFW to show the valid proof of
entitlement when making arrangement that for his/her remittance transfers.
A proof of entitlement that is no longer valid shall not entitle an OCW or OFW to any DST tax
exemption.
RMC31 REVENUE MEMORANDUM CIRCULAR NO. 31-2013 issued on April 12, 2013 prescribes the
-2013 guidelines on the taxation of compensation income of Philippine nationals and alien individuals
employed by foreign governments/ embassies/ diplomatic missions and international
organizations situated in the Philippines.
As an exemption to the general rule, it is noted that most international agreements which grant
Withholding Tax immunity to foreign governments/ embassies/ diplomatic missions and
international organizations also provide exemption to their officials and employees who are
118
I`
foreign nationals and/or non-Philippine residents from paying Income Taxes on their
salaries and other emoluments.
The tax consequence of compensation income received by those employed by foreign

governments/embassies/ diplomatic missions situated in the Philippines hinges on the provisions
of the duly recognized international agreements or local laws granting tax privileges to employees
of said institutions. The exemption should only cover those individuals who were expressly
and unequivocally identified in said international agreements or laws. Those not covered
shall be subject to the general rule on taxability of Philippine nationals and alien individuals. Thus
with respect to those not exempted by the provisions of applicable international agreements or
laws, although their compensation income is exempt from Withholding Tax under the international
agreements or the Withholding Tax Regulations, they are not relieved of their duty to report their
compensation income to the BIR and pay the taxes due thereon pursuant to Section 24 of the Tax
Code of 1997, as amended.
The tax treatment of the following Philippine nationals and alien individuals on compensation
income received by them from foreign governments/embassies and missions and international
organizations are specified in the Circular:
a) Those employed by foreign embassies/diplomatic missions
b) Those employed by aid agencies of foreign governments (i.e. JICA, AUSAID, etc.)
c) Those employed by the United Nations and its specialized agencies (i.e. IMF, WHO,
etc.)
d) Those employed by organizations covered by separate international agreements or
specific provisions of law (i.e. ADB, IRRI, etc.)
e) Employees of other aid agencies or international organizations
Philippine nationals and alien individuals who were not granted tax exemption or immunities under
duly recognized international agreements or local laws shall file their annual Income Tax returns
on or before the 15th day of April each year using BIR Form No. 1700 or 1701, as may be
applicable, declaring therein the amount of their respective compensation income for the
preceding taxable year for services rendered or performed for such foreign government
embassy/diplomatic mission, agency or international organization.
The annual Income Tax return shall be filed with the Revenue District Office (RDO), Authorized
Agent Bank (AAB) or other proper office which has jurisdiction over the employee’s legal
residence or principal place of business. It may be filed with the RDO or AAB where the principal
office of his/her employer is situated. Failure of the covered taxpayers to file the annual Income
Tax returns and to pay the Income Tax due thereon constitutes a violation of Sections 254 and
255 of the Tax.
119
I`
7. Partnership
Sec 26
Tax liability of members of General Professional Partnerships
- A general professional partnership as such shall not be subject to the income tax imposed by this
chapter.
- Persons engaging in business as partners in a GPP shall be liable for income tax only for their
separate and individual capacities.
- For purposes of computing the net distributive share of the partners  the net income of the
partnership shall be computed in the same manner as a corporation
- Each partner shall report as gross income his distributive share, actually or constructively
received, in the net income of the partnership
Sec 73(D)
Net income of a partnership deemed constructively received by partners
The taxable income declared by a partnership which is subject to corporate income tax, after deducting said
corporate income tax, shall be deemed to have been actually or constructively received by the partners in in
the same taxably year, and shall be taxed to them in their individual capacity, whether actually distributed or
not.
- The taxable income declared by a partnership for a taxably year which is subject to tax under Sec
27(A) of this code, after deducting the corporate income tax imposed therein, shall be deemed to
have been actually // constructively received by the partners in the same taxable year and shall
be taxed to them in their individual capacity, whether actually distributed or not.
RMC Clarifying the Tax Implications and Upon receipt of the cash deposits/advances
089-12 Recording of Deposits/Advances Made by from the client, the GPP shall issue an official
Clients of General Partnerships for receipt. The amount received shall be booked
Expenses as income of the GPP and form part of the
GPP’s gross receipts and subject to VAT, if
Background: GPPs (such as accounting or law applicable. The GPP shall record the expenses it
firms) usually require their clients to deposit a incurred and paid on behalf of the client as its
sum of money for them to be used to cover own expenses, for Income Tax purposes, if the
necessary expenses and/or pay in advance the official receipt/invoice issued by the third party is
necessary expenses on behalf of their Client. in the name of the GPP.
The deposits shall thereafter be liquidated, and
the advances made by the GPPs shall Said expenses, supported by official
thereafter be paid by the client. When the Firm receipts/invoices issued by the third party
bills the client for professional fees, such establishments in the name of the GPP, may
deposits is taken into account in the be claimed by the latter as deductions from
computation. its gross income.
However, since the ORs/ Invoices covering Conversely, these expenses may not be
these expenses incurred on behalf of the client claimed as deductions from the gross
are issued by the third party establishments in income of the client.
the name of the Firm, instances occur when
these expenses are claimed as deductions to All payments made by the client to the GPP shall
gross income by both the Firm and the Client. be allowed as deduction from its gross income
120
I`
As a result, the same expense is twice claimed as professional fee/s provided that they are duly
as deductions. substantiated by official receipts issued by the
GPP pursuant to Section 34(A)(1) of the Tax
Code.
The GPP and client are not precluded from

availing of the Optional Standard Deduction
provided under the existing tax laws, rules, and
regulations. The summary of transactions and
the corresponding pro-forma entries in the
Books of Account of the GPP and the client (for
Cash Basis and Accrual Basis of Accounting)
are specified in the Circular.
RR 2- What are the rules in the determination of the amount of OSD of GPPs?
2010 RR 2-2010 [FEBRUARY 18, 2010] amended Sections 6 to 7 of RR 16-2008 with respect to the
determination of the OSD of GPPs.
A GPP is not subject to income tax but the partners shall be liable to pay income tax on their
separate and individual capabilities for their respective distributive share in the net income of the
GPP.
For purposes of computing the distributive share of the partners, the net income of the GPP shall
be computed in the same manner as a corporation. The GPP may claim itemized deductions
or in lieu thereof may opt to avail of the OSD allowed to corporations. The net income determined
by either claiming the itemized deductions or OSD from the GPP’s gross income is the
distributable net income from which the share of each partner is determined.
If the GPP availed of the itemized deductions in computing its net income, a partner may still claim
itemized deductions from his share in the net income of the partnership. However, if the GPP
availed of the OSD in computing its net income, the partner can no longer claim further deduction
from his share in the said net income.
RR 08- Sec 8 –
2018
Determination of the OSD for GPP and Partners of GPP
- GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code.
However, the partners shall be liable to pay tax on their separate and individual
capacities for their distributive share in the net income of the GPP.
- The GPP is not a taxable entity for income tax purposes since it is only acting as a
pass through” entity where its income is ultimately taxed to the partners comprising it.
- Section 26 – as amended provides that, “for purposes of computing the distributive
share of the partners, the net income of the GPP shall be computed in the same
manner as a corporation. AS SUCH! A GPP may claim either the itemized deductions
allowed under Sec. 34 of the Code or in lieu thereof, it can opt to avail of the OSD
allowed to corporations in claiming the deductions in an amount not exceeding 40% of
its gross income.
In computing taxable income defined under Sec 31, the following may be allowed as
121
I`
deductions
a. Itemized expenses which are ordinary, and necessary, incurred or paid for the
practice of profession ; OR
b. OSD
The distributable net income of the partnership may be determined by claiming either itemized
deductions or OSD. The share in the net income of the partnership, actually or constructively
received, shall be reported as taxable income of each partner. The partners comprising the GPP
can no longer claim further deduction from their distributive share in the net income of the GPP
and are not allowed to avail of the 8% income tax rate option since their distributive share from the
GPP is already net of cost and expenses.
If the partner also derives other income from trade, business, or practice of profession apart and
distinct from the share in the net income of the GPP, the deduction that can be claimed from the
other income would either be itemized deductions or OSD.
GPP – as a rule, not taxable

But for presumptive computation to arrive at distributable income – apply the same formula:
- Gross income less deduction (for purpose of computation)
- Once you determine the presumptive net taxable income
- Make a distribution to partners
- GPP distributes, and withholds creditable withholding tax
- Partner then reports income (taxed at partner level)
Ex.
- 5 partners = 5M Net income = equal distribution, each partner gets 1 M
- There is
When GPP distributes actually/constructively net income to the partners corresponding to
partner’s share  there is creditable withholding tax (15%) / (10%)
- Instead of distributing 1M, GPP must withhold creditable withholding tax for each
distributive share
- Upon receipt of ___ by each partners, the amount to be reported by partnership as
(taxable income) – layer upon which income tax
- Partners REPORT the partner can take benefit of creditable withholding tax withheld by
GPP.
122
I`
In Ordinary partnership (Taxable)

- Use, Gross income less deduction but RCIT na 30% (final withholding tax)
- Withholds 10%
- Recipient no more tax obligation
As to OSD:
If GPP claims itemized  partners can claim itemized to the extent that the GPP have not
deducted the itemized deductions!
Ex.
If I were to give up partnership share liquidating dividends (regardless of type of partnership)
123
I`
Illustration 16: Ms. GEAL is a partner of CCF & Co., a general professional partnership, and owns 25%
interest. The gross receipts of CCF & Co. amounted to P10,000,000.00 for taxable year 2018. The record cost
of service and operating expenses of CCF & Co were P2,750,000.00 and P1,500,000.00 respectively.
124
I`
8. Corporations
Domestic Corporations
Corporate tax rate = 30%

Option of 15% = never been operationalized * the reason why
Passive income = bifurcation
Note:
TRAIN amendments by 2021, law seeks to reduce RCIT to 25%
And 20% by 2027
Must be revenue neutral = dip in revenue = who’s going to pay for it? remove tax incentives given
to export
- Do we remove incentives to reduce corporate income tax , disadvantageous to
investments
Taxed on Net Taxable Income (claim deduction)

Domestic corporations – taxed within and without PH
Enumeration under passive income items

- Rule: Passive income item if comply with all detailed requirements to be categorized 
imposed tax rates provided
- Prizes and awards to corporations – forms part of gross income nalang, not passive
income
- Rationale behind inter-corporate dividends exemption – use that dividends received
and flow it back to the operations, by doing so that is exposed again to another income
treatment –vis a vis if its individuals na cannot plow it back to operations
125
I`
Royalties not always 20%

The royalty must be passive income to be subject to 20%
Ex.
 Nike 1 Corp – everything else is done in one entity
 Nike X offshore - A manufacturer becomes interested – Nike 1 gives license  royalty
gained  passive income – you have revenue from sales, but as an incident there is
revenue of royalties which is an offshoot of an improved version of how it was.
 You landed Michael Jordan as advertiser. Nike 1 set up Nike 2 to do advertising. Several
years after want to get trade in, Nike 3 for licensing.
 Treatment of royalties received by Nike 3? What is Nike 3 source of income? – only

royalties as source of income– not passive income, this is ordinary income.
China China Bank (CBC) paid its gross receipt tax "Gross receipts" refer to the total, as opposed to
Bankin (GRT) amounting to about 93M. It included in the net income. These are, therefore, the total
g its GRT the 20% final withholding tax on its receipts before any deduction for the expenses
Corpor passive interest income. of management. The amount of interest income
ation v. withheld, in payment of the 20% final withholding
CIR It claimed for a refund after CTA rendered its tax, forms part of the bank’s gross receipts in
(2013) Asia Bank decision saying that the final computing the GRT on banks.
withholding tax does not form part of the GRT.
Asia Bank decision was subsequently reversed The exclusion of the final withholding tax from
in another case. gross receipts operates as a tax exemption
which the law must expressly grant. No law
WHETHER THE 20% FINAL TAX WITHHELD provides for such exemption. In sum, all the
ON A BANK’S PASSIVE INCOME SHOULD aforementioned cases are one in saying that
BE INCLUDED IN THE COMPUTATION OF "gross receipts" comprise "the entire receipts
THE GRT – YES without any deduction." Clearly, then, the 20%
final withholding tax should form part of
petitioner’s total gross receipts for purposes of
computing the GRT.
Banco The case involves the proper tax treatment of
de Oro the discount or interest income arising from the In this case, it may seem that there was only one
v. CIR ₱ 35 billion worth of 10-year zero-coupon lender — RCBC on behalf of CODE-NGO — to
(2015) treasury bonds issued by the Bureau of whom the PEACE Bonds were issued at the
Treasury on October 18, 2001 (denominated time of origination. However, a reading of the
as the Poverty Eradication and Alleviation underwriting agreement and RCBC term sheet
Certificates or the PEA Ce Bonds by the reveals that the settlement dates for the sale and
Caucus of Development NGO Networks). distribution by RCBC Capital (as underwriter for
CODE-NGO) of the PEACE Bonds to various
On October 7, 2011, the Commissioner of undisclosed investors.
Internal Revenue issued BIR Ruling No. 370-
20111 (2011 BIR Ruling), declaring that the At this point, however, we do not know as to how
126
I`
PEACe Bonds being deposit substitutes are many investors the PEACE Bonds were sold to
subject to the 20% final withholding tax. by RCBC Capital. Should there have been a
Pursuant to this ruling, the Secretary of simultaneous sale to 20 or more
Finance directed the Bureau of Treasury to lenders/investors, the PEACE Bonds are
withhold a 20% final tax from the face value of deemed deposit substitutes within the meaning
the PEACe Bonds upon their payment at of Section 22(Y) of the 1997 National Internal
maturity on October 18, 2011. Revenue Code and RCBC Capital/CODE-NGO
would have been obliged to pay the 20%final
WHETHER THE PEACE BONDS ARE withholding tax on the interest or discount from
"DEPOSIT SUBSTITUTES" AND THUS the PEACE Bonds.
SUBJECT TO 20% FINAL WITHHOLDING
TAX UNDER THE 1997 NATIONAL The obligation to withhold the 20% final tax on
INTERNAL REVENUE CODE – NO the corresponding interest from the PEACE
Bonds would likewise be required of any
It must be emphasized, however, that debt lender/investor had the latter turned around and
instruments that do not qualify as deposit sold said PEACE Bonds, whether in whole or
substitutes under the 1997 National Internal part, simultaneously to 20 or more lenders or
Revenue Code are subject to the regular investors.
income tax.
It is to be noted that under Section 24 of the
Under Sections 24(B)(1), 27(D)(1), and 28(A) 1997 National Internal Revenue Code, interest
(7) of the 1997 National Internal Revenue income received by individuals from longterm
Code, a final withholding tax at the rate of 20% deposits or investments with a holding period of
is imposed on interest on any currency bank not less than 5 years is exempt from the final
deposit and yield or any other monetary benefit tax.
from deposit substitutes and from trust funds
and similar arrangements. Thus, should the PEACe Bonds be found to be
within the coverage of deposit substitutes, the
DEPOSIT SUBSTITUTE proper procedure was for the Bureau of
Under Section 22(Y), deposit substitute is an Treasury to pay the face value of the PEACe
alternative form of obtaining funds from the Bonds to the bondholders and for the Bureau of
public (the term 'public' means borrowing from Internal Revenue to collect the unpaid final
20 or more individual or corporate lenders withholding tax directly from RCBC
at any one time. Capital/CODE-NGO, or any lender or investor if
such be the case, as the withholding agents.
NUMBER OF LENDERS  DETERMINING
FACTOR
Hence, the number of lenders is determinative
of whether a debt instrument should be
considered a deposit substitute and
consequently subject to the 20% final
withholding tax. Furthermore the phrase “at
any one time” for purposes of determining the
“20 or more lenders” would mean every
transaction executed in the primary or
secondary market in connection with the
purchase or sale of securities.
RR 4- Repeated (See above)
127
I`
99
RR 6- Repeated (See above)
2008
Resident Foreign Corporation
*Sir not fan of discussion in BOAC

- continuity of dealings
 The fact of registration automatically makes you RFC
 But the fact of non-registration does not make you an automatic NRFC – look at the
activities of the corporation, which can make them RFC
 BRANCH v. SUBSIDIARY
Branch Subsidiary
Not incorporating ; Incorporating
extension of a foreign corporation treated as an independent corporation even if
the equity is owned by another corporation
Resident foreign corporation Domestic corporation , notwithstanding the
fact that the subsidiary is an absolute or 100%
128
I`
owned by a foreign corporation

Sources within Philippines only Sources within and without
Sales of real property located in PH by RF and NRFC is not exempt, it forms part of the gross
income. Is it impossible for foreign corporation to sell real property?
Ex. Condominium 40% unit bought by US embassy (by a corporation). Tax implication because
no rate for CGT. Net gain forms part of your gross income.
2.5% tax on Gross Philippine Billings

Online carriers – those with touch point in the Philippines, semblance of you having stayed or
landed for an extended period of time
10375 – possibility of not imposing 2.5 % if there is an exemption or preferential rate of the
home country of whoever is landing;
Air Petitioner, Air New Zealand, is a foreign Since petitioner admitted that it sells passage
New corporation organized and existing under the documents in the Philippines through its sales
Zealan laws of New Zealand with principal office at agent, Aerotel, and that it derives revenues from
d v. New Zealand. As an off-line international air the conduct of its business activity regularly
CIR carrier having no landing rights in the pursued within the Philippines, petitioner is a
(2008) Philippines, petitioner does not maintain flight resident foreign corporation engaged in trade or
operations to and from the Philippines. business in the Philippines and must be subject
Likewise, it is not registered with the SEC and to income tax applying Article 8(2) of the RP-
is not licensed to do business in the New Zealand Tax Treaty, it shall be subject to
Philippines. Petitioner, though, has a general an income tax equivalent to 1 1/2% on the profits
sales agent in the Philippines, Aerotel Limited derived from sources within the Philippines.
Corporation (Aerotel), which sells passage Since, as found by the Court in Division,
documents for compensation or commission petitioner already paid its income tax liabilities
129
I`
covering off-line flights of petitioner. Petitioner for taxable year 2002 at the rate of 1 1/2% of its
filed, through Aerotel, its Quarterly Income Tax gross income, the payment is correct and
Returns for the First and Second Quarters of therefore no refundable amount is due.
taxable year 2002 and paid the amount due.
On February 5, 2003, petitioner filed a formal Absence of flight operations to and from the
claim for refund with the respondent CIR. For Philippines is not determinative of the source of
the recovery of the amount allegedly income for purposes of ascertaining income tax
representing erroneously paid tax on Gross liability. It is sufficient that the income is derived
Philippine Billings for the First and Second from activity within the Philippine territory.
Quarters of taxable year 2002.
For the source of income to be considered as
WHETHER AIR NZ IS ENGAGED IN TRADE coming from the Philippines, it is sufficient that
OR BUSINESS IN PH SUBJECT TO the income is derived from activity within the
CORPORATE INCOME TAX ON RESIDENT Philippines. In BOAC's case, the sale of tickets
FOREIGN CORP EITHER AT 32% UNDER in the Philippines is the activity that produces the
SECTION 28(A)(1) OF NIRC OF 1997 OR AT income. The tickets exchanged hands here and
1 ½% UNDER RP-NZ TAX TREATY – YES, payments for fares were also made here in
liable under RP-NZ Tax Treaty. Philippine currency. Since petitioner admitted
that it sells passage documents in the
Philippines through its sales agent, Aerotel, and
that it derives revenues from the conduct of its
business activity regularly pursued within the
Philippines, petitioner is a resident foreign
corporation engaged in trade or business in the
Philippines and must be subject to income tax.
CIR v. BOAC is a 100% British Government-owned BOAC is a resident foreign corporation
BOAC corporation engaged in international airline During the periods of the assessment, it
(1987) business and is a member of the Interline Air maintained a general sales agent in the
Transport Association, and thus, it operates air Philippines. The agent was in charge of:
transportation service and sells transportation i. Selling and issuing tickets
tickets over the routes of the other airline ii. Breaking down the trip into a series of
members. From 1959-1971, BOAC had no trips corresponding to a different airline
landing rights for traffic purposes in the company
Philippines and thus did not carry passenger iii. Receiving the fare
and/or cargo to or from the Philippines but iv. Allocating the payment to the various
maintained a general sales agent in the airline companies on the basis of their
Philippines – Warner Barnes & Co. Ltd, and participation in the services rendered
later Qantas Airways – which was responsible through the mode of interline settlement
for selling BOAC tickets covering passenger of the IATA Agreement
and cargos. The CIR assessed deficiency
income taxes against BOAC. The activities were in the exercise of the
functions normally incident to and for the
WON BOAC DERIVED INCOME FROM THE purpose and object of its organization as an
SALES OF TICKETS IN THE PHILIPPINES international air carrier. Thus, BOAC is engaged
WHILE HAVING NO LANDING RIGHTS - in business in the Philippines through a local
YES agent, and, as a resident foreign corporation, it
is subject to income tax.
WON BOAC IS A RESIDENT FOREIGN
130
I`
CORPORATION DOING BUSINESS IN THE PD 68, in relation to PD 1355, ensures that

PHILIPPINES - YES international airlines are taxed on their income
from Philippine sources. The 2 1/2% tax on
FOREIGN CORPORATION CONSIDERED gross Philippine billings is an income tax. If it
AS DOING BUSINESS IN THE PH had been intended as an excise or percentage
The terms “doing”, “engaging in”, “transacting” tax, it would have been placed under Title V of
business imply a continuity of commercial the Tax Code covering taxes on business.
dealings and contemplates the performance of
acts or works normally incident to and for the In this case, the sale of BOAC tickets in the
purpose and object of the business. Philippines is the activity that produces the
income, since the payments and the giving of
In order that a foreign corporation may be the tickets were made in the Philippines.
regarded as doing business within a State, a. Even though the income from the sale of
there must be continuity of conduct and international transportation tickets is not
intention to establish a continuous one of the items of gross income as
business such as the appointment of a local enumerated in the Tax Code, the
agent, and not one of a temporary character. enumeration is not exclusive, and thus it is
considered as taxable income.
b. The absence of flight operations is not
determinative of the source income. The
income was derived from the sale of
tickets, which is a business activity
regularly pursued within the Philippines.
United United Airlines is a foreign corporation Here, the subject of claim for tax refund is the
Airline organized and existing under the laws of tax paid on passenger revenue for 1999 at the
s v. Delaware, USA, engaged in the international time when petitioner was still operating cargo
CIR airline business. United then filed a claim for flights originating from the PH although it had
(2010) income tax refund for passenger tickets ceased passenger flight operations. The CTA
sold in the PH with uplifts that however did found that United had underpaid its GPB tax for
not originate from the PH. It argued that 1999 because it had made deductions from its
since it no longer operated passenger flights gross cargo revenues in the ITR it filed for 1999,
originating from the PH beginning 1998, its the amount of underpayment even greater than
passenger revenues for 1999-2001 cannot be the refund sought for erroneously paid GPB tax
considered as income from sourced within the on passenger revenues for the same taxable
PH, and hence should be subject to income tax period.
under Art. 9 of the RP-US Tax Treaty. CA ruled
adversely, reasoning that gross revenue from If an international air carrier maintains flights to
carriage of cargoes from the PH is still and from the PH, it shall be taxed at the rate of 2
considered as Gross Philippine Billings. 1/2% of its GPB, while international air carriers
WON UNITED AIRLINES IS ENTITLED TO that do not have flights to and from the PH but
REFUND – NO nonetheless earn income from other activities in
the country will be taxed at the rate of 32% of
such income.
131
I`
Air
Canad
a v.
CIR
132
I`
Offline international air carrier – through a sales agent in the Philippines ; in the Philippines they
assign a general sales agent
In this case:
By having sales agent?  it does not make them online carriers, the benchmark is whether they
have landing rights in the Philippines to an online carrier
Are they RFC ? yes ; passes the elements of continuity of commercial dealings
Held: Not taxed at 2.5% GPB , since not online carriers

- TAX TREATMENT: Default 30% RCIT of Net Taxable Income
If you are the one dealing with OBUs – 15%
BPRT
- Read : ITAD rulings 18-2009 * SEE BELOW*
- Debt Norksy argument: BPRT cannot be imposed daw because there is failure to draw
upon the equivalence for domestic corporations, because in the latter, the branches of
domestic corporations are not offshore they are just here.
- BIR: you should not be envious with domestic corp. Being NRFC is more beneficial as
NRFC – sourced only at PH sourced income unlike domestic corp, there are special
entities that merit specific rates, there are certain tax breaks you are enjoying
(domestic dividends received – exempt, MCIT entitlement)
Branch (Head office  Branch)
Subsidiary  remit to Parent (tax implication now, before waley)

RULES:
- 15% BPRT based on assessed amount actually remitted abroad!
- Only on amounts related to the business of the taxpayer
133
I`
134
I`
Not connected to the business yung money remitted of the branch

Remitted 1 million prize in the head office 1:18:13
1 million not included for BPRT  will be subject
Interest income from a bank deposit subject to tax

To make it form part of BPRT is some form of double taxation, nevertheless the law wants to
soften the impact
RR 15- This RR governs 1) the imposition of Income Tax on the Gross Philippine Billings, Common
2002 Carrier’s Tax, and Other Income of International Air Carriers and 2) the manner of claiming
deductions on Travel Expenses and Freight Charges incurred.
International Air Carriers with flights originating from the Philippines are subject to the Gross
Philippine Billings Tax of 2.5% (which is advantageous for them), regardless of whether the
passage documents are sold here or abroad. The fact of passage documents being sold here or
abroad does, however, have an implication in the manner of computing the gross revenue to
which the tax rate would be applied. (Sec 5)
Originating from the Philippines” has a technical definition. Only the portion of the flight originating
from the Philippines to the place of final destination is subject to the Gross Philippine Billings tax
rate.
Basic Illustration:
- One Way Ticket: Manila → San Francisco—Revenue from the whole trip is subject to
Gross Philippine Billings tax rate.
- Return Trip: Manila → San Francisco → Manila—Revenue from the flight from San
Francisco back to Manila is not subject to Gross Philippine Billings Tax rate.
An International carrier shall refer to 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.
RR 14- Proper Tax Treatment of Interest Income Earnings on Financial Instruments and Other Related
2012 Transactions
135
I`
SUMMARY: (from PM Reyes)

Proper tax treatment on individual taxpayers of income derived from interests:
1. Interest from Philippine currency bank deposits and yield from deposit substitute and from
trust funds or similar arrangements
a. Final tax in case of citizens, resident aliens, and non-resident aliens engaged in
trade or business is 20%
b. Non-resident aliens not engaged in trade or business, the amount received shall
form part of their gross income subject to flat 25% income tax
2. Interest income derived from government debts instruments and securities
a. They are considered deposit substitutes. The same tax treatment as above is
applied
3. Interest derived from long term deposits or investments
a. They are exempt from tax, provided the following requisites are met:
i. Depositor is an individual citizen (resident or nonresident), a resident alien
or non-resident alien engaged in trade or business in the PH
ii. The long-term deposit or investment certificates under name of the
individual
iii. The long term deposits or investments must be in the form of savings,
common or individual trust funds, deposit substitutes, etc evidenced by
certificates in the BSP
iv. The long-term deposits must be issued by banks only
v. The long-term deposits must have a maturity period of not less than 5 years
vi. The long-term deposits must be in denominations of 10,000 and other BSP
prescribed denomination
vii. The long-term deposits must not be pre-terminated
viii. Except those specifically exempted by law, any other income such as gains
from trading, forex gain shall not be covered by income tax exemption
b. If the deposit or investment is pre-terminated, a final tax shall be imposed on the
entire income
i. 4 to less than 5 years - 5%
ii. 3 to less than 4 years - 12%
iii. If less than 3 years - 20%
4. Interest income derived from a depository bank under the expanded foreign currency
deposit system (EFCDS)
a. Derived from FCDUs:
i. The interest income must be derived by residents. If the interest income is
derived by a resident individual taxpayer, it shall be subject to a final tax of
15%
ii. Any income of non-residents, whether individuals or corporations, shall be
tax exempt
iii. Of the bank account is jointly in the name of a non-resident and a resident,
50% shall be treated as exempt and the other 50% shall be subject to the
final tax of 15%
b. Derived by FCDUs:
i. The interest income must be derived by residents. Interest income from
foreign currency loans granted by such depository banks under the EFCDS
other than OBUs shall be subject to final tax of 10%
ii. Any income of non-residents, whether individuals or corporations, shall be
136
I`
tax-exempt
5. Interest income derived from offshore banking units of OBUs
a. Income derived by OBUs from foreign currency transactions with nonresidents,
other OBUs, and local commercial banks are tax-exempt
b. If the foreign currency transactions are with residents other than OBUs and local
commercial banks, the interest income shall be subject to 10%
6. Interest income derived all other instruments
Any other debt instrument not within the coverage of deposit substitutes shall be subjected to a
creditable withholding tax of 20%.
BRANCH PROFIT REMITTANCE TAX
Bank Bank of America is a foreign corporation There is nothing in Section 24 which indicates
of licensed to engage in business in the that the 15% tax is on the total amount of profit.
Americ Philippines through its Makati branch. the Bank Where the law does not qualify that the tax is
a v. CA paid 15% branch profit remittance tax from its imposed and collected at source, the
(1994) regular unit operations and from its foreign qualification should not be read into law.
currency deposit operations. The tax was
based on net profits after income tax without The remittance tax was conceived in an attempt
deducting the amount corresponding to the to equalize the income tax burden on foreign
15% tax. It then filed a claim for refund for the corporations maintaining local branches vs.
portion that corresponds with the 15% branch subsidiary domestic corporations (majority of the
profit remittance tax, claiming that the BIR shares are owned by foreign corporations).
should tax them based on the profits actually
remitted abroad, and not on the amount Prior to the amendment of the Revenue Code,
before the tax. local branches were made to pay only the
usual corporate tax of 25-35% on net income.
WHETHER THE BPRT SHOULD BE While Philippine subsidiaries of foreign
ASSESSED ON THE AMOUNT ACTUALLY corporations were subject to the same rate 25-
REMITTED ABROAD – YES 35% on their net income, however, dividend
payments were additionally subjected to a 15%
withholding tax.
To equalize, a 15% profit remittance tax was

imposed on local branches on their remittances
of profits abroad.
Compa In both cases, Compania General filed a claim The taxable base in computing the 15% branch
nia for refund with CIR for the alleged overpaid profit remittance tax is the amount actually
Genera Branch Profit Remittance Tax. Compania applied for by the branch with the Central Bank
l de General, in both cases, alleged a) that the 15% as profit to be remitted abroad and not the total
Tabaco branch profit remittance tax should be based amount of branch profits. The use of the word
s de on the profits actually paid abroad; and b) the “remitted” may well be understood as referring to
Filipina profits remitted abroad by a branch office to its that part of the said total branch profits which
s v. mother company is an income tax hence, would be sent to the Head office as
CIR passive income which are already subjected to distinguished from the total profits of the branch
(Aug the final tax shall not be included for purposes (not all of which need be sent or would be
and of computing the branch profits remittance tax. ordered remitted abroad)
Nov On the other hand, CIR contends that a) the
1993) 15% branch profit remittance tax is imposed
and collected at source necessarily the tax
137
I`
base should be the amount actually applied for

by the branch with Central Bank of the
Philippines as profit to be remitted abroad “EFFECTIVELY CONNECTED”
pursuant to Revenue Memorandum No. 8-12 As worded in the previously mentioned
(March 17, 1982). provision, the rule is that interests and dividends
received by foreign corporation during a taxable
WON THE BRANCH PROFITS TAX ARE year from all sources within shall not be
COMPUTED BASED ON THE PROFITS considered as branch profits unless the same
ACTUALLY REMITTED ABROAD OR ON are effectively connected with the conduct of
THE TOTAL BRANCH PROFITS OUT OF trade and business of the corporation. The
WHICH THE REMITTANCE IS MADE phrase “effectively connected” was interpreted to
mean income derived from the business activity
Section 28(A)(5) in which the corporation is engaged. In this case,
(5) Tax on Branch Profits Remittances. - Any the corporation is engaged in business of leaf
profit remitted by a branch to its head office tobacco dealer. In its corporate quarterly income
shall be subject to a tax of fifteen (15%) which tax returns submitted to respondent, Compania
shall be based on the total profits applied or argues that the interests it received from savings
earmarked for remittance without any deposit of Philtrust, or those from Land Bank
deduction for the tax component thereof bonds and cash dividends from received from
(except those activities which are registered PLDT and Tabacalera Industrial Dev’t
with the Philippine Economic Zone Authority). Corporation of the Philippines are not effectively
The tax shall be collected and paid in the same connected with the business it is engaged in
manner as provided in Sections 57 and 58 of hence, not subject to tax.
this Code: provided, that interests, dividends,
rents, royalties, including remuneration for Furthermore, pursuant to Section 24(c) and (d)
technical services, salaries, wages premiums, of the NIRC, dividends and interest are subject
annuities, emoluments or other fixed or to final tax. To include them again as subject to
determinable annual, periodic or casual gains, branch profit remittance tax under the same
profits, income and capital gains received by a Section 24 (b)(2)(ii) would be contrary to law.
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.
ITAD Det Norske is a Norweigian corporation, The Philippines-Norway tax treaty recognizes
BIR licensed to do business in the Philippines. For the BPRT and gives way to its imposition as
Ruling the years 1998 to 2004, its Philippine branch paragraph 7, Article 10 of the tax treaty provides
018-09 remitted branch profits to the head office in that branch profits remitted by a branch office of
Norway, thus, the corresponding branch profits a Norwegian corporation in the Philippines to its
remittance taxes (BPRT) were withheld. The head office in Norway may be subject to an
country manager of Det Norske now claims additional tax like the BPRT at a rate not to
that it should be exempt from the tax pursuant exceed 15 percent.
to Article 25 of the Philippines-Norway tax
treaty. The BIR rejected this view. It held that it Paragraph 1, Article 25 of the Philippines-
is not exempt and should be subject to the Norway tax treaty does not provide a legal basis
branch profit remittance (BPRT). The for the non-imposition of the BPRT. The principle
Philippines-Norway tax treaty recognizes the of equal treatment intended by this paragraph is
BPRT and gives way to its imposition as limited to nationals of the Philippines and of
138
I`
paragraph 7, Article 10 of the tax treaty Norway who are both residents of the
provides that branch profits remitted by a Philippines. While Det Norske is a national of
branch office of a Norwegian corporation in the Norway, it is not, however, a resident of the
Philippines to its head office in Norway may be Philippines under paragraph 1, Article 4 of the
subject to an additional tax like the BPRT at a tax treaty.
rate not to exceed 15 percent. It is not Paragraph 2, Article 25 of the Philippines-
discriminatory since Det Norske is not a Norway tax treaty lays down a principle of equal
resident corporation within the view of the treatment between a permanent establishment
treaty. of a Norwegian enterprise in the Philippines and
a domestic enterprise. Similar with the United
W/NT THE BRANCH PROFIT REMIITED IS States, the Philippines is of the view that as long
TAXABLE – YES as the aggregate taxes imposed by the
Philippines on a permanent establishment are
not greater than the taxes imposed by the
Philippines on a domestic enterprise, it cannot
be considered that the permanent establishment
is treated less favorably in the Philippines than
the domestic enterprise. In this connection, while
the BPRT is imposed only on permanent
establishments and not on domestic enterprises,
the burden of this tax upon a permanent
establishment is, however, mitigated by the
current tax regimes which greatly favor the
permanent establishment over the domestic
enterprise.
Also, as long as the aggregate taxes imposed by

the PH on a permanent establishment of a
foreign corporation in the Philippines is not
greater than that imposed on any domestic
corporation, it cannot be said that the foreign
permanent establishment is treated less
favorably in the PH than a domestic
corporation/enterprise.
RR 11- Filipinos employed by ROHQs or RHQs in a managerial or technical position shall have the option
2010 to be taxed at either 15% of their gross income or at the regular income tax rate on taxable
compensation income. All other employees are considered as regular employees who are subject
to the regular income tax rate on their taxable compensation income. The former shall meet the
following requirements:
1. Position and function test – must occupy a managerial or technical position and must
actually be exercising functions pertaining to said position
2. Compensation threshold test – employee must have received, or is due to receive a gross
taxable compensation of at least PhP975,000
3. Exclusivity test – employee must be exclusively working for the RHQ or ROHQ as a regular
employee and not just a consultant or contractual personnel
139
I`
Exemptions remain to be there

Soon be gone – transitory period
Nonresident Foreign Corporations
Gross income taxpayer

NO DEDUCTIONS!!!
Interest foreign loans 

Interest income x percent rate
Ex. X (domestic corp) lends to Y (NRFC) and loan extended is subject to )__ imputes interest.
When Y pays X, that interest is that subject to 20% tax? NO. because when the law speaks on
foreign loans, interest derived by the NRFC. = to apply, X BORROW from Y NRFC
140
I`
Counter of BOAC – NRFC – Dividend indications
CIR v. SC Johnsons and Sons, Inc. (SCJS) is a Private respondent is claiming for a refund of the
SC domestic corporation who entered into a alleged overpayment of tax on royalties;
Johns license agreement with SC Johnson and Sons however there is nothing on record to support a
on USA (USA), a foreign corporation for right to claim that the tax on royalties under the RP-
(1999) use patent, trademark and technology, with a US Treaty is paid under similar
right to manufacture, package and distribute as circumstances as the tax on royalties under
well as secure assistance with USA. For their the RP-West Germany Tax Treaty.
use of trademark, SCJS was required to pay
royalties to USA which payments were subject The entitlement of the 10% rate by U.S. firms
to 25% withholding tax on royalty payments despite the absence of a matching credit (20%
SCJS filed with the international tax affairs for royalties) would derogate from the design
division (ITAD) of BIR for refund due to the behind the most grant equality of international
overpayment of taxes. It claims that since treatment since the tax burden laid upon the
the license agreement was approved by income of the investor is not the same in the two
Technology Transfer Board (TT), it should countries.
be subject to the 10% withholding tax only
pursuant to the most favored nation clause The similarity in the circumstances of
in the RP-US Tax treaty in relation to the payment of taxes is a condition for the
RP-West Germany Tax Treaty. enjoyment of most favored nation treatment
precisely to underscore the need for equality of
WON THE 10% WITHHOLDING TAX treatment. Respondent cannot be deemed
SHOULD BE APPLIED – NO entitled to the 10% rate granted under the
RP-West Germany Tax Treaty for the reason
The purpose of a most favored nation clause is that there is no payment of taxes on royalties
to grant to the contracting party treatment not under similar circumstances in RP-US treaty.
less favorable than that which has been or may
be granted to the most favored among other
countries. It is intended to establish the Given the purpose underlying tax treaties and
principle of equality of international treatment the rationale for the most favored nation clause,
by providing that the citizens or subjects of the the concessional tax rate of 10% provided for in
contracting nations may enjoy the privileges the RP-Germany Tax Treaty should apply only if
141
I`
accorded by either party to those of the most the taxes imposed upon royalties in the RP-US
favored nation. The essence of the principle Tax Treaty and in the RP-Germany Tax Treaty
is to allow the taxpayer in one state to avail are paid under similar circumstances. (meaning
of more liberal provisions granted in that private respondent must prove that the RP-
another tax treaty to which the country of US Tax Treaty grants similar tax reliefs to
residence of such taxpayer is also a party residents of the United States in respect of the
provided that the subject matter of taxation, taxes imposable upon royalties earned from
in this case royalty income, is the same as sources within the Philippines as those allowed
that in the tax treaty under which the to their German counterparts under the RP-
taxpayer is liable. Germany Tax Treaty.)
The RP-US and the RP-West Germany Tax

Treaties do not contain similar provisions on tax
crediting. The RP-Germany Tax
Treaty, expressly allows crediting against
German income and corporation tax of 20% of
the gross amount of royalties paid under
Philippine law. On the other hand, the RP-US
Tax Treaty, which is the counterpart provision
with respect to relief for double taxation, does
not provide for similar crediting of 20% of the
gross amount of royalties paid.
Marub Marubeni Corporation is a foreign corporation The alleged overpaid taxes were incurred for the
eni v. duly organized and existing under the laws of remittance of dividend income to the head office
CIR Japan and duly licensed to engage in business in Japan which is a separate and distinct income
(1889) under Philippine laws. It has equity taxpayer from the branch in the Philippines.
investments in AG&P of Manila. AG&P
declared and paid cash dividends to Marubeni This is inferred from the fact that the investment
and withheld 10% final dividend tax thereon. was made for purposes peculiarly germane to
AG&P again declared and paid cash dividends the conduct of the corporate affairs of
to Marubeni and withheld 10% final dividend Marubeni, Japan, but not of the branch in the
tax thereon. AG&P directly remitted the cash Philippines.
dividends to Marubeni’s head office in Tokyo,
Japan, net not only of the 10% final dividend Marubeni, having made this independent
tax but also of the withheld 15% profit investment attributable only to the head office,
remittance tax based on the remittable amount cannot now claim the increments as ordinary
after deducting the final withholding tax of consequences of its trade or business in the
10%. Philippines and avail itself of the lower tax rate of
10%.
Marubeni sought a ruling from the BIR on
whether the dividends received from AG&P are Marubeni Japan, being a non-resident foreign
effectively connected with its conduct or corporation, as a general rule, is taxed 35% of
business in the Philippines as to be considered its gross income from all sources within the
branch profits subject to the 15% profit Philippines. However, a discounted rate of 15%
remittance tax imposed under Section 24 (b) is given to Marubeni on dividends received from
(2) of the National Internal Revenue Code as a domestic corporation (AG&P) on the condition
amended by Presidential Decrees Nos. 1705 that its domicile state (Japan) extends in favor of
and 1773. Marubeni, a tax credit of not less than 20% of
142
I`
the dividends received.

Additionally, It is the argument of petitioner
corporation that following the principal-agent
relationship theory, Marubeni Japan is likewise
a resident foreign corporation subject only to
the 10 % intercorporate final tax on dividends ASK AGAIN –
received from a domestic corporation in 1. Identify tp
accordance with Section 24(c) (1) of the Tax 2. Tax status of TP
Code of 1977. Under the Tax Code, a resident 5 individuals
foreign corporation is one that is "engaged in 3 corporations
trade or business" within the Philippines.
Petitioner contends that precisely because it is Marubeni Japan , subsidiary Marubeni PH
engaged in business in the Philippines through invested in AG&P Manila. Marubeni Japan
its Philippine branch that it must be considered received dividends from domestic corporation
as a resident foreign corporation.
Head office and branch (RFC)
WON THE CASH DIVIDENDS ARE SUBJECT Subsidiary and parent (domestic corp)
TO PROFIT REMITTANCE TAX - NO
because the same were not income earned by Type of taxpayer
a Philippine Branch of Marubeni Corporation of - Marubeni japan
Japan - PH source income (interest)
Dividends declared by AG&P cannot fall
WON MARUBENI (JAPAN) IS RESIDENT under BPRT
FOREIGN CORPORATION – NO
Is it correct to tax as intercorporate
dividends?
- It is not correct. Is marubeni japan a
resident or non-resident?
- Branch RFC, single entity rule
- XPN: If head office transacted

independently of the branch office in the
Philippines, the transaction entered into
by head office, will be treated as a
transaction of a non-resident foreign
corporation
Implication
NRFC receiving dividends = 15%
143
I`
Reeder MV Amstelmeer and MV Amstelkroon vessels N.V. Reederij "AMSTERDAM" is a foreign

ij of N.B. Reederij "AMSTERDAM," called on corporation not authorized or licensed to do
Amster Philippine ports to load cargoes for foreign business in the Philippines.It does not have a
dam destination. The freight fees were paid abroad. branch office in the Philippines and it made only
and Royal Interocean Lines acted as husbanding two calls in Philippine ports.
Royal agent for a fee or commission on said vessels.
Interoc CIR filed the ITR for and in behalf of .V. In order that a foreign corporation may be
ean Reederij "AMSTERDAM" under Sec. 15 of the considered engaged in trade or business, its
Lines v NIRC. CIR assessed Royal for deficiency business transactions must be continuous. A
CIR income tax as a non-resident foreign casual business activity in the Philippines by a
(1988) corporation not engaged in trade or business in foreign corporation, as in the present case, does
the Philippines under Section 24 (b) (1) of the not amount to engaging in trade or business in
Tax Code. Royal filed ITR for the subject the Philippines for income tax purposes.
vessels on the assumption that NV Reederij is
a foreign corporation engaged in trade or Foreign corporations not doing business in the
business in the Philippines. Royal as the Philippines are taxable on income 'from all
husbanding agent filed a written protest sources within the Philippines, as interest,
against the assessment made by the CIR dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations,
WON NV REEDERIJ AMSTERDAM, NOT emoluments, or other fixed or determinable
HAVING ANY OFFICE OR PLACE OF annual or periodical or casual gains, profits and
BUSINESS IN THE PH, WHOSE VESSELS income and capital gains.' The tax is 30% (now
CALLED ON THE PH PORTS FOR THE 35%) of such gross income. (Sec. 24 (b) (1), Tax
PURPOSE OF LOADING CARGOES ONLY Code.)
TWICE, SHOULD BE TAXED AS A FOREIGN
CORPORATION ENGAGED IN TRADE OR
BUSINESS IN THE PH – NO
CIR v. PMC-PH is a domestic corporation which is SEC 24(b)(1) provides that the tax sparing
Procto wholly-owned subsidiary of PMC-USA, a non- provision will be applied if:
r& resident foreign corporation. PMC-USA then, 1. The country of domicile of the foreign
Gambl as the sole shareholder of PMC-PH, is entitled corporation shall allow such foreign
e to receive income from the latter in the form of corporation a tax credit for taxes deemed
Philipp dividends. For the following years, PMC-PH paid in the Phil. (Note that this tax credit is
ines declared cash dividends. PMC-PH invoked the applicable as against the said country of
(1991) tax sparing provision in Section 24(B)(1) of domicile of the foreign corporation; and
the Tax Code as the withholding agent of the that the PH does not require that the US
gov’t with respect to the dividends paid to tax law deem the parent corporation to
PMC-USA, claiming a refund of the 20% point have paid the 20% points of dividend tax
portion of the 35% point whole tax paid. The waived by the PH-enough that the US
CIR opposed, claiming that PMC-USA, the “shall allow.”)
taxpayer, and not PMC-PH, the remittor or 2. It reaches a minimum amount equivalent
payor, should be legally entitled to receive the to 20% points which is the difference
refund, if any. between the regular dividend tax of 35%
and the preferential tax rate of 15%.
WON PMC-PH IS ENTITLED TO THE 15%
PREFERENTIAL TAX RATE ON DIVIDENDS Such requirements were met in the case at bar.
DECLARED AND REMITTED TO ITS As to first requirement, US tax law treats the
PARENT CORPORATION – YES. PH corporate income tax as if it came out of the
144
I`
pocket, as it were, of PMC-PH as a part of the

What is a tax-sparing provision? economic cost of carrying on business
As explained in the case of CIR V. PROCTER operations in the PH through the medium of
& GAMBLE PHILIPPINES [DECEMBER 2, PMC-PH, and here earning profits. What is,
1999]: A more general way of mitigating the under US law, deemed, paid by PMC-US are not
impact of double taxation is to recognize the “phantom taxes” but instead PH corporate
foreign tax as a tax credit. However, the income taxes actually paid here by PMC-PH.
principal defect of the tax credit system is
when low tax rates or special tax concessions As for the second requirement, for every 55.25
are granted in a country for the obvious reason of dividends actually remitted (after withholding
of encouraging foreign investments. For at the rate of 15%) by PMC-PH to its parent, a
instance, if the usual tax rate is 35 percent but tax credit of 29.75 is allowed by the US Tax
a concession rate accrues to the country of the Code for PH corporate income tax “deemed
investor rather than to the investor himself.80 paid” by the parent but actually paid by the
To obviate this, a tax sparing provision may be wholly- owned subsidiary. Since 29.75 is much
stipulated. With tax sparing, taxes exempted or higher than the 13 amount of dividend tax
reduced are considered as having been fully waived by the PH govt, the US Tax Code
paid. specifically and clearly complies with the
requirement of SEC 24(b)(1) of the NIRC.
Good
year
Redemption – sale of shares – when GPI redeemed the shares of stock,
What is the transaction?
BIR Cash dividends declared by SM Investments, a A dividend paid to a non-resident foreign

Ruling PH domestic corporation whose shares are corporation is subject to the withholding tax of
DA- traded and listed with the PSE to Asia 35% as a general rule, but if the country where
145-07 Opportunities, a foreign corporation organizedthe NRFC is domiciled allows a credit against
under the British virgin Island (BVI). the tax due from the NRFC taxes deemed to
have been paid in the PH in an amount
SM is asking whether it is subject to the 15% equivalent to 20% of such dividend, or does
preferential withholding tax rate pursuant to not subject such dividend to taxation, then
145
I`
Section 28(B)(5)(b) of the Tax Code as dividend paid to such NRFC are taxed only at
amended by RA 9337. 15%.
Relevant provision: The International Business Companies

(b) Intercorporate Dividends. — A final Ordinance of British Virgin Islands does not
withholding tax at the rate of fifteen percent impose any tax on dividend received from
(15%) is hereby imposed on the amount of foreign sources, including those received from
cash and/or property dividends received from a PH corporations by foreign corporations
domestic corporation, which shall be collected domiciled therein, the cash dividend is subject to
and paid as provided in Section 57(A) of this the preferential withholding tax rate of 15%.
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;
Mirant Mirant Corp is a domestic corporation situated PERMANENT ESTABLISHMENT IS NOT
Operati at Quezon province. It is primarily engaged in ALWAYS RFC
ons the managing of gas turbine and other power Although VHL and WES World-wide Education
Corp v. generating plants and related facilities for the Service Ltd. do not have a fixed place of
CIR conversion into electricity of coal and other business, nonetheless, they would still be
(2008) fuel. Mirant filed its monthly remittance return considered as having established a "permanent
of income taxes withheld for 1999-2000 as final establishment" if they have "furnished services
taxes withheld from VHL Enterprises and WES through their employees or other personnel for a
Worldwide Education Service. Both are non- period or periods the aggregate of which is more
resident foreign corporations. VHL’s head than 183 days in a 12-month period." The treaty
office is at Alabama, USA while WES provision says that the business profits of an
Worldwide’s is at England, UK. Mirant availed enterprise shall be taxable only if there is a
of the 5% expanded/creditable withholding permanent establishment. The key is, before any
taxes and availed of the BIR’s Voluntary profit could be taxed, first, you have to ask this
Assessment Program as it believed that it had question: Will this enterprise make a profit, a
erroneously withheld and remitted the final business profit that is defined in the treaty? If so,
withholding taxes from VHL and WES. Mirant does he have a permanent establishment in the
argued that under the RP-US and RP-UK Tax Philippines? If the answer to both questions is
Treaties, VHL and WES have established their yes, then the Philippine government can tax. If
permanent establishments in the Philippines the answer to the second question is negative,
for having furnished services through their there is no permanent establishment, then you
employees or other personnel for more than cannot tax a profit.
146
I`
183 days. Hence, they should be legally

considered as resident foreign corporations for In this case, VHL and WES are both non-
income tax purposes and the income resident foreign corporations with no fixed place
payments to said corporations are subject only of business in the Philippines; but these
to the 5% creditable withholding tax. CIR corporations render hands-on training,
argued that absent a showing that VHL and instructional and/or consultancy services to the
WES are resident foreign corp, they are employees of petitioner, respectively for a period
subject to final withholding tax as provided of more than 183 days within a 12-month period.
under Sec. 28(b) of the Tax Code (32%) as it Thus, they have established permanent
had not been shown that the corporations are establishments in the PH.
doing business in the PH.
However, it must be remembered that a foreign
WHETHER THE TRANSACTIONS BETWEEN corporation wishing to avail of the benefits of the
MIRANT AND THE FOREIGN tax treaty should invoke the provisions of the tax
CORPORATIONS HAVE CREATED treaty and prove that indeed the provisions of
PERMANENT ESTABLISHMENTS – YES, the tax treaty applies to it, before the benefits
THEY ARE NOT TAX EXEMPT may be extended to such corporation. Nowhere
in the records of the case was it shown that
petitioner indeed took the liberty of properly
observing the provisions of the said order.
The finding that they have effectively created

permanent- establishments makes them liable to
pay taxes to the Philippine government for
taxable transactions within the Philippines but it
does not automatically convert their status into
"resident foreign corporations" in the Philippines.
INCOME COVERED BY TAX TREATIES
Deutsc The bank remitted to the BIR an amount The constitution provides for the adherence to
he representing 15% of the branch profit the general principles of international law as part
Bank remittance tax on its regular banking unit net of the law of the land. Every treaty is binding
v. CIR income remitted to the Deutsche Bank of upon the parties and obligations must be
(2013) Germany for 2002 and prior taxable years. performed. There is nothing in RMO 1- 2000
Believing that they made an overpayment, it indicating a deprivation of entitlement to a tax
filed a claim for refund or a tax credit treaty for failure to comply with the 15-day
certificate. It also requested from the period. The denial of availment of tax relief for
International Tax Affairs Division for a the failure to apply within the prescribed period
confirmation of its entitlement to a preferential would impair the value of the tax treaty. The
tax rate of 10% under the RP-Germany Tax obligation to comply with the tax treaty must
Treaty. take precedence over the objective of RMO 1-
2000 because the non-compliance with tax
The claim was denied on the ground that treaties would have negative implications on
application for tax treaty relief was not filed international affairs and would discourage
with ITAD prior to the payment of BPRT, foreign investments.
violating the fifteen-day period mandated under
Section III, Par. 2, of RMO 1-2000.
W/N THE FAILURE TO STRICTLY COMPLY

147
I`
WITH THE PROVISIONS OF RMO 1-2000

WILL DEPRIVE PERSONS OR
CORPORATIONS THE BENEFIT OF A TAX
TREATY - NO
Relationship of tax code and the tax treaties

Rule: as long as under PH laws, you are able to establish Resident or NRFC apply tax code will
apply
Dual application: treaties if applicable based on the specific provisions of appropriate tax treaties,
gives party a choice
PH entity declares dividends to US share holder

Tax code: GR  30% all income of NRFC lowered to 15% as loan as US is giving 15% deemed
paid tax credit concession
If us is not giving, RP-US tax treaty -> avail of the tax rate under RP-US treaty
Treaties
1.Corporate tax rate
2. what is dividend tax implication
3. exit scenario – relocation – what does it take for one to exit – capital gains tax – selling of
shares
Transaction
Tax code provision
Apply
148
I`
RMO Guidelines on Tax Treaty Relief Application

072-10
ITAD is the sole office charged with the receiving of tax treaty relief applications (TTRA). All tax
treaty relief applications relative to the implementation and interpretation of the provisions of
Philippine tax treaties shall only be submitted to and received by the International Tax Affairs
Division (ITAD). All rulings relative to the application, implementation and interpretation of the
provisions of Philippine tax treaties shall emanate from ITAD.
ITAD Energizer, a domestic corporation, entered into The tax imposed on royalties derived by a
Ruling a Renewal Agreement with Everyday, a US resident of the United States from sources within
102- 02 corporation, for the right to use its trademarks the Philippines shall be the lowest rate of
and patents, technical information, business Philippine tax that may be imposed an royalties
information, data, and know-how. The of the same kind paid under similar
agreement was registered with the Technology circumstances to a resident of a third State. This
Transfer Registry. is the "most-favored nation"` clause found in
Article 13(2)(b)(iii) of the RP-US tax treaty.
As consideration, Energizer is to pay Everyday
3% royalties. In this connection, it must be noted that the
royalties arising from the Philippines and paid to
Everyday (NRFC) is not licensed to do a resident of the Netherlands may also be taxed
business in the PH, and neither it is registered in the Philippines but the tax so charged shall
herein. not exceed 15 percent of the gross amount of
Tax on royalty income from Everyday royalties in cases other than royalties paid by in
enterprise registered in preferred areas of
activities in the Philippines.
WON ENERGIZER IS ENTITLED TO THE
MOST FAVOURABLE NATION CLAUSE IN ROYALTIES, defined
THE RP-US TAX TREATY IN RELATION TO The term "royalties" as used in this Article
THE RP- NETHERLANDS TAX TREATY, means any payment of any kind received as a
THUS MAKING IT SUBJECT TO THE consideration for the use of, or right to use, any
LOWER TAX RATE OF 15%. — YES. patent, trademark, design or model, secret
formula or process, or for the use of, or the right
to use of, industrial, commercial or scientific
equipment, or for information concerning
industrial, commercial or scientific experience.
MOST-FAVORED-NATION CLAUSE
The SC has interpreted the "most-favored-
nation" clause, particularly the phrase "paid
under similar circumstances," as referring to the
manner of payment or taxes and not to the
subject matter of the tax which is royalties.
Hence, the "most-favored-nation" clause of the

RP-US tax treaty must be interpreted not only in
relation to Article 12 of the RP-Netherlands tax
treaty but also in connection with the provisions
on the elimination of double taxation of both.
149
I`
A perusal of the RP-US and the RP-Netherlands

tax treaties, particularly their provisions on the
avoidance of double taxation, shows a similarity
on the manner of payment of taxes, that is, the
allowable foreign tax credit on both treaties is
the amount actually paid in the Philippines.
Such being the case, and since Energizer is not

registered and engaged in preferred areas of
activities in the Philippines, this Office is of the
opinion and so holds that the royalty payments
by Energizer to Eveready are subject to the
preferential tax rate of 15% of the gross amount
of royalties pursuant to the "most-favored-nation"
provision of the RP-US tax treaty in relation to
the RP-Netherlands tax treaty.
ITAD Avon Comestics (domestic corp.) submitted a Under paragraph 2 (b) (iii) of the Philippine-US
Ruling Tax Treaty Relief Application (TTRA) on June tax Treaty, royalties arising in the Philippines
024- 13 23, 2011 requesting confirmation that royalties and paid to a resident of the United States may
to be paid to Avon Products (foreign corp.) are be taxed in the Philippines at the lowest rate of
subject to Philippine Income tax at the reduced income tax that may be imposed on royalties of
rate of 10% pursuant to the PH-US tax treaty, the same kind paid under similar circumstances
in relation to the PH-Czech tax Treaty. to a resident of a third State (also known as the
"most-favored-nation treatment”). Both PH-US
WON ROYALTY PAYMENTS OF AVON tax treaty and PH-CZECH Tax treaty satisfy the
COSMETICS TO AVON PRODUCTS ARE conditions as said in S.C. Johnson case in order
SUBJECT TO PHILIPPINE INCOME TAX AT to apply the reduced rate of 10%.
THE REDUCED RATE OF 10 PERCENT?
YES, but DENIES relief on all royalties under "S.C. Johnson case" requires two conditions for
the Agreement paid before June 24, 2011 in a most-favored-nation treatment on royalties to
violation of the requirement that filing of the apply:
TTRA should be made BEFORE the 1. Royalties arising in the Philippines and
transaction under RMO 72-2010. paid to a resident of the other State, in
this case, the United States, must be of
the same kind as those arising in the
Philippines and paid to a resident of a
third State (Czech in this case) to which
the latter's tax treaty with the Philippines
subjects the latter royalties to a most-
favored-nation treatment.
2. The method of elimination of double
taxation applied by the other State, in this
case, the United States, on royalties paid
to a resident thereof must be the same
as that applied.
150
I`
9. Withholding Tax
Passive
Not entitled to deduction
Consultation fees
30% FWT – rfc
Creditable
- Finite list ; specified rates and regulations
1. Payment to contracotrs
2. Payment to professionals
- Apply withholding taxes
Ex. X pays Y 100k, let’s assume that payment subject to withholding tax of 20%
Both instances – when X pays Y , X must withhold 20%, and pay Y only 80% (whether creditable or final)
In a final withholding – when X pays Y 80&% and remits 20% to BIR; nothing else to be done ; income no
more returnable
Creditable withholding – income recipient Y needs to report income of 100% calculate tax due forms part of
gross income. To capture the fact in the advance payment, Y can take that as a TAX CREDIT
CIR v. Smart entered into 3 agreements with Prism WITHHOLDING AGENT MAY CLAIM A TAX
Smart (non-resident Malaysian corporation) under REFUND
Comm which Prism would provide programming and The person entitled to claim a tax refund is the
unicati consultancy services for the installation of the taxpayer. However, in case the taxpayer does
151
I`
on, Inc. Service Download Manager Agreement and not file a claim for refund, the withholding
(2010) the Channel Manager Agreement, and for the agent may file the claim. What is clear in the
installation and implementation of Smart prior decision of CIR v. Procter & Gamble is that
FWT at Money and Mobile Banking Service. a withholding agent has a legal right to file a
source claim for refund for two reasons:
For the payment, Smart thought that the
amount to be paid constituted royalties so First, he is considered a “taxpayer” under the
Smart withheld from its payments $136K (25% NIRC as he is personally liable for the
royalty tax under the RP-Malaysia Tax Treaty). withholding tax as well as for deficiency
Smart filed an administrative claim with the BIR assessments, surcharges and penalties, should
claiming that its payments to Prism were not the amount of the tax withheld be finally found to
royalties but “business profits” which were not be less than the amount that should have been
taxable because Prism did not have a withheld under the law.
permanent establishment in the Philippines.
Second, as an agent of the taxpayer, his
CIR countered that Smart as the withholding authority to file the necessary income tax return
agent was not a party-in-interest to claim the and to remit the tax withheld to the government
refund. impliedly includes the authority to file a claim for
refund and to bring an action for recovery of
WON SMART CAN CLAIM THE REFUND  such claim.
YES
As an agent of the TP, it is the duty of the
withholding agent to return to the principal
TP what he has recovered. Otherwise, he
would be unjustly enriching himself at the
expense of the principal TP from whom the
taxes were withheld and from whom he derives
his legal right to file a claim for refund.
152
I`
ING : Timing required to withhold

- Requirement to withhold when tax accrued, payable (time where said amount is legally
due, demandable and enforceable), or paid whichever comes first
Successful refund – incumbent upon payer to return to payee that amount

Phil
Airline
s v CIR
Failure to remit  estafa
If X pays Y 100k, X is exempt 

Exempt from taxes
X exempt from taxes
Should X still withhold? – OF COURSE, the exemption is from the perspective of income
recipient ; advanced tax payment,
RR 11- Section 1
18
Filipina Petitioner Filipinas Synthetic questions the There was a definite liability, a clear and
s CIR’s deficiency withholding tax at source imminent certainty that at the maturity of the loan
Synthe assessments for the (a) the fourth quarter of contracts, the foreign corporation was going to
153
I`
tic 1974 to the fourth quarter of 1975, and (b) the earn income in an ascertained amount, so much
Fiber fourth quarter of 1975 to the fourth quarter of so that petitioner already deducted as business
Corp. 1976. The bulk of the deficiency assessments expense the said amount as interests due to the
v. CA consisted of interest and compromise penalties foreign corporation. This is allowed under the
(1999) for alleged late payment of withholding taxes law, petitioner having adopted the ‘accrual
due on interest loans, royalties, and guarantee method’ of accounting in reporting its incomes.
CWT fees Filipinas Synthetic paid to non-resident
corporations. Although Filipinas Synthetic uses Petitioner cannot now claim that there is no duty
the accrual method of accounting, it still to withhold and remit income taxes as yet
contends that its liability to withhold tax at because the loan contract was not yet due and
source arises when the said amounts have demandable. Having “written-off” the amounts as
become due and demandable under their business expense in its books, it had taken
respective contracts, and not upon their advantage of the benefit provided in the law
“setting-up” or accrual. allowing for deductions from gross income.
Moreover, it had represented to the BIR that the
WON THE LIABILITY TO WITHHOLD TAX amounts so deducted were incurred as a
AT SOURCE ON INCOME PAYMENTS TO business expense in the form of interest and
NON-RESIDENT FOREIGN CORPORATIONS royalties paid to the foreign corporations. It is
ARISES UPON REMITTANCE OF THE estopped from claiming otherwise now
AMOUNTS DUE TO THE FOREIGN
CREDITORS OR UPON ACCRUAL Tax Code is silent as to when the duty to
THEREOF  UPON ACCRUAL withhold taxes arises. In this case, to determine
when the duty to withhold the taxes arose,
the Court inquired into the nature of accrual
method of accounting, the procedure used by
the taxpayer, and to the modus vivendi of
withholding tax at source come. It noted that
under the accrual basis method of accounting,
income is reportable when all the events have
occurred that fix the taxpayer’s right to receive
the income and the amount can be determined
with reasonable accuracy. Such method is
allowed by law in reporting incomes.
PNB v. Gotesco, a corporation engaged in real estate, PNB was able to establish, through evidence
CIR entered in 1995 into a syndicated loan presented, that it did not in fact use the claimed
(2015) agreement with PNB and 3 other banks. To creditable withholding taxes to settle its tax
secure the loan, Gotesco mortgaged a 6- liabilities, such as: (1) 2003 Audited FS, which
CWT hectare expanse known as the Ever Ortigas still included the mortgaged property in the asset
Commercial Complex, under a mortgage trust account, providing the it did not recognize the
indenture agreement in favor of PNB, through foreclosure sale and therefore, the payment by
its Trust Banking Group, as trustee. Gotesco PNB of the creditable withholding taxes
subsequently defaulted on its loan obligations. corresponding to the same; (2) the ITRs, which
Thus, PNB foreclosed the mortgaged property. the CTA required to show that the excess
Gotesco then filed a civil case against PNB for creditable withholding tax was not used by
the annulment of the foreclosure proceedings. Gotesco; (3) testimony of Gotesco’s former
accountant; and (4) Withholding Tax Remittance
As its prepared for the consolidation of its Returns providing that the amount was withheld
ownership over the foreclosed property, PNB and paid by PNB in 2003.
154
I`
paid the BIR DST and also withheld and

remitted to withholding taxes equivalent to Thus, evidence on record sufficiently proves that
6% of the bid price. the claimed creditable withholding tax was
withheld and remitted to the BIR, that such
withholding and remittance was erroneous, and
PNB then filed for refund on the basis that that the claimed creditable withholding tax was
it inadvertently applied the 6% creditable not used by Gotesco to settle its tax liabilities.
withholding tax rate on the sale of real
property classified as ordinary asset, when
it should have applied the 5% rate on the
sale of ordinary asset, as provided in SEC.
2.47.2(J)(B) of RR 2-98, as amended by RR 6-
01, considering that Gotesco is primarily
engaged in the real estate business.
WON GOTESCO IS ENTITLED TO THE TAX

REFUND  YES
No benefit yet = can correct the rules

RR 12- Amends Section 2.57.2 of Revenue Regulations No. 2-98 relative to the collection of the creditable
98 withholding tax on income payments from medical practitioners.
It will be the duty and responsibility of the hospital or clinic to collect from any patient
admitted by such hospital or clinic the professional fee of the attending medical
practitioner and to withhold the tax prescribed in the Regulations. The withholding tax
prescribed in the regulations will not apply whenever there is proof that no professional fee has in
fact been charged by the medical practitioner and paid by his patient, provided, however, that this
fact is shown in a sworn declaration jointly executed by the medical practitioner, the patient or his
duly authorized representative and the administrator of the hospital or clinic.
RR 1- SUBJECT: Amendments to Sections 2.78.1(B), Section 2.79(A) and (F), 2.83.4(C) and 2.83.5 of
2006 Revenue Regulations No. 2-98, as Amended
155
I`
Pursuant to Section 244, in relation to Section 79 (A) Internal Revenue Code of 1997, as
amended, these Regulations are hereby promulgated to amend Sections 2.78.1(B), Section
2.79(A) and (F), 2.83.4(C) and 2.83.5 of Revenue Regulations No. 2-98 , as amended, with
respect to the withholding of income tax on compensation income received by minimum wage
earners
SECTION 1. Section 2.78.1(B) of Revenue Regulations No. 2-98, as amended, is hereby

"SECTION 2.78.1. Withholding of Income Tax on Compensation Income.
xxx xxx xxx
"(B) Exemptions from withholding tax on compensation. — The following income

payments are exempted from the requirement of withholding tax on compensation:
xxx xxx xxx
"(13) COMPENSATION INCOME OF INDIVIDUALS THAT DO NOT EXCEED THE ST A

TUTORY MINIMUM W AGE OR FIVE THOUSAND PESOS (PHP5,000.00) PER
MONTH (SIXTY THOUSAND PESOS [PHP60,000.00] A YEAR), WHICHEVER IS
HIGHER."
"(14) COMPENSATION INCOME OF EMPLOYEES OF THE GOVERNMENT OF THE

PHILIPPINES, OR ANY OF ITS POLITICAL SUBDIVISIONS, AGENCIES OR
INSTRUMENTALITIES, WITH SALARY GRADES 1 TO 3."
SECTION 2. Section 2.79(A) and (F) of Revenue Regulations No. 2-98, as amended, is hereby
“SEC. 2.79. Income Tax Collected at Source on Compensation Income.
"(A) Requirement of Withholding. — Every employer must withhold from compensations

paid, an amount computed in accordance with these regulations. PROVIDED, THAT
COMPENSATION INCOME OF (1) INDIVIDUALS THAT DO NOT EXCEED THE
STATUTORY MINIMUM WAGE OR FIVE THOUSAND PESOS (PHP5,000.00) PER
MONTH (SIXTY THOUSAND PESOS [PHP60,000.00] A YEAR), WHICHEVER IS
HIGHER, AND (2) EMPLOYEES OF THE GOVERNMENT OF THE PHILIPPINES, OR
ANY OF ITS POLITICAL SUBDIVISIONS, AGENCIES OR INSTRUMENTALITIES,
WITH SALARY GRADES 1 TO 3, SHALL NOT BE SUBJECT TO WITHHOLDING TAX.
"THE AFOREMENTIONED INDIVIDUALS WHOSE COMPENSATION INCOME IS NOT

SUBJECT TO WITHHOLDING TAX SHALL REMAIN LIABLE FOR INCOME TAXES
AND SHALL CONTINUE TO FILE THEIR ANNUAL INCOME TAX RETURNS AND PAY
THE INCOME TAXES DUE THEREON, IF ANY, NOT LATER THAN APRIL 15 OF THE
156
I`
YEAR IMMEDIATELY FOLLOWING THE TAXABLE YEAR.
xxx xxx xxx
"(F) Requirement for Deductibility. — The provisions of Sec. 2.58.5 of these Regulations
shall apply. PROVIDED, THAT COMPENSATION INCOME WHERE NO INCOME
TAXES WERE WITHHELD PURSUANT TO SECTION 2.79(A) OF THESE
REGULATIONS, SHALL BE ALLOWED AS A DEDUCTION FROM AN EMPLOYER'S
GROSS INCOME WHEN THE REQUIRED EMPLOYEES WITHHOLDING STATEMENT
(BIR FORM NO. 2316) HAVE BEEN ISSUED TO SUBJECT EMPLOYEES IN
ACCORDANCE WITH SECTION 2.83.1 OF RR 2-98. PROVIDED, FURTHER, THAT
THE ALPHABETICAL LIST OF THE SUBJECT EMPLOYEES SHALL BE SUBMITTED
UNDER SCHEDULE 7.2 OF BIR FORM NO. 1604-CF IN ACCORDANCE WITH
SECTION 2.83.2 OF RR 2-98."
SECTION 3. Section 2.83.4(C) of Revenue Regulations No. 2-98, as amended, is hereby

"SEC. 2.83.4. Substituted Filing of Income Tax Returns by Employees Receiving Purely
Compensation Income. — . . . .
xxx xxx xxx
The following individuals, however, are not qualified for substituted filing and therefore,
still required to file BIR Form No. 1700 in accordance with existing regulations:
xxx xxx xxx
"(C) EMPLOYEES WHOSE GROSS COMPENSATION INCOME DO NOT EXCEED

THE STATUTORY MINIMUM WAGE OR FIVE THOUSAND PESOS (PHP5,000.00)
PER MONTH (SIXTY THOUSAND PESOS [PHP60,000.00] A YEAR), WHICHEVER IS
HIGHER, INCLUDING EMPLOYEES OF THE GOVERNMENT OF THE PHILIPPINES,
OR ANY OF ITS POLITICAL SUBDIVISIONS, AGENCIES OR INSTRUMENTALITIES,
WITH SALARY GRADES 1 TO 3."
xxx xxx xxx"
SECTION 4. Section 2.83.5 of Revenue Regulations No. 2-98, as amended, is hereby amended to
read as follows:
"SEC. 2.83.5. Registration as Withholding Agent. — Every person who makes payment
or expects to make payment of compensation in AN AMOUNT EXCEEDING THE
STATUTORY MINIMUM WAGE OR SIXTY THOUSAND PESOS (P60,000.00) A YEAR
(FIVE THOUSAND PESOS [PHP5,000.00] MONTHLY), WHICHEVER IS HIGHER, to
any single employee shall register by filing in duplicate, with the Revenue District Office
(RDO) of the City or Municipality where his legal residence or place of business is
located, an Application for Registration as a withholding agent using the form prescribed
by the Bureau not later than ten (10) days after becoming an employer."
157
I`
RMC SUBJECT: Withholding of Income Tax on Backwages, Allowances, and Benefits Received by
39- Employees through Garnishments of Debts or Credits Pursuant to a Labor Dispute Award
2012
TO: All Internal Revenue Officials, Employees and Others Concerned
This Circular is issued to require the withholding of taxes on backwages, allowances and benefits
received by virtue of a labor dispute award through garnishments of debts due to the employers
and other credits to which the employer is entitled including bank deposits, financial interests,
royalties, or commissions.
It should be noted that backwages, allowances and benefits awarded in a labor dispute constitute
remunerations for services that would have been performed by the employee in the year when
actually received, or during the period of his dismissal from the service which was subsequently
ruled to be illegal. The employee should report as income and pay the corresponding income
taxes by allocating or spreading his backwages, allowances and benefits through the years from
his separation up to the final decision of the court awarding the backwages. The said back wages,
allowances and benefits are subject to withholding tax on wages.
However, when the judgment awarded in a labor dispute is enforced through garnishment of debts
due to the employer or other credits to which the employer is entitled, the person owing such
debts or having in possession or control of such credits (e.g., banks or other financial institutions)
would normally release and pay the entire garnished amount to the employee. As a result,
employers who are mandated to withhold taxes on wages pursuant to Section 79 of the Tax Code
of 1997, as amended, as implemented by Revenue Regulations No. 2-98, as amended, cannot
withhold the appropriate tax due thereon.
In this regard, the provisions of Section 78 (D) (1) of the Tax Code of 1997, as amended, and
Section 2.78.4 (A) of Revenue Regulations No. 2-98 , as amended, provide, thus:
"SEC. 78. Definitions. — As used in this Chapter: "SECTION 2.78.4. Employer. — . . .
xxx xxx xxx
(D) Employer — The term 'employer' means the person for whom an individual performs
or performed any service, of whatever nature, as the employee of such person, except
that:
(1) If the person for whom the individual performs or performed any service does
not have control of the payment of the wages for such services, the term
'employer' (except for the purpose of Subsection A) means the person having
control of the payment of such wages." (Emphasis and underscoring supplied)
(A) Person for whom the services are or were performed does not have control. — The
term "employer" also refers to the person having control of the payment of the
compensation in cases where the services are or were performed for a person
who does not exercise such control. For example, where compensation, such as
certain types of pensions or retirement pay, are paid by a trust and the person for whom
the services were performed has no control over the payment of such compensation, the
158
I`
trust is deemed to be the "employer". (Emphasis and underscoring supplied)
Based on the foregoing provisions, persons having control of the payment of wages or salaries are
authorized to deduct and withhold upon such wages or salaries the withholding tax due thereon. In
this case, the garnishees are the persons owning debts due to the employer or in possession or
control of credits to which the employer are entitled. Accordingly, they are in control of the
payment of backwages, allowances and benefits and they are authorized to deduct and withhold
the income tax due from the backwages, allowances and benefits to be paid to employees, and
are respectively liable for such deductions.
In order to ensure the collection of the appropriate withholding taxes on wages, garnishees of a
judgment award in a labor dispute are constituted as withholding agents with the duty of deducting
the corresponding withholding tax on wages due thereon in an amount equivalent to five percent
(5%) of the portion of the judgment award representing the taxable backwages, allowances and
benefits.
All internal revenue officers and others concerned are hereby enjoined to give this Circular as
wide a publicity as possible.
Sectio Withholding Tax by Government Agencies
n Income payments, except any single purchase which is P10,000 and below, which are made by a
2.57.2( government office, national or local, including GOCCs83,111 on their purchases of goods from
N), RR local suppliers shall be subject to a withholding tax of 1%.
2-98
159
I`
10. Special Rules

Minimum Corporate Income Tax
Gross income – gross sales LESS Sales RDAC (return, discount, allowances, cost of goods sold)
There’s a side by side computation, whichever is greater that’s what TP will pay
RCIT v. MCIT
Rate: 30% v. 2%
Base: Gross income less deduction v. gross sales less Sales RDAC
NOTE: Not always true that MCIT will be lower, because the tax base will have an effect
Implications;
If RCIT higher  k thanks bye 30%
MCIT higher 
1.Pay MCIT amount = 1 million , RCIT – 300,000 = Pay 1m, kasi higher
2. Take difference :700,000 carried forward and treated as tax credit for immediately succeeding 3 yrs
160
I`
CREB CREBA assails the imposition of the minimum MCIT does not tax capital but only taxes income
A v. corporate income tax as being violative of the as shown by the fact that the MCIT is arrived at
Exec. due process clause as it levies income tax by deducting the capital spent by a corporation
Secret even if there is no realized gain. They also in the sale of its goods, i.e., the cost of goods
ary question the creditable withholding tax on and other direct expenses from gross sales.
(2010) sales of real properties classified as ordinary
assets stating that: (1) they ignore the different Besides, there are sufficient safeguards that
treatment of ordinary assets and capital exist for the MCIT:
assets; (2) the use of gross selling price or fair (1) it is only imposed on the 4th year of
market value as basis for the CWT and the operations;
collection of tax on a per transaction basis (and (2) the law allows the carry forward of any
not on the net income at the end of the year) excess MCIT paid over the normal income
are inconsistent with the tax on ordinary real tax; and
properties; (3) the government collects income (3) the Secretary of Finance can suspend the
tax even when the net income has not yet imposition of MCIT in justifiable instances.
been determined; and (4) the CWT is being
levied upon real estate enterprises but not on
The regulations on CWT did not shift the tax
other enterprises, more particularly those in the
base of a real estate business’ income tax from
manufacturing sector. net income to GSP or FMV of the property sold
since the taxes withheld are in the nature of
WON THE IMPOSITION OF MCIT ON advance tax payments and they are thus just
DOMESTIC CORPORATIONS IS installments on the annual tax which may be due
UNCONSTITUTIONAL FOR VIOLATING DUE at the end of the taxable year. As such the tax
PROCESS  NO base for the sale of real property classified as
ordinary assets remains to be the net taxable
income and the use of the GSP or FMV is
because these are the only factors reasonably
known to the buyer in connection with the
performance of the duties as a withholding
agent.
161
I`
Taxing on the gross
Q: In the year you are liable to pay MCIT, are you able to claim NOLCO?
A: Cannot claim, because NOLCO is part of deductible expenses, when you calculate MCIT, you
do not account anything outside of the direct cost, and NOLCO is not a direct cost.
CIR v. For its fiscal year ending March 2001 (FY First, Section 13 (a) of Presidential Decree No.
PAL 2000-2001), PAL allegedly incurred zero 1590 refers to “basic corporate income tax.” In
(2009) taxable income, which left it with unapplied Commissioner of Internal Revenue v. Philippine
creditable withholding tax in the amount of Airlines, Inc., the Court already settled that the
P2,334,377.95. PAL did not pay any MCIT for “basic corporate income tax,” under Section 13
the period. PAL requested for the refund of its (a) of Presidential Decree No. 1590, relates to
unapplied creditable withholding tax for FY the general rate of 35% (reduced to 32% by the
2000-2001. The Large Taxpayers Audit and year 2000) as stipulated in Section 27 (A) of the
Investigation Division 1 (LTAID 1) of the BIR NIRC of 1997.
Large Taxpayers Service (LTS), issued a Tax
Verification Notice authorizing verification of Second, Section 13 (a) of Presidential Decree
the supporting documents and pertinent No. 1590 further provides that the basic
records. During an informal conference, BIR corporate income tax of PAL shall be based on
relayed to PAL that it was instead being its annual net taxable income. This is consistent
assessed for deficiency MCIT. PAL argued that with Section 27 (A) of the NIRC of 1997, which
it was not liable for MCIT under its franchise. provides that the rate of basic corporate income
The CIR argued that Section 13 (a) of PD No. tax, which is 32% beginning 1 January 2000,
1590 provides that the corporate income tax of shall be imposed on the taxable income of the
PAL shall be computed in accordance with the domestic corporation.
NIRC. And, since the NIRC of 1997 imposes
MCIT, and PAL has not applied for relief from
Third, even if the basic corporate income tax and
the said tax, then PAL is subject to the same.
the MCIT are both income taxes under Section
27 of the NIRC of 1997, and one is paid in place
WON PAL is liable for deficiency MCIT for of the other, the two are distinct and separate
FY 2000-2001  NO taxes.
Lifted from PM Reyes: Fourth, the evident intent of Section 13 of

In COMMISSIONER VS. PAL [JULY 7, 2009], Presidential Decree No. 1520 is to extend to
PAL under PD 1590 (its franchise) was liable PAL tax concessions not ordinarily available to
only for basic corporate income tax or other domestic corporations. Section 13 of
franchise tax, whichever is lower and this is in Presidential Decree No. 1520 permits PAL to
lieu of all other taxes, except real property. The pay whichever is lower of the basic corporate
CIR contends that PAL is subject to MCIT income tax or the franchise tax; and the tax so
while it was the contention of PAL that the paid shall be in lieu of all other taxes, except
MCIT was included in the “in lieu of all other only real property tax. Hence, under its
taxes” provision. The Supreme Court noted franchise, PAL is to pay the least amount of tax
there is a distinction between taxable income, possible.
which is the basis for basic corporate income
tax; and gross income, which is the basis for Fifth, the CIR posits that PAL may not invoke in
162
I`
the MCIT under Section 27(E). The two terms the instant case the “in lieu of all other taxes”
have their respective technical meanings, and clause in Section 13 of Presidential Decree No.
cannot be used interchangeably. Hence, the 1520, if it did not pay anything at all as basic
basic corporate income tax cannot cover MCIT corporate income tax or franchise tax. As a
since the basis for the first is the annual net result, PAL should be made liable for “other
taxable income; while the basis for the second taxes” such as MCIT. This line of reasoning has
is gross. Thus, MCIT is included in “all other been dubbed as the Substitution Theory, and
taxes” from which PAL is exempted. this is not the first time the CIR raised the same.
And sixth, Presidential Decree No. 1590

explicitly allows PAL, in computing its basic
corporate income tax, to carry over as deduction
any net loss incurred in any year, up to five
years following the year of such loss. Therefore,
Presidential Decree No. 1590 does not only
consider the possibility that, at the end of a
taxable period, PAL shall end up with zero
annual net taxable income (when its deductions
exactly equal its gross income), as what
happened in the case at bar, but also the
likelihood that PAL shall incur net loss (when its
deductions exceed its gross income). If PAL is
subjected to MCIT, the provision in Presidential
Decree No. 1590 on net loss carry-over will be
rendered nugatory. Net loss carry-over is
material only in computing the annual net
taxable income to be used as basis for the basic
corporate income tax of PAL; but PAL will never
be able to avail itself of the basic corporate
income tax option when it is in a net loss
position, because it will always then be
compelled to pay the necessarily higher MCIT.
RR 9- RR 9-98 prescribes the regulations to implement RA No. 8424 relative to the imposition of the
98 Minimum Corporate Income Tax (MCIT) on domestic corporations and resident foreign
except corporations.
Sec.
2.28  An MCIT of 2% of the gross income as of the end of the taxable year is imposed upon any
(E)(7) domestic corporation beginning the 4th taxable year immediately following the taxable year
in which such corporation commenced its business operations.
 The MCIT will be imposed whenever such operation has zero or negative taxable income
or whenever the amount of MCIT is greater than the normal income tax due from such
operation.
 In the case of a domestic corporation whose operations or activities are partly covered by
the regular income tax system and partly covered under a special income tax system, the
MCIT will apply on operations covered by the regular income tax system.
 Any EXCESS OF THE MINIMUM CORPORATE INCOME TAX (MCIT) over the normal
income tax as computed under Sec. 27(A) of the Code shall be carried forward on an
annual basis and credited against the normal income tax for the three (3) immediately
163
I`
succeeding taxable years.

o The taxpayer shall pay the MCIT whenever it is greater than the regular or normal
corporate income tax, which is imposed under Sec. 27(A) and Sec. 28(A)(1) of the
Code.
o The excess MCIT is creditable against the normal income tax within the next three
(3) years from payment thereof.
o The excess MCIT cannot be claimed as a credit against the MCIT itself or against
any other losses.
 For purposes of the MCIT, the taxable year in which business operations commenced shall
be the year in which the domestic corporation registered with the Bureau of Internal
Revenue (BIR).
o Firms which were registered with BIR in 1994 and earlier years shall be covered by
the MCIT beginning January 1, 1998.
o Firms which were registered with BIR in any month in 1998 shall be covered by the
MCIT three calendar years thereafter (i.e. after the lapse of three calendar years
from 1998). For example, a firm which was registered in May 1998 shall be covered
by the MCIT in 2002.
o The reckoning point for firms using the fiscal year shall also be 1998. For example, a
firm which registered with the BIR on July 1, 1998 shall be subject to an MCIT on his
gross income earned for the entire fiscal year ending in the year 2002.
o Transitory Rule for determining the MCIT for 1998 on firms which are taxable on a
fiscal year basis. For firms using the fiscal year basis and whose first taxable period
under the minimum corporate income tax covers month/months in 1997 (i.e. prior to
the imposition of MCIT under RA 8424), the MCIT which is due for 1998 shall be
computed using an apportionment formula. The ratio to be applied is the number of
months in 1998 to twelve (12) months (i.e. the total number of months in a fiscal
year).
 The minimum corporate income tax (MCIT) shall apply only to domestic corporations
subject to the normal corporate income tax prescribed under these Regulations.
Accordingly, the minimum corporate income tax shall not be imposed upon any of the
following:
 Domestic corporations operating as proprietary educational institutions subject to tax
at ten percent (10%) on their taxable income; or
 Domestic corporations engaged in hospital operations which are nonprofit subject to
tax at ten percent (10%) on their taxable income; and
 Domestic corporations engaged in BUSINESS AS DEPOSITORY BANKS UNDER
THE EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM, otherwise known as
Foreign Currency Deposit Units (FCDUs), on their income from foreign currency
transactions with local commercial banks, including branches of foreign banks,
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with
foreign currency deposit system units and other depository banks under the foreign
currency deposit system, including their interest income from foreign currency loans
granted to residents of the Philippines under the expanded foreign currency deposit
system, subject to final income tax at ten percent (10%) of such income.
 Firms that are taxed under a special income tax regime such as those in accordance
with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act,
respectively).
164
I`
 A MCIT of (2%) of the gross income from sources within the Philippines is imposed upon
any resident foreign corporation, beginning on the fourth (4th) taxable year (whether
calendar or fiscal year, depending on the accounting period employed) immediately
following the taxable year in which the corporation commenced its business operations,
whenever the amount of the minimum corporate income tax is greater than the normal
income tax due for such year.
 The minimum corporate income tax shall only apply to resident foreign corporations, which
are subject to normal income tax.
 Accordingly, the minimum corporate income tax shall not apply to the following resident
foreign corporations:
o Resident foreign corporations engaged in business as "international carrier" subject
to tax at two and one-half percent (2 1⁄2%) of their "Gross Philippine Billings";
o Resident foreign corporations engaged in business as Offshore Banking Units
(OBUs) on their income from foreign currency transactions with local commercial
banks, including branches of foreign banks, authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with Offshore Banking Units (OBUs),
o including interest income from foreign currency loans granted to residents of the
Philippines, subject to a final income tax at ten percent (10%) of such income; and
o Resident foreign corporations engaged in business as regional operating
headquarters subject to tax at ten percent (10%) of their taxable income.
o Firms that are taxed under a special income tax regime such as those in accordance
with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act,
respectively).
The Regulations will apply to domestic and resident foreign corporations on their aforementioned
taxable income derived beginning January 1, 1998 pursuant to the pertinent provisions of RA
8424, provided, however, that corporations using the fiscal year accounting period and which are
subject to MCIT on income derived pertaining to any month or months of the year 1998 will not be
imposed with penalties for late payment of the tax.
Improperly Accumulated Earnings Tax
GR: You don’t want to declare dividends, you will be taxed

Dividend declaration attracts some form of tax, there is a tendency not to declare that so BIR will
165
I`
do something
Tax Avoidance cases but the law proactively addresses IAET

Nondeclaration will also expose TP to SEC penalties!
Rate and Base: 10% tax on the amount established after the calculation : arrive at the
financial income. Why are you adding those back, because the TP is put in the place where
the base of the IAET was the base available for dividend declaration
Accumulation is not itself wrong, it is the improper accumulation of the asset.

Beyond reasonable business tax. Contra – if you are accumulating within reasonable business
rates
NOT PAY IAET:
1.SPECIFIC KIND OF ENTITY

- publicly held corporation – no alterego to speak of unlike privately held corp
-banks and nonbank financial
-insurance companies
-not taxable entities GPP, etc
2. Using accumulation because of a REASONABLE BUSINESS NEED
166
I`
1.allowance for increase in accumulation of earnings up to 100% of PUC

2.for definite corporate expansion approved by BOD, requiring capital expenditure
3.reserved for building plants or equipment acquisition approved by BOD
4.compliance with any loan covenant or pre-existing obligation established under a legitimate
business agreement
5. required by law/applicable regulations to be retained by corporation / in respect of which
there is legal prohibition against distribution
Note: Mutually exclusive if I’m a specific kind of entity no need to justify how accumulation used
vice versa
The Manila Wine Merchants Inc. is a domestic Using the IMMEDIACY DOCTRINE, CTA is
Manila corporation engaged in the importation and correct in finding that the investment made
Wine sale of whiskey, wines, liquors and distilled by petitioner in the USA Treasury shares in
Mercha spirits. CIR examined its books of account 1951 was an accumulation of profits in
nts, and found it had unreasonably accumulated excess of the reasonable needs of
Inc. v. surplus amount in excess of the reasonable petitioner’s business. The finding of the Court
CIR needs of the business subject to the 25% of Tax Appeals that the purchase of the USA
(1984) surtax imposed by Sec. 25 of the NIRC. Treasury bonds (for future expansion,
acquisition of lots, land and buildings) were in
CIR found that the accumulated surplus in no way related to petitioner’s business of
question were invested to ‘unrelated business’ importing and selling wines whisky, liquors
which were not considered in the ‘immediate and distilled spirits, and thus construed as
needs’ but MWMI asserts that it was for the an investment beyond the reasonable needs
future expansion of the company, and that the of the business is binding. Assuming it was for
surplus profits allegedly accumulated in the expansion, it was just a mere afterthought.
form of USA Treasury shares in 1951 should
not be subject to surtax of 25% in 1957 but In determining whether accumulations of
should be based on surplus accumulated in earnings or profits in a particular year are within
1951. the reasonable needs of a corporation for the
25% surtax, it is necessary to take into
WON THE PURCHASE OF THE USA account prior accumulations, since
TREASURY BONDS BY PETITIONER IN accumulations prior to the year involved may
167
I`
1951 CAN BE CONSTRUED AS AN have been sufficient to cover the business needs
INVESTMENT TO AN UNRELATED and additional accumulations during the year
BUSINESS  YES involved would not reasonably be necessary.
WON THE PENALTY TAX OF 25% CAN BE

IMPOSED ON SUCH IMPROPER
ACCUMULATION IN 1957 DESPITE THE
FACT THAT THE ACCUMULATION
OCCURRED IN 1951  NO
CIR v. Tuason was assessed 25% surtax on The Court does not dispute that these
Tuaso unreasonable accumulation of surplus for the investments were actually made.
n years 1975-1978. Tuason protested the
(1989) assessment on the ground that the However, it also points out that the
accumulation of surplus profits was solely for corporation did not use up its surplus profits.
the purpose of expanding its business
operations as an ESTATE BROKER which The enormous discrepancy between the alleged
included construction of an apartment building investment cost and the declared market value
and the purchase of a condominium unit which of these pieces of real estate was not denied by
was intended for resale or lease. Tuason. Thus, since the company as of the time
of assessment had invested in its business
WON THE ASSESSMENT WAS PROPER  operations only a portion of its accumulated
YES surplus profits, its remaining accumulated
surplus profits are subject to 25% surtax.
From Pm Reyes:
In CIR v. TUASON [MAY 15, 1989], the CIR The touchstone of liability is the purpose behind
assessed Tuason, Inc. for IAET. The CIR the accumulation of the income and not the
presumed that when Tuason, Inc. accumulated consequence of the accumulation. Thus, if the
profits, the purpose was to avoid the income failure to pay dividends were for the purpose of
tax on its shareholders on the finding that it using the undistributed earnings and profits for
was a mere holding or investment company. the reasonable needs of the business, that
Tuason contended it was for the purpose of purpose would not fall within the interdiction of
expanding their business as a real estate the statute cited in Manila Wine Merchants, Inc.
broker. The Supreme Court ruled that Tuason vs. CIR.
was liable for IAET. Tuason was a mere
holding company as it was not involved
itself in the development of the
subdivisions but merely subdivided its own
lots and sold them for bigger profits. It
derived its income from interest, dividends,
and rental from the sale of realty. The
touchstone of liability is the purpose behind the
accumulation of the income and not the
consequences of the accumulation. The
company's failure to distribute dividends to its
stockholders was clearly for reasons other than
the reasonable needs of the business.
Cyana Petitioner is a corporation organized under PH Section 25 of the NIRC of 1977 discouraged tax
mid laws, is a wholly owned subsidiary of American avoidance through corporate surplus
168
I`
Philipp Cyanamid Co., based in Maine, USA. CIR sent accumulation. When corporations do not declare
ines, an assessment letter to petitioner and dividends, income taxes are not paid on the
Inc. v. demanded the payment of deficiency income undeclared dividends received by the
CA tax of 119K for 1981. Petitioner contended that shareholders. The tax on improper accumulation
(2000) it availed of the tax amnesty under EO 41. It is essentially a penalty tax designed to compel
said that the surtax assessment were improper the corporations to distribute earnings so the
since the profits were retained to increase the same could be taxed.
working capital of the company and would be
used for reasonable business needs of the
As of 1981, the working capital of Cyanamid was
company. CIR denied the request. So
more than 2x its current liabilities, there is
petitioner appealed to the CTA. During the
therefore adequacy in the working capital.
pendency of the appeal in the CTA, the
Available income covered the expenses and
assessment was reduced to 26K as a result of
indebtedness for that year, and there is no
a compromise settlement. But the surtax on
reason to expect an impending working capital
improperly accumulated profits remained
deficit. If the CIR determined that the corporation
unsolved. is avoiding the tax by accumulating earnings or
profit, it is for the taxpayer to prove the
WON PETITIONER IS LIABLE FOR determination wrong . This applies even when
ACCUMULATED EARNINGS TAX FOR 1981 the corporation is not a mere holding or
 YES investment company and does not have
unreasonable accumulation of earning or profits.
In order to determine whether the profits are

accumulated for the reasonable needs to
avoid surtax, it must be shown that the
controlling intention of the taxpayer is
manifest at the time of the accumulation, not
intentions declared subsequently which are
mere afterthoughts. And the profits must be
used within a reasonable time after the close
of the taxable year. Petitioners failed to do so.
Does your business model require you have lots of back pocket for a rainy day???
169
I`
Reasonableness
RR 2- The IAET is being imposed in the nature of a penalty to the corporation for the improper
01 accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders
who are supposed to pay dividends tax on the earnings distributed to them by the corporation.
As a general rule, the IAET 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 accumulate instead of being divided or distributed.
As exceptions, the IAET shall not apply to:

1. Publicly-held corporations
2. Banks and other non-bank financial intermediaries; and
3. Insurance companies
4. GPPs
5. Non-taxable joint ventures
6. Enterprises registered under SEZs
RMC Clarification on the imposition of the 10% IAET to taxable income of closely-held domestic
35- corporations, except publicly held corporations, banks, and other non-bank financial
2011 intermediaries, insurance companies and those enumerated under Section 4 of the RR No. 2-
2001
Section 29 of the Tax Code provides that a corporation that permits the accumulation of earnings
and profits beyond the reasonable needs of the business, instead of dividing or distributing said
profits, is subject to 10% IAET on the improperly accumulated taxable income (IATI).
Corporations using the calendar year basis – accumulated earning under tax shall not apply on
improperly accumulated income as of December 31 1997.
Corporations adopting the fiscal year accounting period – the improperly accumulated income not
170
I`
subject to this tax shall be reckoned as of the end of the month comprising the 12-month period of
fiscal year 1997-1998.
BIR Abbot Phils., as a wholly-owned subsidiary of Abbot Phils. is considered a publicly-held
Ruling Abbot-US, will be considered as being owned corporation exempt from the Improperly
25-02 proportionately by Abbott-US shareholders. Accumulated Earnings Tax. This is based on the
The ownership of a domestic corporation, for representation that as of the year end 2000,
purposes of determining whether it is a closely- Abbot-US had 101 to 272 shareholders holding
held corporation or a publicly-held corporation, a combined 1,545,937,133 shares of common
is ultimately traced to the individual stock, and the twenty largest shareholders of
shareholders of the parent company. Abbott-US as of September 30, 2001 own an
aggregate of 30.1% of Abbot-US issued as
WON ABBOT PHILS. IS A PUBLICLY-HELD outstanding shares.
CORPORATION  YES
Based on Section 4 of Revenue Regulations No.
2-2001, closely-held corporations are those
corporations at least 50% in value if 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.
Abbot-Phils. does not fall under the definition of
a closely-held corporation.
Fringe Benefits Tax
Regular compensation / FBT?

It depends on whose perspective.
VALUE = 100,000
GR: Compensaiton given to employee (35%) = payment made by employee by employer instead
of paying 100,000 = withhold 35,000, the balance of 65,000 which employee takes home
171
I`
100,000 denominated under FBT as monetary value

3
MV = monetary value – 100,000 whatever given as compensation
- A car worth 100,000
Monetary value / 65% = 154,000 (grossed up monetary value)
GMV = 154,000 x 35% = 54,000
***Grossing up – ensuring that the recipient is able to receive what was granted to her in full.
All FBT are given in kind. But since to pay 35% surrender 1 wheel etc
Ensure to get the car in full. The law ensures that there is a tax collection as it maintains
characteristic as additional compensation.
Which one more beneficial?

If given to employee = characterized FBT, because the employer is the one required to pay FBT
by law. It ensures that employee receives 100,000. If compensation – 65,000 only
Cashout of employee
FBT
100,000 employee
54,0000 to govt
As to the employer however, there is a higherpartial recovery of employee’s FBT as

deductible expense = 154,000 (grossed up monetary value)
MIXTURE OF THE FOLLOWING FBT

Vehicle used for businesses and personal purposes = partial amount as FBT calculation
13:24
Discussion:
For the convenience of the employer – not FBT
Interest on loan  account for legal interest (6%)
- If company offers company loans lower than 6% then FBT is the difference is 6% and
whatever rate given by company
Educational assistance  granted directly to both employee and dependents of the employee
- To be captured to FBt must not be complying with the requirements as compensation
income
- Related to what you do
- For past or future service
- (forms part of compensation0
- Under a competitive scholarship scheme
Rules provide that if 500 m of housing within employer’s premise convenience of the employer
172
I`
FBTs not taxable, does this mean its exempt? nope

If not FBT, but treated as income compensation, the BIR will capture them
Under de minimis  exempted absolutely
Granted to rank and file
 all employee will get housing
??????/
Benagl Petitioner, Benaglia, is manager of the hotels The petitioner lived at the hotel solely because
ia v. of the Hawaiian Hotels, Ltd., in Hawaii for he could not otherwise perform the services
CIR which he receives his salary as well as a free required of him. The occupation of the premises
(1937) room and compensated meals. The IRS was imposed upon him for the benefit of the
Commissioner included the room and board employer. This is not to say that anytime an
that he and his wife receive as part of his gross employee is fed or lodged by the employer that it
income. is not taxable income. The court also looked at
the intent of the parties and decided the
Petitioner argues he has to live in the hotel employer never intended the room and board to
room as a necessary part of his job as form part of his compensation.
manager of the hotel, and that it should not
be counted as constituting part of his The Board held that a taxpayer employee may
salary. exclude the value of food and lodging received
from his employer, if he receives it solely for the
WON THE PETITIONER’S RECEIPT OF convenience of his employer and as a necessary
FREE ROOM AND MEALS FROM HIS incident of the proper performance of his duty.
EMPLOYER SHOULD BE REPORTED AS The meals-and-lodging exclusion has been
PART OF HIS COMPENSATION AND THUS formalized as §119 in the tax code.
FORM PART OF HIS GROSS INCOME  NO
Though this case established the important
NOT PART OF GROSS INCOME if doctrine of “convenience of the employer,”
-for benefit of employer §119(a) of the tax code now has two other
To be excluded as fringe benefit requirements that are needed in order to take
1.meals and lodging on business premises fringe benefit exclusions for meals and
2.condition of taking the job lodging. First,
1. it must be on the business premises.
173
I`
Second, in the case of lodging,

2. it must be a condition of taking the
job.
RR 3- Implements Section 33 of the National Internal Revenue Code (NIRC), as amended by RA No.
98 8424, relative to the special treatment of fringe benefits granted or paid by the employer to
employees, except rank and file employees, beginning January 1, 1998. The definition of fringe
benefits as well as the determination of the amount subject to the fringe benefits tax are specified
in the Regulations.
The grossed- up monetary value of the fringe benefit represents the whole amount of income
received by the employee which includes the net amount of money or net monetary value of
property which has been received + PLUS + the amount of the fringe benefit tax thereon
otherwise due from the employee, but paid by the employer for and in behalf of his employee.
RMC RMC clarifies the tax implications of income or gain derived by an employee from exercise
88- of stock option plans.
2012
Under BIR ruling No. 119-2012, it was ruled that ANY INCOME OR GAIN DERIVED BY THE
EMPLOYEES FROM THEIR EXERCISE OF STOCK OPTIONS is considered as additional
compensation subject to Income tax, and consequently, withholding taxes on
compensation.
Any income or gain derived from stock option plans granted to managerial and supervisory
employees which qualify as fringe benefit tax imposed under Sec. 33 of the NIRC as amended.
The additional compensation or the taxable fringe benefit, is the difference of the book value / fair
market value of the shares, whichever is higher, at the time of the exercise of the stock option and
the price fixed on the grant date. The option has value only if, at the time of the exercise, the stock
is worth more than the price fixed on the grant date. The additional compensation or taxable fringe
benefit arises whether the shares of stocks involved are that of a domestic or foreign corporation.
If the shares to be issued at the exercise of the stock options come from the unissued shares of
stock of the issuing corporation, the original issuance of said shares is subject to DST.
174
I`
In the event that employees subsequently sell, barter, exchange or otherwise dispose of shares of
stock obtained from their exercise of the stock options, the tax treatment is as follows:
1. If the shares involved are shares in a domestic corp, not traded in the stock exchange, the
gain if any is subject to CGT. Further, the sale or transfer of said shares is subject to
DST, upon execution of the deed or upon delivery, assignment or indorsement of such
shares in favor of another.
2. If the shares involved are shares of stock listed and traded through the Local Stock
Exchange, the transaction is subject to stock transaction tax.
3. If the shares involved are shares of stock in a foreign corporation, the gain, if any is subject
to ordinary Income Tax.
RMC Clarifies the tax treatment of stock option plans and other option plans.
79-
2014 Stock option are “shares of stocks” as defined by Section 22(L) of the National Internal Revenue
Code (NIRC) of 1997, as amended, and are taxable as such. In the event that the said option was
granted due to an employee-employer relationship, and where the grantor is the employer and the
grantee is the employee, and no payment was received for the grant of the said option, on the
year an option was granted, the grantor cannot claim deductions for the grant of the stock option.
However, if the option was granted for a price, the full price of the option shall be considered
capital gains, and shall be taxed as such.
Upon issuance of the Option, the same is subject to a Documentary Stamp Tax amounting to P
0.75 on each P 200.00, or fractional part thereof, of the par value of the stock subject of the
option, or in the case of stock without par value the amount equivalent to 25% of the Documentary
Stamp Tax paid upon the original issue of the stock subject of the option, as provided for in the
Section 175 of the NIRC of 1997, as amended.
Any grant of an option for consideration, or transfer of the option is subject to Capital Gains Tax.
If the option was granted without any consideration, the cost base of the option for purposes of
computing capital gains shall be zero.
If the option is transferred by the grantee/ subsequent owner without any consideration, the same
shall be treated as a donation of shares of stock subject to Donor’s Tax. The basis shall be the fair
market value of the option at the time of the donation.
In equity-settled options, the grantee/ subsequent owner pays the exercise price to the grantor
and the latter is obligated to deliver the stocks to the owner of the option.
In the event the option was granted by an employer involving the employer’s own shares of stock
or shares it owns, upon the exercise of the option by a rank-and-file employee, an additional
compensation equivalent to the difference of the book value/fair market value of the shares,
whichever is higher, at the time of the exercise of the stock option and the price fixed on the grant
date, shall be recognized and subjected to Income Tax and consequently to Withholding Tax on
compensation. However, if the employee which exercises the option occupies a supervisory or
managerial position, the difference of the book value/fair market value of the shares, whichever
is higher, at the time of the exercise of the stock option and the price fixed on the grant date, shall
be treated as a fringe benefit subject to Fringe Benefit Tax.
175
I`
In the event the option was granted to a supplier of goods or services, the difference between the
book value/fair market value of the shares, whichever is higher, at the time of the exercise of the
stock option and the price fixed on the grant date, shall be recognized as additional
consideration for the services rendered or goods supplied by the said supplier, and shall be
subject to the relevant Withholding Tax at source and other taxes applicable.
In the event the option was granted to a person, natural or juridical, who is not an employee, or a
supplier of goods or services to the grantor, the difference between the book value/fair market
value of the shares, whichever is higher, at the time of the exercise of the stock option and the
price fixed on the grant date shall be considered a donation, and shall be subject to Donor’s Tax,
among others.
The above rules on equity-settlement option also applies in case of cash-settlement options.
Cash-settled options do not require the actual delivery of stocks. Instead, the market value, at the
exercise date, of the stock is compared to the exercise price, and the difference (if in a favorable
direction) is paid by the grantor to the holder of the option.
The issuing corporation shall submit to the Revenue District Office where it is registered a
statement under oath within 30 days from the grant of the option indicating the following:
1. Terms and condition of the stock option
2. Names, TINs, positions of the grantees
3. Book value, fair market value, par value of the shares subject of the option at the grant
date
4. Exercise price, exercise date and/or period
5. Taxes paid on the grant, if any
6. Amount paid for the grant, if any
During the exercise period, the issuing corporation shall file a report on or before the 10th day of
the month following the month of exercise stating therein the following:
1. Exercise date
2. Names, TINs, positions of those who exercised the option
3. Book value, fair market value, par value of the shares subject of the option at the exercise
date/s
4. Mode of settlement (i.e. cash, equity)
5. Taxes withheld on the exercise, if any
6. Fringe Benefits Tax paid, if any
176
I`
Transfer Pricing
To address related party transactions

- Purpose: Juridical relationships transactions – distrust by government; if you are related
you are able of seeing the bigger picture
- Ex. Conglomerate Ayala with 5 companies within conglomerate of Ayala
Because of Pandemic companies are suffering, conglomerate Pres ask
Rich subsidiaries will lend to other subsidiaries on the condition that the loan should
impose a lower interest rate
Elements
1. Related party
2. Because related party appears not reflecting the correct transaction between parties
3. #2 Gives power to CIR, because of the disconnect of actual and real, the law authorizes the
BIR to allocate and apportion necessary to prevent evasion of taxes to reflect the income of
such organization, trade, or business
Transfer Pricing
- Should related parties shy away from one another? Familial / juridical? NO
- From tax perspective, hurdle more checkpoints than usual transactions between unrelated
parties
Glaxo and Amazon checkpoints

1.ensure that you are dealing with each other at ARMS LENGTH 
Arms length principle – a distance sufficient to exclude a notion of intimacy.
Ex. Social distancing , jowa
In the previous example

Use correct interest rate – 8% ; but the transaction actually is 7%  by and large arms length
parin, need not be completely identical
177
I`
In a related party transaction, when you stipulate a rate at X%, cast a wide net and look at
similarly situated parties
Look at:
1.Parties involved
2.Amount /loan extended
3. What is the interest rate applicable
With one critical difference, that these similar transactions are between unrelated parties
10 similarly situated transaction, 1 party using 3%, 4 at 6%, and 20% etc. Drop the outliers, 3%
and 20%, we get what is the average, am I too far from average? Not too far  arms length
Make sure that in the commercial transaction, the gain is not achieved by using the
relationship
CIR v. FDC entered into several transactions: The Court held that Section 43 (now Section 50)
Filinve 1. It extended advances to its affiliates for gives the BIR the power to distribute, apportion
st operational purposes. or allocate gross income or deductions between
(2011) 2. It entered into a deed of exchange with or among such organization, trade or business.
FLI where he transferred a building in FDC and its affiliates fall under the definition of
exchange for shares of stock. “controlled” and “controlled taxpayer.” Aside
3. It entered into a shareholder’s from owning significant portions of the shares of
agreement with RHPL for a formation of stock of FLI, FAI, DSCC, and FCI, the fact that
a joint venture company. FDC extended substantial sums of money as
It was assessed by the BIR for deficiency cash advances to its said affiliates for the
income taxes for these transactions. With purpose of providing them financial assistance
regard to the advances, it is being assessed for their operational and capital expenditures
for “theoretical interests” and Documentary seemingly indicate that the situation sought to be
Stamp Taxes. There really was no interest addressed by the subject provision exists.
stipulated between FDC and its affiliates but
the BIR basically assumed that there was and CIR’s power to distribute, apportion, or allocate
invoked Section 43 of the old NIRC which gross income or deductions between or among
provides that: (i)n any case of two or more controlled taxpayers may likewise be exercised
organizations, trades or businesses (whether whether or not fraud inheres in the transaction/s
or not incorporated and whether or not under scrutiny. For as long as the controlled
organized in the Philippines) owned or taxpayer’s taxable income is not reflective of that
controlled directly or indirectly by the same which it would have realized had it been dealing
interests, the Commissioner of Internal at arm’s length with an uncontrolled taxpayer,
Revenue is authorized to distribute, apportion the CIR can make the necessary rectifications in
or allocate gross income or deductions order to prevent tax evasion.
between or among such organization, trade or
business, if he determines that such Despite the broad parameters provided,
distribution, apportionment or allocation is however, we find that the CIR’s powers of
necessary in order to prevent evasion of taxes distribution, apportionment or allocation of gross
or clearly to reflect the income of any such income and deductions under Section 43 of the
organization, trade or business. According to 1993 NIRC and Section 179 of Revenue
the CIR, since FDC resorted to interest-bearing Regulation No. 2 does not include the power to
fund borrowings from commercial banks. Since impute “theoretical interests” to the controlled
178
I`
considerable interest expenses were deducted taxpayer’s transactions. There must be proof of
by FDC when said funds were borrowed, the the actual, or at the very least, probable
CIR theorizes that interest income should receipt or realization by the controlled
likewise be declared when the same funds taxpayer of the item of gross income sought
were sourced for the advances FDC extended to be distributed, apportioned, or allocated
to its affiliates. by the CIR.
WON THE ADVANCES EXTENDED BY Record yielded no evidence of actual or possible

RESPONDENT TO ITS AFFILIATES ARE showing that the advances of FDC resulted to
SUBJECT TO INCOME TAX  NO the interests subsequently assessed. FDC’s
Fund Management Department Manager
testified that the advances were sourced from
the corporation’s rights offering in 1995 as well
as its sale of its investment in Bonifacio Land in
1997. Thus, not from the bank loans. But they
are liable for documentary stamp taxes for such
transactions as they qualify as loan agreements.
Her Glaxo Canada acted as a secondary A proper application of the arm’s length principle
Majest manufacturer and marketer of patented drug requires that regard be had for the “economically
y the products. Between 1990 and 1993, they relevant characteristics” of the arm’s length and
Queen purchased the pharmaceutical ingredient non-arm’s length circumstances to ensure they
v. ranitidine for upwards of $1500 for the are “sufficiently comparable.” Where there are
GlaxoS patented drug Zantac, pursuant to a Licensing no related transactions or where related
mithKli Agreement with parent company Glaxo transactions are not relevant to the
ne, Inc. Holdings, while generics pharmas were determination of the reasonableness of the price
(2012) purchasing the same ingredient for only $200- in issue, a transaction-by-transaction approach
$300 for their generic drugs. They were may be appropriate. However, “economically
reassessed for the taxation years in question relevant characteristics of the situations being
and their income was raised by some $51M on compares” may make it necessary to consider
the basis that it had paid more than a other transactions that impact the transfer price
reasonable amount for the purchases. The Tax under consideration. In each case, it is
Court affirmed the minister’s reassessment, necessary to address this situation by
employing the Comparable Uncontrolled Price considering the relevant circumstances and, if
method in directly comparing the purchase required, transactions other than the purchasing
price of Glaxo with those of the generics transactions must be taken into account.
companies in finding the purchase price paid to
be unreasonable. The Court of Appeals, In this case, Glaxo Canada was paying for at
however, found that the Tax Court had erred in least some of the rights and benefits under the
not considering the Licensing Agreement in License Agreements part of the purchase prices
determining whether the amount paid was for rantidine from Adechsa. As such, the License
reasonable. The Court of Appeals instead Agreement could not be ignored in determining
adopted the Reasonable Business Person the reasonable amount paid to Adechsa, which
Test, which required looking into the applies not only to payment for goods but also
circumstances that an arm’s length purchaser payment for services. Considering the License
would consider relevant when deciding what and Supply Agreements together offers a
price to pay. realistic picture of the profits of Glaxo Canada.
The prices paid by Glaxo Canada to Adechsa
WON THE LICENSING AGREEMENT were payment for a bundle of at least some
179
I`
SHOULD BE CONSIDERED IN rights and benefits under the License Agreement

DETERMINING THE REASONABLENESS and product under the Supply Agreement. The
OF THE PURCHASE PRICE PAID  YES generic comparators used thus do not reflect the
economic and business reality of Glaxo Canada
and, at least without adjustment, do not indicate
the price that would be reasonable in the
circumstances had Glaxo Canada and Adchesa
been dealing at arm’s length,
Amazo
n. Com
v.
Commi
ssion
Some add ons to add on to reflect the correct tax basis.
180
I`
Defenses of related parties

1. Transact in good faith
2. Advance Pricing Agreement
GLAXO SMITH
- Advance pricing agreemnt – bilateral / multilateral
RR 2- Transfer pricing - pricing of cross-border, intrafirm transactions between related parties or

2013 associated enterprises.
 Occurs between a taxpayer of a country with high income taxes and a related or
associated enterprise of a country with low income tax.
Arm’s length principle - internationally recognized standard for transfer pricing between associated
enterprises.
 Requires that transactions with a related party must be made under comparable conditions
and circumstances as a transaction with an independent party
3-steps
1. Conduct a comparability analysis
2. Identify the tested party and appropriate transfer pricing method
3. Determine the arm’s length results
RR 19- NEW BIR FORM No. 1709

20 July 8, 2020
Section 1. Background:
Through the years, transactions around the world have become more complex and have been
subject to abuse by taxpayers with intent to evade taxes by concluding transactions between them
at unreasonable prices, thus eroding the tax base. Undeniably. this usuallv happens between
related parties. While majority of related party transactions (RPTs) are not detrimental, there is a
pressing worldwide concem that they can be easily abused in the absence of a relevant
framework and effective enforcement.
Significant risks arise when RPTs are not conducted at arm's length and are used as a
conduit to channel funds out of the company into another related party, such as the risk of
material misstatement in the financial statements as a result of inappropriate accounting,
181
I`
and non-identification or non-disclosure.
Therefore, in order to ensure that proper disclosures of related party transactions are made and
that these transactions have been conducted at arm's length so as to protect the tax base, there
should be an effective implementation of Philippine Accounting Standards (PAS) 24, Related Party
Disclosures, for tax purposes. Under this PAS, an entity's financial statements shall contain the
disclosures necessary to draw attention to the possibility that its financial position and profit or loss
may have been affected by the existence of related parties and by transactions ani outstanding
balances, including commitments, with such parties. This Revenue Regulations requires,
therefore, the submission of BIR Form No. 1709 a1d its supporting documents following the
guidelines prescribed by the related revenue issuances for the submission of the required
attachments to the Annual lncome Tax Returns' Tax examiners are hereby enjoined to conduct a
thorough examination of the related party transactions and see to it that revenues are not
understated and expenses are not overstated in the financial statements as a result of these
transactions.
Section 3. Definition of Terms

1) "Associate" is an entity over which the investor has significant influence.
2) "Close members of the family of a person" are those family members who may be expected
to influence, or be influenced by, that person in their dealings with the entity and include:
(i) that person's children and spouse or domestic partner;
(ii) children of that person's spouse or domestic partner; and
(iii) dependents of that person or that person's spouse or domestic partner.
3) "Compensation" includes all employee benefits, i.e., all forms of consideration paid, payable
or provided by the entity, or on behalf of the entity, in exchange for services rendered to the entity.
It also includes such consideration paid on behalf of a parent of the entity in respect of the entity.
Compensation includes:
(a) short-term employee benefits, such as wages, salaries and social security, contributions, paid
annual leave and paid sick leave, profit-sharing and bonuses (if payable within twelve months of
the end of the period) and non-monetary benefits (such as medical care, housing, cars and free or
subsidized goods or services) lbr current employees;
(b) post-employment benefits such as pensions, other retirement benefits, post-employment life
insurance and post-employment medical care;
(c) other long-term employee benefits, including long-service leave or sabbatical leave, jubilee or
other long-service benefits, long-term disability benefits and, if they are not payable wholly within
twelve months after the end of the period, profit-sharing, bonuses and deferred compensation;
(d) termination benefits; and
(e) share-based payment.
4) 'Control" refers to the power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities.
5) "Joint Control" is the contractually agreed sharing of control of an arrangement, which exists
only when decisions about the relevant activities require the unanimous consent of the parties
sharing control.
6) "Joint Venture" is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement.
7) "Key management personnel" are those persons having authority and responsibility for
planning, directing and controlling the activities of the entity, directly or indirectly, including any
director (whether executive or otherwise) of that entity.
182
I`
8) "Post-employment Benefit Plans" are formal or informal arrangements under which an entity
provides post-employment benefits for one or more employees such as the following:
(a) retirement benefits (e.g. pensions and lump sum payments on retirement); and
(b) other post-employment benefits, such as post-employment life insurance and post-
employment medical care.
9) "Related Party" is a person or entity that is related to the reporting entity, i.e., the entity that
is preparing its financial statements.
10)"Related Party Transaction" refers to the transfer of resources, services or obligations

between a reporting entity and a related party,
regardless of whether a price is charged.
11) "Significant influence" is the power to participate in the financial and operating policy
decisions of an entity, but is not control over those policies. It may be gained by share ownership,
statute or agreement.
12) "Subsidiary" is an entity that is controlled by another entity.
l3)"Venturer" is a party to a joint venture and has joint control over that joint venture.
Section 4. Related Parties and Related Party Transactions
In determining whether a person or entity is a related party, ff rules:

a. A person or a close member of that person’s family is related to a reporting entity if that
person:
(i) has control or joint control of the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of
the reporting entity.
The list of family members in Section 3(2) hereof is not exhaustive and does not preclude other
family members from being considered as close members of the family of a person.
Consequently, other family members, including parents or grandparents, could qualify as
close members of the family depending on the assessment of specific facts and
circumstances.
b.An entity is related to a reporting entity if any of the following conditions applies:
(i) The entity and the reporting entity are members of the same group (which means that each
parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of
a member of a group of which the other entity is a member).
(iii)both entities are joint ventures of the same third party
(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third
entity.
(v)The entity is a post-employment benefit plan for the benefit of employees of either the reporting
entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the
sponsoring employers are also related to the reporting entity.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity).
183
I`
(viii) The entity, or any member of a group of which it is a part. provides key management
personnel services to the reporting entity or to the parent of the reporting entity
In all cases, the substance of relationships between entities shall be taken into account and not
merely the legal form. On the other hand, related party transactions shall include, but not limited
to, the following:
(a) purchases or sales of goods (finished or unfinished);
(b) purchases or sales of property and other assets;
(c) rendering or receiving of services;
(d) leases;
(e) transfers of research and development;
(f) transfers under license agreements;
(g) transfers under finance arrangements (including loans and equity contributions in cash or in
kind);
(h) provision of guarantees or collateral;
(i) commitments to do something if a particular event occurs or does not occur in the future,
including executory contracts, i.e., contracts under which neither party has performed any of its
obligations or both parties have partially performed their obligations to an equal extent (recognized
and unrecognized); and O settlement of liabilities on behalf of the entity or by the entity on behalf
of that related party.
Section 5. Related Party Disclosures To attain the objective of the PAS to provide an
understanding of the potential effect of the relationship on the financial statements, the
following requirements shall be observed by' the taxpayer, who may either be a reporting
entity or a related party:
(a) The required disclosures on transactions and outstanding balances shall be made separately
for each of the following categories:
(i) the parent;
(ii) entities with joint control or significant influence over the entity;
(iii) subsidiaries; (iv) associates; (v) ' joint ventures in which the entity is a joint venturer; (vi) key
management personnel of the entity or its parent; and (vii) other related parties.
(b) For each of said category, the following information shall be provided:
(i) the amount of the transactions;
(ii) the amount of outstanding balances, including commitments, and their terms and conditions,
including whether they are secured, and the nature of the consideration to be provided in
settlement, and details of any guarantees given or received;
(iii)provisions for doubtful debts related to the amount of outstanding balances;
(iv) the expense recognized during the period in respect of bad or doubtful debts due from related
parties.
Section 6. Procedures and Guidelines In filling out BIR Form No. 1709, the taxpayer is
hereby directed to observe the following:
1) BIR Form No. 1709 shall be completely and truthfully accomplished by the taxpayer or its
authorized representative/s, and shall be attached to the ITRs for the current taxable year and
subsequent years, making it an integral part of the latter.
2)The nature of transaction and the accounts affected shall be described in detail.
3)The "business overview of the ultimate parent company" referred to in Part IV(A) of BIR Form
No. 1709 shall include the profile of the multinational group of which the taxpayer belongs, along
with the name, address, legal status and country of tax residence of each of the related parties
with whom intra-group transactions have been entered into by the taxpayer, and ownership
linkages among them.
184
I`
4)On the other hand, the "functional profile" referred to in Part IV(B) of BIR Form No. 1709 shall
include a broad description of the business of the taxpayer and the industry in which it operates,
and of the business of the related parties with whom the taxpayer has transacted;
5)The following are required to be attached to BIR Form No. 1709: a) certified true copy of the
relevant contracts or proof of transaction; b) withholding tax returns and the corresponding proof of
payment of taxes withheld and remitted to the BIR; c) proof of payment of foreign taxes or ruling
duly issued by the foreign tax authority where the other party is a resident; and d) certified true
copy of Advance Pricing Agreement, if any; and e) any transfer pricing documentation.
6) No spaces shall be left unanswered. If one or some portions are not applicable, such t-act shall
be so stated.
RMO This RMO prescribes the policies and guidelines on the determination of taxable income on inter-
63-99 company loans or advances pursuant to Section 50 of the Tax Code, as amended. The arm’s
length bargaining standard will be used as the ultimate test for determining the correct
gross income and deductions between two or more enterprises under common control.
185
I`
11. Special Entities

Proprietary Educational Institutions and Hospitals
186
I`
Montero:
RMO-38-2019
In registration of an entity with SEC you must pass 2 tests:
1. Organizational Test – when the entity is a fraternal organization that needs to

be registered as non-profit, your papers must reflect that (SEC documents)
2. Operational Test – must also be reflected in day to day operations
Walk the walk , talk the talk , Comply with these 2 requirements
Definition of Non-Profit
RMO defines and enumerates activities conducted for profit
RMO 38-2019
YMCA – midterms
Marubeni
RMO REVENUE MEMORANDUM ORDER NO. 38-2019 issued on July 24, 2019
38- clarifies the nature, character and tax treatment of organizations and corporations
2019 enumerated under Section 30 of the National Internal Revenue Code (NIRC), which shall not
be taxed under Title II (Tax on Income) in respect to income received by them as such. The
Order also devolves to the Revenue Regions the issuance of Certificate of Tax Exemptions
187
I`
(CTEs) to said corporations (excluding the processing of CTEs of non-stock, non-profit

educational institutions which is covered by RMO No. 44-2016).
The said organizations and corporations are the following:

A. Labor, agricultural or horticultural organization not organized principally for profit;
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 non-stock 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 non-stock corporation or their dependents;
D. Company-owned cemetery, which is operated exclusively for the benefit of its
members;
E. Non-stock 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 belongs to or inures 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 stockholder or individual;
G. Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
H. A non-stock and non-profit 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.
A corporation claiming tax exemption must be able to show clearly that it is organized and
operated for the purposes under Section 30 of the NIRC, and that its income is derived pursuant
thereto.
The following shall be the basis in determining the entitlement to exemption of an

organization:
i. Organizational Test: This requires that the corporation or association's constitutive
documents (SEC Registration, Articles of Incorporation and By-Laws) must show that its
primary purpose/s of incorporation fall under Section 30 of the NIRC.
ii. Operational Test: This requires that the regular activities of the corporation or association
be exclusively devoted to the accomplishment of the purposes specified in Section 30 of
the NIRC. A corporation or association fails to meet this test if the corporation has no
activities conducted in furtherance of the purpose for which it was organized, or if a
substantial part of its operations constitutes "activities conducted for profit".
DEFINITION OF NON-PROFIT CORPORATION

In order for an entity to qualify as a non-profit corporation exempt from Income Tax, it must
demonstrate that its earnings or assets do not inure to the benefit of any of its trustees,
organizers, officers, members or any specific person. It must not be organized or operated for the
benefit of private interests such as specific individual s, incorporators or his family, shareholders of
the organization, or persons controlled directly or indirectly by such private interests.
188
I`
The activities that are considered "inurements" of such nature are the following:
i. The payment of compensation, salaries, or honorarium to its trustees or organizers;
ii. The payment of exorbitant or unreasonable compensation to its employees;
iii. The provision of welfare aid and financial assistance to its members. An organization
is not exempt from Income Tax if its principal activity is to receive and manage funds
associated with savings or investment programs, including pension or retirement
programs. This does not cover a society, order, association, or nonstock corporation
under Section 30(C) of the NIRC providing for the payment of life, sickness, accident
and other benefits exclusively to its members or their dependents;
iv. Donation to any person or entity (except donations made to other entities formed for
the purpose/purposes similar to its own);
v. The purchase of goods or services for amounts in excess of the fair market value of
such goods or value of such services from an entity in which one or more of its
trustees, officers or fiduciaries have an interest; and
vi. When upon dissolution and satisfaction of all liabilities, its remaining assets are
distributed to its trustees, organizers, officers or members. Its assets must be
dedicated to its exempt purpose. Accordingly, its constitutive documents must
expressly provide that in the event of dissolution, its assets shall be distributed to one
or more entities formed for the purpose/purposes similar to its own, or to the Philippine
government for public purpose
The Income Tax exemption of organizations and corporations under Section 30 of the NIRC of
1997, as amended, covers only the income derived by the corporation in furtherance of the
purposes for which it was organized. Said corporations are still subject to the corresponding
internal revenue taxes imposed on income derived from any of their properties, real or personal, or
any activity conducted for profit regardless of the disposition thereof (i.e. interest income from
bank deposits, gains from investments, rental income from real or personal properties), which
income should be reported for taxation purposes.
The interest income from currency bank deposits and yield or any other monetary benefit from
deposit substitute instruments and from trust funds and similar arrangement, and royalties derived
from sources within the Philippines or organizations under Section 30 are subject to 20% Final
Withholding Tax. Moreover, the interest income derived by them from a depository bank under the
expanded foreign currency deposit system shall be subject to 15% Final Withholding Tax pursuant
to Section 27(D)(1) in relation to Section 57(A), both of the NIRC of 1997, as amended. The tax
exemption granted under Section 30 of the NIRC of 1997 does not cover Withholding Taxes on
compensation income of the employees of the corporation, or the Withholding Tax on income
payments to persons subject to tax pursuant to Section 57 of the NIRC of 1997. The corporation
or association is therefore constituted as a withholding agent for the government if it acts as an
employer and any of its employees receives compensation income subject to Withholding Tax or if
it makes income payments to individuals or corporations subject to the Withholding Tax.
Purchase of goods or properties or services and importation of goods by a corporation organized

and operated as a Section 30 corporation shall be subject to the 12% Value-Added Tax (VAT).
The VAT, being an indirect tax, can be shifted or passed on the buyer/purchaser, transferee or
lessee of the goods, properties or services. Once shifted to the buyer/customer as an addition to
the cost of goods or services sold, it is no longer a tax but an additional cost which the
buyer/customer has to pay in order to obtain the goods or services. Thus, the shifting of the VAT
to it does not make it the person directly liable and therefore, it cannot invoke its tax exemption
privilege under Section 30 of the NIRC of 1997 to avoid the passing on or shifting of the VAT.
Section 105 of the NIRC of 1997 provides that 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 VAT imposed under Sections 106 to 108 of the same code.
The phrase “in the course of trade or business” means the regular conduct or pursuit of a
189
I`
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 (irrespective of the disposition of its net income and whether or not it sells its good
exclusively to members or its guests), or government entity.
Hence, if the corporation is engaged in the sale of goods or services in the course of a business
pursuit, including transactions incidental thereto, its revenues derived therefrom shall be subject to
the 12% VAT, in case the gross receipts from such sales exceed Three Million Pesos
(₱3,000,000.00), or to the 3% Percentage Tax, if gross receipts do not exceed ₱3,000,000.00.
The guidelines in the processing and issuance of Certificate of Tax Exemptions (CTE), which have
been devolved to the Revenue Regions, are prescribed in the Order. A CTE issued under this
Order shall be valid for a period of three (3) years from the date of effectivity specified in the
Ruling, unless sooner revoked or cancelled. The CTE may be revalidated for another period of
three (3) years under the same procedure set forth herein. The Tax Exemption Ruling shall be
deemed revoked if there are material changes in the character, purpose, or method of operation of
the corporation or association which are inconsistent with the basis for its income tax exemption.
The revocation takes effect as of the date of the material change. All Regional Directors are
required to submit on or before the 20th day of the month following the end of each quarter a
Quarterly Summary Report of all CTEs issued to Section 30 corporations, together with copies of
said CTEs, to the Assistant Commissioner, Legal Service, for a centralized database of issued
CTEs. All applications for CTEs under Section 30 of the NIRC, as amended, filed with the Law and
Legislative Division after the effectivity of this Order shall be transmitted to the concerned
Revenue District Office, for their appropriate processing.
CIR v. St. Luke’s Medical Center is a hospital The Court holds that Section 27(B) of the NIRC
St. organized as a non-stock and non-profit does not remove the income tax exemption of
Luke’s corporation. The BIR assessed St. Luke's proprietary non-profit hospitals under Section
Medica deficiency taxes for 1998, comprised of 30(E) and (G). Section 27(B) on one hand, and
l deficiency income tax, value-added tax, Section 30(E) and (G) on the other hand, can be
Center, withholding tax on compensation and construed together without the removal of such
Inc. expanded withholding tax. St. Luke’s protested tax exemption. The last paragraph of Section 30
(2012) against the assessment made but BIR failed to provides that if a tax exempt charitable institution
act on it. The BIR argued before the CTA that conducts “any” activity for profit, such activity is
Section 27(B) of the NIRC, which imposes a not tax exempt even as its not-for-profit activities
10% preferential tax rate on the income of remain tax exempt. Thus, even if the
proprietary non-profit hospitals, should be charitable institution must be “organized and
applicable to St. Luke's. The BIR claimed that operated exclusively” for charitable
St. Luke's was actually operating for profit in purposes, it is nevertheless allowed to
1998 because only 13% of its revenues came engage in “activities conducted for profit”
from charitable purposes. St. Luke’s countered without losing its tax exempt status for its
that the BIR should not consider its total not-for-profit activities.
revenues, because its free services to patients
was 65.20% of its 1998 operating income. It The Court finds that St. Luke’s is a corporation
also claimed that its income does not inure to that is not “operated exclusively” for charitable or
the benefit of any individual. St. Luke's social welfare purposes insofar as its revenues
maintained that it is a non-stock and non-profit from paying patients are concerned. This ruling
institution for charitable and social welfare is based not only on a strict interpretation of a
purposes under Section 30(E) and (G) of the provision granting tax exemption, but also on the
NIRC. It argued that the making of profit per se clear and plain text of Section 30(E) and (G).
does not destroy its income tax exemption. Section 30(E) and (G) of the NIRC requires that
an institution be “operated exclusively” for
190
I`
WON THE IMPOSITION OF 10% TAX charitable or social welfare purposes to be

UNDER SEC. 27(B) REMOVES THE TAX completely exempt from income tax. An
EXEMPTION GRANTED UNDER SEC. 30(E) institution under Section 30(E) or (G) does
AND (G) OF THE TAX CODE  NO not lose its tax exemption 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).
RMC This RMC circularizes the relevant portions of the Supreme Court decision in Commissioner of
67- Internal Revenue v. St. Luke’s Medical Center Inc. Based on the said Supreme Court Decision,
2012 the following provisions are specified in the Circular:
a. Private non-profit hospitals and educational institutions whose gross income from unrelated
trade, business or other activity does not exceed 50% of their total gross income derived
from all sources shall pay a tax of 10% on their taxable income except those covered by
Section 27(D) of the National Internal Revenue Code (NIRC). However, the following shall
be subject to the tax prescribed under Section 27(A) of the NIRC or the regular corporate
tax rate on their taxable income, except those covered by Section 27(D) of the NIRC:
i. Private non-profit hospitals and educational institutions whose gross income from
unrelated trade, business or other activity exceeds 50% of their total gross income
derived from all sources, or
ii. Hospitals and educational institutions claiming to be within the coverage of Section
27[B] of the NIRC that fail to meet the above definition of “proprietary” and “non-
profit”
In all cases, whether their Income Tax rates fall under Section 27[A] or 27[B] of the NIRC,
the aforesaid institutions are likewise subject to other applicable taxes, if warranted.
b. Non-stock, non-profit corporations or associations, which claim to be charitable institutions,
yet, they fail to meet the definition of “charitable” institutions, are not entitled to Income
Tax-exemption under Section 30[E] of the NIRC, as amended, and their taxable income
shall be subject to ordinary 30% corporate rate under Section 27(A) of the NIRC. They are
likewise subject to other applicable taxes, if warranted.
c. Non-stock, non-profit corporations or associations, which claim to be charitable or social
welfare but are not organized and operated “exclusively” for charitable or social welfare
purposes are not entitled to the Income Tax- exemption under Sections 30[E] and [G] of
the NIRC, as amended, and their taxable income shall be subject to ordinary 30%
corporate rate under Section 27(A) of the NIRC, as amended. They are likewise subject to
other applicable taxes, if warranted.
d. Activities for profit should not escape the reach of taxation. Being a non-stock and non-
profit corporation does not, by this reason alone, completely exempt an institution from tax.
An institution cannot use its corporate form to prevent its profitable activities from being
taxed.
The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be “operated exclusively” for charitable or social welfare purposes to be completely
191
I`
exempt from Income Tax. An institution under Section 30(E) and (G) does not lose its tax
exemption 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).
St. Luke’s fails to meet the requirements under Section 30[E] and [G] of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section
27[B] of the NIRC as long as it does not distribute any of its profits to its members and such profits
are reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary non-profit hospital,
is entitled to the preferential tax rate of 10% on its net income from its for-profit activities.
All concerned revenue officials and employees are directed to fully implement the decision of the
Supreme Court in G.R. Nos. 195909 and 195960 by ensuring that the proper taxes are collected
from private non-profit hospitals and educational institutions starting from January 1, 1998.
RMC This RMC clarifies the tax exemptions of non-stock, non-profit corporations and non-stock non-
76- profit educational institutions.
2003
Non-stock, non-profit organizations enumerated under Section 30 of the Tax Code of 1997 are
exempt from the payment of Income Tax on income received by them as such organization.
However, they are subject to the corresponding internal revenue taxes imposed under the Tax
Code of 1997 on their income derived from any of their properties, real or personal, or any activity
conducted for profit regardless of the disposition thereof (i.e. rental payment from their
building/premises), which income should be returned for taxation.
In addition, their interest income from currency bank deposits and yield or any other monetary
benefit from deposit substitute instruments and from trust funds and similar arrangement, and
royalties derived from sources within the Philippines are subject to the 20% final withholding tax:
provided, however, that interest income derived by them from a depository bank under the
expanded foreign currency deposit system shall be subject to 7 1⁄2% final withholding tax.
The exemption of non-stock, non-profit educational institutions, on the other hand, refers to
internal revenue taxes imposed by the National Government on all revenues and assets used
actually, directly and exclusively for educational purposes.
Revenues derived from assets used in the operation of cafeterias/canteens and bookstores are
exempt from taxation provided they are owned and operated by the educational institution as
ancillary activities and the same are located within the school premises. Private educational
institutions shall also be exempt from Value-Added Tax, provided they are accredited as such
either by the Department of Education, Culture and Sports or by the Commission on Higher
Education. However, this exemption does not extend to their other activities involving the sale of
goods and services.
Said educational institutions shall, however, be subject to internal revenue taxes on income from
trade, business or other activity, the conduct of which is not related to the exercise or performance
by such educational institutions of their educational purposes or functions.
Unlike non-stock, non-profit corporations, interest income of such educational institutions from
currency bank deposits and yield from deposit substitute instruments used actually, directly and
192
I`
exclusively in pursuance of their purposes as an educational institution, are exempt from the 20%
final tax and 71⁄2% tax on interest income under the expanded foreign currency deposit system
imposed under Section 27(D)(1) of the Tax Code of 1997, subject to compliance with the
conditions that as a tax- exempt educational institution, they shall on an annual basis submit to the
Revenue District Office concerned an annual information return and duly audited financial
statement, together with documents specified in the Circular.
Both non-stock, non-profit organizations and educational institutions are subject to the payment of
the annual registration fee of P500.00. They are also required to issue duly registered receipts or
sales or commercial invoices for each sale or transfer of merchandise or for services rendered
which are not directly related to the activities for which they are registered.
GOCCs
GR: GOCCs are exempted

XPN : except those enumerated
PAGCOR has been a tax payer, but clarified by PAGCOR v. BIR – bifurcating the income of
gaming operations (privilege of 5% tax by virtue of franchise) ; for non-gaming operations,
licensing it out ….___ 1:03:04
PAGC In the 2011 case of PAGCOR v. BIR, the Court On gaming income:
OR v. ruled that PAGCOR is no longer exempt from
BIR paying income tax since RA 9337 was passed, There is no need for Congress to grant tax
(2014) but it is still exempt from paying 10% VAT. In exemption to petitioner with respect to its income
2013, PAGCOR filed a Motion for Clarification in gaming operations as the same is already
193
I`
based on the 2011 decision and a TRO against exempted from all taxes of any kind of whatever
the implementation of RMC 33-2013 on form under its Charter, except the 5% franchise
“Income Tax and Franchise Due from tax imposition. Basically, income tax of gaming
PAGCOR, its Contractees and Licensee.” The operations is exempted in the first place under
RMC subjected PAGCOR’s income from its Charter. To assume that its exemption under
operations and licensing of gambling, casinos, another law (which exemption would be
gaming clubs and other similar recreation or subsequently withdrawn) would put it PAGCOR
amusement places, gaming pools and other in an injurious position.
related operations to corporate income tax
under the NIRC. In this 2014 case, PAGCOR On income from operation of related services:
sought to declare Section 1 of RA 9337 insofar
as it amends the NIRC by excluding PAGCOR PAGCOR’s charter is not deemed amended by
from the list of GOCCs exempted from liability RA 9337. With respect to PAGCOR’s income on
of corporate income tax. PAGCOR claims that operations of related services, it is subject to
the RMC is an erroneous interpretation and income tax only. The 5% franchise tax finds no
application of the 2011 decision (PAGCOR v. application with respect to income from other
BIR). related services in view of the express provision
of Section 14 (5) of PD 1869. Hence, there is no
WON PAGCOR’S GAMING INCOME IS basis for the imposition of franchise tax on
SUBJECT TO: income from operations from other related
(A) 5% FRANCHISE TAX  YES services.
(B) INCOME TAX  NO
WON PAGCOR’S INCOME FROM

OPERATION OF RELATED SERVICES IS
SUBJECT TO:
(A) 5% FRANCHISE TAX  NO
(B) INCOME TAX  YES
Exempt Corporations
Dumag Petitioner Dumaguete Cathedral Credit The Court finds merit in the petition. On
uete Cooperative (DCCCO) is a credit cooperative November 16, 1988, the BIR declared in BIR
Cathed duly registered with and regulated by the Ruling No. 551-888 that cooperatives are not
ral Cooperative Development Authority (CDA). On required to withhold taxes on interest from
Credit April 24, 2003, petitioner received from the BIR savings and time deposits of their members. The
Cooper Regional Director, Sonia L. Flores, two Letters Court holds that there is nothing in the ruling to
ative v. of Demand ordering petitioner to pay the suggest that it applies only when deposits are
CIR deficiency withholding taxes, inclusive of maintained in a bank. Rather, the ruling clearly
(2010) penalties, for the years 1999 and 2000 in the states, without any qualification, that since
amounts of P1,489,065.30 and P1,462,644.90, interest from any Philippine currency bank
respectively. On May 9, 2003, petitioner deposit and yield or any other monetary benefit
protested the Letters of Demand and from deposit substitutes are paid by banks,
Assessment Notices with the CIR. The CTA cooperatives are not required to withhold the
First Division cancelled the assessment for corresponding tax on the interest from
deficiency withholding taxes on the honorarium savings and time deposits of their members.
and per diems of petitioners Board of This interpretation was reiterated in BIR Ruling
Directors, security and janitorial services, [DA-591-2006] dated October 5, 2006, upon the
194
I`
commissions and legal and professional fees, request of the cooperatives for a confirmatory
but affirmed the assessments for deficiency ruling on several issues, among which is the
withholding taxes on interests. Thereafter, the alleged exemption of interest income on
CTA En Banc denied the MR. members deposit (over and above the share
capital holdings) from the 20% final withholding
WON PETITIONER IS LIABLE TO PAY THE tax.
DEFICIENCY WITHHOLDING TAXES ON
INTEREST FROM SAVINGS AND TIME
DEPOSITS OF ITS MEMBERS  NO
CIR v. Vicente G. Sinco organized VG Sinco It is too sweeping if not unfair to conclude that
G. Educational Institution part of the income of the VGSEI as an institution
Sinco (VGSEI) in order to establish and operate inured to the benefit of one of its stockholders
Educat Foundation College of Dumaguete. VGSEI is a simply because part of the income was carried in
ional non-stock corporation and was capitalized by its books as accumulated salaries of its
Corp. Sinco and his family. The CIR assessed an president and teacher. Much less can it be said
(1956) aggregate sum of P5,364.77, which was paid that the payments made by the college to the
by the college. 2 years later, VGSEI Community Publishers, Inc. redounded to the
commenced an action in the CFI of Negros personal benefit of Sinco simply because he is
Oriental for the refund alleging that it is exempt one of its stockholders.
from income tax under section 27 (e) of the
NIRC --- that it is exempt from the payment of It has been established that the VGSEI is a
the income tax because it is organized and non-profit institution and since its
maintained exclusively for the educational organization it has never distributed any
purposes and no part of its net income inures dividend or profit to its stockholders. Of
to the benefit of any private individual. course, part of its income went to the payment of
However, the CIR maintained that part of the its teachers or professors and to the other
net income accumulated by the VGSEI inured expenses of the college incident to an
to the benefit of V. G. Sinco, president and educational institution but none of the income
founder of the corporation (and also a teacher), has ever been channeled to the benefit of any
and therefore the corporation is not entitled to individual stockholder.
the exemption prescribed by the law. CIR also
showed that the corporation had accounts
payable to V. G. Sinco and Community
Publishers, Inc., to which Sinco is the biggest
stockholder.
WON VGSEI IS EXEMPT  YES

RR 13- Implementing Regulations of RA 9856 (REIT Law) “The Real Estate Investment Trust Act of 2009”
2011
REIT – Real Estate Investment Trust
 established in accordance with the Corporation Code of the Philippines
 rules and regulations promulgated by SEC
 Purpose: owning income-generating real estate assets
 Except as otherwise provided, a corporation becomes a REIT and qualified to avail of the
incentives and privileges of the Act when:
 Its REIT plan is rendered effective by the SEC; and
 Its listing as a REIT is approved by the Exchange.
 Under RA 9856, REITs and their shareholders are entitled to various forms of tax
195
I`
incentives and privileges. Below are some of the salient features of the implementing
regulations:
Some Salient Features:

 For tax purposes: Real estate owned by REIT is considered ordinary assets.
 Minimum public ownership requirement. A REIT can avail of the tax incentives if it
maintains the minimum public ownership requirement of 40% for the first two years and
67% on or before the end of the third year and thereafter.
 Income taxation of REIT
 A REIT shall be taxable on income derived from sources within and without the
Philippines at 30% based on taxable net income.
 To arrive at net taxable income, REITs shall enjoy a deduction for dividends actually
distributed out of its distributable income.
 A REIT is not subject to minimum corporate income tax (MCIT) Summary of taxes: A REIT
shall be subject to the following taxes:
a. 20% final Income Tax on 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
b. 7.5% final Income Tax on interest income derived from a depository bank under the
expanded foreign currency deposit system
c. Capital Gains Tax on sales or exchanges of shares of stock d. Corporate Income Tax
and VAT on real estate transactions
d. Documentary Stamp Tax on transactions not otherwise qualified for DST incentive (if
qualified, reduced by 50%)
e. All other taxes not otherwise expressly exempted by any law
 Establishment of escrow account. A REIT is required to create an escrow with an
Authorized Agent Bank (AAB) where the REIT shall place the income tax collectible if it will
be disqualified from deducting the dividends it has declared for the first and second year of
its existence should it fail to attain the minimum ownership of 67%. The escrowed amount
covering the income tax waived shall be released to the REIT only when it shows proof of
compliance with the increase of minimum ownership to 67% within three years from its
listing; otherwise, it will be released in favor of the BIR.
 DST on transfer of real property. The transfer of real property to REITs, including the sale
or transfer of any and all security interest, shall be subject to a reduced rate at 50% of the
applicable documentary stamp tax (DST). The 50% DST granted as incentive on transfer
of real property to REITs shall be placed in an escrow to be created with an AAB. The
amount held in escrow shall be released to the REIT only upon submission of proof of
listing within the two-year period; otherwise, it shall be released in favor of the government.
 VAT on transfer of property for shares of stock. The transfer or exchange of real property
for shares of stock in a REIT pursuant to Section 40(c)(2) of the Tax Code shall be subject
to value added tax (VAT).
 Taxation of dividends of Overseas Filipino Workers (OFWs). The dividends received by an
OFW shall be exempt from the dividends tax for seven years from the effectivity of
Revenue Regulations No. (RR) 13- 2011.
 A REIT availing of tax incentives under the Act shall not be entitled to avail of incentives for
the same types of taxes that may be available under special laws.
RMC Section 26 (H) of the 1977 Tax Code, provided that clubs which are organized and operated
196
I`
35- exclusively for pleasure, recreation, and other non-profit purposes were exempt from income tax.
2012 This provision, however, was deleted in the 1997 Tax Code, as amended. Hence, the income of
recreational clubs from whatever source, including but not limited to membership fees,
assessment dues, rental income, and service fees are subject to income tax.
Also, Section 105 of the 1997 Tax Code provides that any person who engage in the regular
conduct or pursuit or commercial or an economic activity, regardless of whether or not the person
engaged therein is a nonstock, nonprofit private organization, or government entity is subject to
VAT. Thus, from the said provision, even a nonstock, non-profit organization is liable to pay VAT
on the sale of goods or services irrespective of the disposition of its net income.
RMC 9- Homeowners’ Association collection of membership fees:
2013 1. FORMS PART OF THEIR GROSS INCOME, HENCE, SUBJECT TO TAX.
 This is because a homeowners’ association furnishes its members with benefits,
advantages and privileges in return for such payments; and
2. SUBJECT TO VALUE-ADDED TAX (VAT)
3. BUT may be EXEMPT from Income Tax and VAT IF:
a. The homeowners’ association must be a duly constituted “Association” as defined
under Section 3(b) of RA No. 99045;
b. The local government unit having jurisdiction over the homeowners’ association must
issue a certification:
o identifying the basic services being rendered by the homeowners’ association
o stating its lack of resources to render such services
but such services must be “basic community services and facilities” referring to
services and facilities that redound to the benefit of all homeowners ex. security;
street and vicinity lights; maintenance, repairs and cleaning of streets; garbage
collection and disposal; and other similar services and facilities.; and
c. The homeowners’ association must present proof (i.e. financial statements) that the
income and dues were used for such basic services.
RMC Non-stock and/or non-profit corporations/associations/organizations are EXEMPT from INCOME
51- TAX as long as its earnings or assets SHALL NOT INURE to the benefit of any of its trustees,
2014 organizers, members, or any specific person.
NOT EXEMPT IF:

 They paid compensation, salaries, or honorarium to its trustees or organizers;
 They paid exorbitant or unreasonable compensation to its employees;
 They have provisions of welfare aid and financial assistance to its members.
 Donation to any person or entity (except donations made to other entities formed for the
purpose/ purposes similar to its own);
 The purchase of goods or services for amounts over the fair market value from an entity in
which one or more of its trustees, officers or fiduciaries has an interest; and
 When upon dissolution and satisfaction of all liabilities, its remaining assets are distributed
to its trustees, organizers, officers or members. Its assets must be dedicated to its exempt
purpose; NOT to inure to the benefits of any of its members.
Special 1. Executive Order 226 (Article 39) or the Omnibus Investment Code
laws
grantin Registered Enterprises are granted an Income Tax Holiday as follows:
g a. For six (6) years from commercial operation for pioneer firms and four (4)
exempt years for non- pioneer firms, new registered firms shall be fully exempt from
197
I`
status income taxes levied by the National Government. This tax exemption will be
to extended for another year in each of the following cases:
certain b. the project meets the prescribed ration of capital equipment to number of
types workers set by the BOI
of c. utilization of indigenous raw materials at rates set by the BOI
Corpor d. the net foreign exchange savings or earnings amount1
ations
e. For a period of three (3) years from commercial operation, registered
expanding firms shall be entitled to an exemption from income taxes levied
by the National Government.2
2. RA 7916 (Sections 23 to 25) or the Special Economic Zone Act

SEC. 23. Fiscal Incentives. – Business establishments operating within the ECOZONES shall be
entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating
the Export Processing Zone Authority, or those provided under Book VI of Executive Order No.
226, otherwise known as the Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as Inputs shall enjoy the same benefits
provided for in the Export Development Act of 1994.
SEC. 24. Exemption from National and Local Taxes.- Except for real property taxes on land owned
by developers, no taxes, local and national, shall be imposed on business establishments
operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by
all business enterprises within the ECOZONE shall be paid and remitted as follows:
 3% to the National Government;
 2% which shall be directly remitted by the business establishments to the treasurer’s office
of the municipality or city where the enterprise is located.
SEC. 25. Applicable National and Local Taxes. – All persons and services establishments in the
ECOZONE shall be subject to national and local taxes under the National Internal Revenue Code
and the Local Government Code.
3. RA 9178 or the Barangay Micro Business Enterprises Act

All BMBEs shall be exempt from tax for income arising from the operations of the enterprise.
Section 3. Definition of Terms – As used in this Act, the following terms shall mean:
2. "Barangay Micro Business Enterprise," hereinafter referred to as BMBE, refers to any
business entity or enterprise engaged in the production, processing or manufacturing of
products or commodities, including agro-processing, trading and services, whose total
assets including those arising from loans but exclusive of the land on which the particular
business entity's office, plant and equipment are situated, shall not be more than Three
Million Pesos (P3,000,000.00) The Above definition shall be subjected to review and
upward adjustment by the SMED Council, as mandated under Republic Act No. 6977, as
amended by Republic Act No. 8289.
1
No registered pioneer firm may avail of this incentive for a period exceeding eight (8) years.
2
During the period within which this incentive is availed of by the expanding firm it shall not be entitled to additional deduction for incremental labor
expense.
198
I`
For the purpose of this Act, "service" shall exclude those rendered by any one, who is duly
licensed government after having passed a government licensure examination, in
connection with the exercise of one's profession.
4. RA 9593 (Section 4 & 86, 88) or Tourism Act
1. New enterprises in Greenfield and Brownfield Tourism Zones3shall, from the start of
business operations, be exempt from tax on income for a period of six (6) years. This
income tax holiday may be extended if the enterprise undertakes a substantial expansion or
upgrade of its facilities prior to the expiration of the first six (6) years.4
2. These enterprises shall likewise be allowed to carry over as deduction from the gross
income for the next six (6) consecutive years immediately following the year of the loss,
their net operating losses for any taxable year immediately preceding the current taxable
year which had not been previously offset as deduction from gross income.
3. An existing enterprise in a Brownfield Tourism Zone shall be entitled to avail of a non-
extendible income tax holiday if it undertakes an extensive expansion or upgrade of
facilities.5
4. In lieu of all other national and local taxes, license fees, imposts and assessments, except
real estate taxes and such fees as may be imposed by the TIEZA, a new enterprise shall
pay a tax of five percent (5%) on its gross income earned, which shall be distributed as
follows:
- 1/3 to be proportionally allocated among affected LGUs
- 1/3 to the National Government; and
- 1/3 to the TIEZA
5. RA 9856 or the Real Estate Investment Trust (REIT) Act
A REIT6 shall be subject to income tax on its taxable net income defined in the Act as the pertinent
items of gross income less all allowable deductions, less the dividends distributed by the REIT
out of its distributable income.7 In no case, shall the REIT be subject to MCIT.
Note, however, that if the REIT (1) fails to maintain its status as a public company as defined in
the Act; (2) fails to maintain the listed status of the investor securities on the Exchange; and (3)
fails to distribute at least 90% of its distributable income, the income tax shall be imposed on
taxable net income not as defined in the Act but as defined in the Tax Code.
(see RR 13-2011 [JULY 25, 2011])
6. RA 10165 (Sections 3-5 & 22-24 only)
Section 3. Definition of Terms. – For purposes of this Act, the following terms are defined:
3
A “Greenfield Tourism Zone” refers to a new or pioneer development, as determined by the TIEZA (Tourism Infrastructure and Enterprise Zone
Authority) while a “Brownfield Tourism Zone” refers to an area with existing infrastructure or development as determined by the TIEZA.
4
This extension shall consider the cost of such expansion or upgrade in relation to the original investment, but shall in no case exceed an additional six
(6) years.
5
Such an income tax holiday shall consider the cost of such expansion or upgrade in relation to the original investment, but shall in no case exceed six
(6) years to be counted from the time of completion of the expansion or upgrade.
6
A REIT is a stock corporation established principally for the purpose of owning income - generating real estate assets.
7
Dividends are allowed deductions.
199
I`
(a) Agency refers to any child-caring or child-placing institution licensed and accredited by
the Department of Social Welfare and Development (DSWD) to implement the foster care
program.
Section 23. Incentives to Agencies. – Agencies shall be entitled to the following tax incentives:
(a) Exemption from Income Tax. – Agencies shall be exempt from income tax on the
income derived by it as such organization pursuant to Section 30 of the NIRC of 1997, as
implemented by Revenue Regulation (RR) No. 13-98; and
(b) Qualification as a Donee Institution. – Agencies can also apply for qualification as a
donee institution.
RCIT – all deductions

GIE – in the middle
MCIT – direct costs
:Q so if you are a company, you can always calculate tax due by using RCIT, RIE,MCIT
Is the 5% GIE increased to 10%?

Is the 10% GIE better than 25% CIT?
REIT LAW
- Real Estate Investment Trust
- List shares for atleast 67%
- Lower withholding, lower DST
- REIT Tax Incentive  to take dividends as deductible expense!! Which is the only situation
that we have that.
- Why no takers? Previous landscape: you list 67% of your shares –risky choice for
companies  the requirement now is 33% of the shares to list
BMBE
- Give tax exemptions for businesses with less than 3 m in assets (excluding land)
200
I`
-
Go through registration of enterprise
-
Allied law of BMBE law is the Go Negosyo law  go to DTI and register
-
Income tax exempt for 2 years
-
3 million or less total assets go to the City Hall get registration get income tax exemption
for 2 yrs
MNMEs v BMBEs
Incentives = stay within confines of registration
201
I`
12. Capital Gains and Losses

Capital Assets/Income
ORDINARY ASSETS - SIFoRD

Stock in trade – not share of stocks, size 8 and a half stock NIKE shoes
Inventory
For sale – in the ordinary course of T/B
Real property – used in t/b
Depreciation – used in t/b
Ordinary assets
1.Holding Period
2.Loss Carry Over with respect to Capital Losses
A company buys a machinery manufactures face shields and sold and the company realizes revenue
202
I`
therefrom. The vaccine comes and arrives and for a period of time there is no relapse of the virus. So the
equipment has not been utilized for 3 yrs, now you want to sell the equipment, 3 yrs after you purchase it.
You can characterize it

1.ordinary – used in t/b
2.capital – idle for 3 yrs
Which is more advantageous? Yield lower tax due

Same process:
1.is your car a capital asset? (go back to definition)
2.Is the seller an individual taxpayer – these rules will apply  held not for more than 12 months? = if capital
asset 50% , not relevant if seller is a corporation
Calasa Ursula Calasanz inherited a 1.6M sqm The spouses are real estate dealers under the
nz v. agricultural land from her father which she Tax Code because of the business element of
CIR subdivided and introduced improvements unto development, of the amount of contract
(1986) so she could liquidate the inheritance and sell receivables which indicated the number,
them. The land was converted into a frequency and continuity of sales and of the lots
residential subdivision called Don Mariano being advertised as part of the residential
Subdivision. Ursula and her husband paid subdivision.
capital gains tax on the profit they received
from sale of the lots but the CIR assessed
As the spouses were deemed as real estate
them for deficient income tax claiming that the
dealers, the properties are deemed to be
gains from the sale should be taxed as
property held by the taxpayer primarily for
ordinary income because the spousessale to customers in the o rdinary course of
engaged in business as real estate dealers, as
his trade or business, one of the exceptions in
defined under the Tax Code. the definition of a capital asset. If for the
liquidation of a capital asset, the property owner
WON THE SPOUSES ARE REAL ESTATE enters the real estate business and carries
DEALERS  YES on the sale in the manner in which such a
business is ordinarily conduct, the
WON THE GAINS FROM THE SALE OF THE liquidation constitutes a business and a sale
LOTS WERE TO BE TAXED AS CAPITAL in the ordinary course of such a business
GAINS OR ORDINARY INCOME  and the preferred tax status is lost.
ORDINARY
203
I`
In furtherance of or in the course of t/b  ordinary course of business ; no full intent to have real estate
business  asset originally capital can become ordinary course of business
204
I`
BIR A letter was sent by the Sentosa Park Property It is necessary to first determine the character of
Ruling Development the real property being sold.
27-02 Corporation requesting for a ruling on the tax 1. If the real property is a land or building
consequences on a sale of real estate property which is not actually used in the
by a corporation (i.e. when both buyer and business of the seller-corporation and
seller corp are engaged in real estate is treated as a capital asset:
business; when corp engaged in real estate a. final tax: 6%
sells to not engaged; when corp not engaged b. NOTE: applies, whether or not the
to real estate sells to engaged; and when corp seller-corporation is engaged in real
engaged in real estate sells to individual estate business [Sec. 27(D)(5), Tax
buyer). However, it did not specify in each of Code]
these instances, whether the property being 2. If the real property being sold is an
sold is an ordinary asset or a capital asset in ordinary asset, withholding tax rates
the hands of the seller. under Sec. 2.57.2 of RR No. 2-98 shall
apply (see comprehensive digest). The
HOW TO DETERMINE THE TAX rate of withholding tax will depend on
CONSEQUENCES ON A SALE OF REAL whether:
ESTATE PROPERTY BY CORPORATION a. the seller is exempt or taxable;
[ENGAGED ON REAL ESTATE BUSINESS] b. whether the seller is habitually
engaged in real estate business or
not; and
c. if the seller is habitually engaged in
real estate business, the gross
selling price.
Also, registration with the HLURB or HUDCC

shall be sufficient for a seller/transferor to be
considered as habitually engaged in the real
estate business. If the seller/transferor is not
registered with HLURB or HUDCC, he/it may
205
I`
prove that he/it is engaged in the real estate

business by offering other satisfactory evidence
(for example, he/it consummated during the
preceding year at least six taxable real estate
transactions, regardless of amount).
Ordinary Assets/Income
Tuaso Petitioner inherited two contiguous parcels The record discloses that the petitioner owned
n v. situated on Pureza and Sta. Mesa streets in other real properties which he was putting out for
Lingad Manila. The lands were subdivided into 29 lots. rent, from which he periodically derived a
(1974) The 28 lots were used for rent while the 29 th substantial income, and for which he had to pay
was not leased due to its low elevation. The 28 the real estate dealer’s tax (which he used to
lots were eventually sold. The 29th lot, after deduct from his gross income). Under the
doing the necessary filling of land, was sold on circumstances, the petitioner’s sales of the
a 10-year installment basis. The petitioner paid several lots forming part of his rental business
the taxes for his gains by treating the sale as cannot be characterized as other than sales of
capital gains sales. During such times, the non-capital assets. The sales concluded on
Commissioner attested to the correctness of installment basis of the subdivided lots
his payment. However, in 1963, the comprising Lot 29 do not deserve a different
Commissioner reversed itself and required him characterization for tax purposes. Thus it is also
to pay deficiency taxes because the income he considered a sale on ordinary asset. However,
received should be computed as a sale on the court sees that there is no need to collect
ordinary asset not capital asset. (See notes at surcharges as he relied in good faith to the
the bottom on why it is advantageous to be opinions of the Commissioner of BIR.
taxed at sale of capital assets rather than
ordinary asset). PM Reyes:
In this case, the activities of A are
WON THE PROPERTIES IN QUESTION indistinguishable from those invariably employed
WHICH THE PETITIONER HAD INHERITED by one engaged in the business of selling real
AND SUBSEQUENTLY SOLD IN SMALL estate. One strong factor is the business
LOTS TO OTHER PERSONS SHOULD BE element of development which is very much in
REGARDED AS CAPITAL ASSETS  NO evidence. A did not sell the land in the condition
in which he acquired it. In the course of selling
the subdivided lots, A engaged in the real estate
business and accordingly, the gains from the
sale of the lots are ordinary income taxable in
full.
Limitation on Capital Loss

China Petitioner China Banking Corporation made a Section 29(d)(4)(B) of the NIRC conveys that the
Bankin 53% equity investment in the First CBC loss sustained by the holder of the securities,
g Capital Asia, Ltd. (a Hong Kong Subsidiary) in which are capital assets (to him), is to be
Corpor 1980. By 1986, First CBC Capital Asia has treated as a CAPITAL LOSS as if incurred from
ation v. become insolvent. Subsequently, with the a sale or exchange transaction.
CA approval of Bangko Sentral, petitioner CBC
(2000) wrote off as being worthless its investment Moreover, Section 33(c) of the NIRC provides
in First CBC Capital (Asia), Ltd., in its 1987 that, “x x x capital losses are allowed to be
Income Tax Return and treated it as a bad deducted only to the extent of capital gains,
206
I`
debt or as an ordinary loss deductible from i.e., gains derived from the sale or exchange
its gross income. Respondent CIR disallowed of capital assets, and not from any other
the said deduction, and assessed petitioner for income of the taxpayer.
income tax deficiency. CIR had the following
contentions: (a) that although the Hong Kong
In sum, the Court denied the petition because:
Banking Commissioner had revoked First CBC
1. The equity investment in shares of stock
Capital’s license as a “deposit-taking” held by CBC of approximately 53% in its
company, it was still permitted to exercise its
Hong Kong subsidiary (the First CBC
financing and investment activities; (b) that the
Capital (Asia), Ltd.) is not an
investment should not be classified as being
indebtedness, and it is a capital, not an
“worthless;” and (c) that even assuming that
ordinary, asset;
they are worthless, they should be classified
2. Assuming that the equity investment of
as “capital loss,” and not as bad debt CBC has indeed become “worthless,” the
expense (there being no indebtedness to loss sustained is a capital, not an
speak of between petitioner and its subsidiary).
ordinary, loss; and
Both the CTA and CA affirmed the CIR’s
3. The capital loss sustained by CBC can
decision; hence, this petition. only be deducted from capital gains if
any derived by it during the same taxable
WON PETITIONER CBC WAS CORRECT IN year that the securities have become
CLAIMING THE SECURITIES AS A BAD “worthless.”
DEBT EXPENSE WHICH IT CAN DEDUCT
FROM ITS GROSS INCOME  NO
207
I`
13. Determination of Gain or Loss from Sale or Transfer of Property

Merger or Consolidation
CRG -- INCOME
Gain
Realization
Complete dominion
Not excluded by law (sec 32)
Concept of Recognition
Basic principles:
Gain – selling (amt realized) > purchase price (basis) = gain
Loss – selling < purchase price = loss
Technical definition
AMOUNT REALIZED – what I get in addition to money – property other than money ; Boot
If you win I get your car, to make it fair, if I win (with a lesser looking car) ill get the nice car, if you win I will
give you my car including the boom box to compensate the amount in exchange for equalization (BOOT –
butal)
BASIS –
1. Purchase price
Alternative ways as to amount :
2. FMV
3. Donation
4. Amount paid less than adequate consideration
- Basis inversely proportional to taxable income ; government wants basis to be less in amount
208
I`
Under 40(c)(2)
Basis from transferor and transferee
If X transfers to Y property, in exchange Y gives something.
X is transferor
Y transferee
In so far as X is concerned look at the basis as amount same…
Things to consider:
What exchanges
Who are the parties
What is the basis ??
Do a couple of adjustments (increase, decrease) if 40(C)(2) transfers
If not exchange is not under 40(c)(2) definition in first slide will apply
If it is a 40(c)(2) transfer use 2nd slide
40(C)(2) TRANSFERS (4 transfers)
209
I`
* all instances must be in connection of some business purpose requirement

#1.MERGER
- merger, and exchange
#4. PROPERTY TRANSFERRED to CORP by Person, in exchange of STOCK
X owns property (individual) , Y corporation has 100 OCS. X transfers property to Y in exchange Y gives up
all 100 shares to X. As a result, X gains control of Y corporation.
Rationale : to encourage these kinds of transactions – tax implications

Estate tax planning mechanism
General Rule: Illustration 1
210
I`
FIRST STEP:
Gain is both realized and recognized  taxable  since in amount
 Amount realized (Selling Price) = 10 M (cash received)
 Basis = (acquisition Price) 6 m
 Realized gain = 10 – 6 = 4 m
 Before we STOP THERE dati, we equated that realized = recognized = whole gain taxable
 Deferred gain = realized gain compared to recognized gain
Recognized taxable gain row
Since entire realized is same as recognized = 0 yung deferred gain

Illustration 2-1
Instead of straight sale, I want to sell land but can I get all your shares valued at 10M
1.it is a Sec 40(C)(2) exchange – transferor exchanges property to a corporaiton in exchange for shares, gains
control of the entire corporation
What is amt realized? = 10 Million in the amount of X (amount of shares received)
Basis = 6 million (land exchanged acquisition cost of the land exchanging)
Realized gain = 10 M – 6 M = 4 M
Recognized (TAXABLE GAIN) = because of 40©(2) = non recogniton = 0
Deferred gain = can no longer be 0. So realized (4M) – recognized (0) = 4 M
 Merely deferred not exempting
211
I`
Illustration 2-2
After 1 yr, goes to Z. Z buys shares of stock of Y.

Is this deferred? – no more deferral anymore, because there is no allegation of fact it is compliant with 40(c)
(2).
The deferred gain must be realized in subsequent transaction!!!
Amount realized = 13 M (selling price)
Basis = 6 million = 6 – 0 + 0
Same basis of property exchanged 6 million, decreased by other money or property received (walang
nareceive na kahit ano except the shares of stock) increased by any gain (no gain recognized in the
exchange).
Realized gain = 13 M – 6 M = 7 M
TO CHECK WHETHER BASIS IS CORRECT :

Current transaction gain 13 – 10 (that’s the value of Y Co. Shares) ) = under current trasnaction I am gaining
3, PLUS deferred gain of 4 M = 3 M + 4M = 7 M
CIR v. There are two corporations involved in this It is clear, in fact, that the purpose of the merger
Rufino case, “old corporation” (term life 25 years) and was to continue the business of the Old
(1987) the “new corporation” (Term life 50 years). Corporation, whose corporate life was about
Rufino et al are both the majority stock holder to expire, through the New Corporation to
of the old corporation and the new corporation. which all the assets and obligations of the
They are both engaged in the same kind of former had been transferred. What argues
business, (operating theaters more particularly strongly, indeed, for the New Corporation is that
the Lyric Capitol Theaters in Manila. it was not dissolved after the merger agreement
in 1959. On the contrary, it continued to operate
The President of the Old corporation and the the places of amusement originally owned by the
General-Manager of New Corporation decided Old Corporation and transferred to the New
212
I`
to merge. It was expressly declared that the Corporation, particularly the Capitol and Lyric
merger of the Old Corporation with the New Theaters, in accordance with the Deed of
Corporation was necessary to continue the Assignment. The New Corporation, in fact,
exhibition of moving pictures at the Lyric and continues to do so today after taking over the
Capitol Theaters even after the expiration of business of the Old Corporation twenty-seven
the corporate existence of the former. Pursuant years ago.
to resolution of the BOD of the old corporation,
the President of the old made Deed of The Court emphasized that the merger in
Assignment providing for the conveyance question involved a pooling of resources
and transfer of all the business, property, aimed at the continuation and expansion of
assets and goodwill of the Old Corporation business and so came under the letter and
to the New Corporation in exchange for the intendment of the National Internal Revenue
latter’s shares of stock to be distributed Code, as amended by the law, exempting
among the shareholders on the basis of one from the capital gains tax exchanges of
stock for each stock held in the Old property effected under lawful corporate
Corporation except that no new and combinations.
unissued shares would be issued to the
shareholders of the Old Corporation. The reason for this conclusion is traceable to the
purpose of the legislature in adopting the
As agreed, and in exchange for the properties, provision of law in question. The basic Idea was
and other assets of the Old Corporation, the to correct the Tax Code which, by imposing
New Corporation issued to the stockholders of taxes on corporate combinations and
the former stocks in the New Corporation equal expansions, discouraged the same to the
to the stocks each one held in the Old detriment of economic progress, particularly
Corporation. The BIR declaring that the the promotion of local industry. Speaking of this
merger of the aforesaid corporations was problem, HB No. 7233, which was subsequently
not undertaken for a bona fide business enacted into R.A. No. 1921 embodying Section
purpose but merely to avoid liability for the 35 as now worded, declared in the Explanatory
capital gains tax on the exchange of the old Note:
for the new shares of stock.
Accordingly, he imposed the private RATIONALE: The exemption from the tax of the
respondents are liable for deficiency income gain derived from exchanges of stock solely for
tax, surcharge and interest. stock of another corporation resulting from
corporate mergers or consolidations the
WON THE MERGER IS IN FURTHERANCE provisions of the law, as amended, was intended
OF BUSINESS  YES to encourage corporations in pooling, combining
or expanding their resources conducive to the
WON THE NEW CORPORATION IS LIABLE economic development of the country.
FOR CAPITAL GAINS AFTER THE MERGER
 NO
Transfer of Property for Shares of Stocks
CIR v. Filinvest Development Corporation (FDC), a No. The Supreme Court stated that the
Filinve holding company, is the owner of 80% of the requisites for the non-recognition of gain or loss
st outstanding shares of respondent Filinvest of a transfer of property for shares of stock are
Develo Alabang Inc. (FAI) and 67.42% of the as follows:
pment outstanding shares of Filinvest Land Inc. (FLI). a) the transferee is a corporation;
Corpor FDC and FAI entered into a Deed of Exchange b) the transferee exchanges its shares of
ation with FLI. FDC and FAI both transferred in favor stock for property/ies of the transferor;
213
I`
(2011) of FLI parcels of land. In exchange for said c) the transfer is made by a person, acting
parcels which were intended to facilitate alone or together with others, not
development of medium-rise residential and exceeding four persons; and,
commercial buildings, shares of stock of FLI d) as a result of the exchange the
were issued to FDC and FAI. FDC extended transferor, alone or together with others,
advances in favor of its affiliates and entered not exceeding four, gains control of the
into a Shareholders' Agreement with Reco transferee.
Herrera PTE Ltd. (RHPL) for the formation of a
Singapore-based joint venture company. FDC Rather than isolating FDC, the shares issued to
received from the BIR a Formal Notice of FDC should be appreciated in combination with
Demand to pay deficiency income and the new shares issued to FAI. Together, FDC
documentary stamp taxes, plus interests and and FAI’s shares add to 70.99% of FLI’s shares.
compromise penalties. Deficiency taxes were Since the term "control" is clearly defined as
assessed on the taxable gain supposedly "ownership of stocks in a corporation possessing
realized by FDC from the Deed of Exchange it at least fifty-one percent of the total voting power
executed with FAI and FLI, on the dilution of classes of stocks entitled to one vote, “ the
resulting from the Shareholders' Agreement exchange of property for stocks between FDC-
FDC executed with RHPL as well as the FAI and FLI clearly qualify as a tax-free
"arm's-length" interest rate and documentary transaction.
stamp taxes imposable on the advances FDC
extended to its affiliates. Inasmuch as the combined ownership of FDC
and FAI of FLI's outstanding capital stock
WON THE EXCHANGE OF SHARES OF adds up to a total of 70.99%, it stands to
STOCK FOR PROPERTY AMONG FDC, FAI, reason that neither of said transferors can be
AND FLI MET ALL THE REQUIREMENTS held liable for deficiency income taxes the
FOR THE NON-RECOGNITION OF CIR assessed on the supposed gain which
TAXABLE GAIN UNDER SECTION 34(C)(2) resulted from the subject transfer.
OF THE OLD NIRC (NOW SEC 40(C)(2)) -
YES
BIR Maray Maray Farms, Inc. had six incorporators There was neither gain nor loss to the
Ruling (de Rivera, et. al.) who transferred and incorporators but in order for their “gain” to not
274-87 conveyed their properties to the corporation in be recognized for tax purposes, they must
exchange of shares of stock. After said transfer comply with the requirements enumerated. They
and conveyance, the said incorporators (now are, however, still liable for documentary stamp
transferors) gained control of the corporation tax because a stock is still considered as a
by owning more than 51% of the total voting valuable consideration in exchange for property.
power of all classes of stocks entitled to vote.
In other words, the corporation exchanged
their shares of stock for the incorporators’ real
properties.
WHAT IS/ARE THE TAX IMPLICATION/S OF

THE EXCHANGE OF PROPERTY BY THE
INCORPORATORS AND SHARES OF
STOCK BY THE CORPORATION?
Administrative Requirements in Case of Tax-Free Exchanges
RR 18- See full text
01
214
I`
RMR 1- REVENUE MEMORANDUM RULINGS NO. 1-2002 issued on May 9, 2002 consolidates,
02 provides, clarifies and harmonizes the existing guidelines on the tax consequences of a de facto
merger pursuant to Section 40(C)(2) and (6)(b) of the National Internal Revenue Code of 1997.
A de facto merger involves the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock. The phrase “substantially all the properties of
another corporation” mean “the acquisition by one corporation of at least 80% of the assets,
including cash, of another corporation,” which has the element of permanence and not merely
momentary holding.
To constitute a de facto merger, the following elements must occur: 1) there must be a transfer of
all or substantially all of the properties of the transferor corporation solely for stock; and 2) it must
be undertaken for a bona fide business purpose and not solely for the purpose of escaping the
burden of taxation.
The provisions of the Ruling shall apply solely and exclusively to situations in which the facts are
substantially similar to the facts specified in the Ruling.
The Transferor (a domestic corporation) shall not recognize any gain or loss on the transfer of the
property to the Transferee. Consequently, the Transferor will not be subject to Capital Gains Tax,
Income Tax, nor to Creditable Withholding Tax on the transfer of such property to the Transferee.
Neither may the Transferor recognize a loss, if any, incurred on the transfer.
In addition, the assumption of liabilities or the transfer of property that is subject to a liability does
not affect the non-recognition of gain or loss under Section 40(C)(2) of the Tax Code of 1997,
since in this case, the total amount of such liabilities does not exceed the basis of the property
transferred.
The Transferee is not subject to Income Tax on its receipt of the property as contribution to its
capital, even if the value of such property exceeds the par value or stated value of the shares
issued to the Transferor.
The Transferor is not subject to Donor’s Tax, regardless of whether the value of the property
transferred exceeds the par/stated value of the Transferee shares issued to the Transferor, there
having no intent to donate on the part of the transferor.
The Transferor is not subject to Value-Added Tax (VAT) on the transfer of the property if it is not
engaged in a business that is subject to the VAT. Even if the Transferor is engaged in an activity
that is subject to VAT, it is nonetheless not subject to VAT on the transfer of the property to the
Transferee.
The Documentary Stamp Tax consequences of the transfer, including the time of payment of the
tax are specified in the Ruling.
Business Purpose
Gregor Petitioner Gregory was the owner of all the Reorganization was defined as the transfer by a
y v. stock of United Mortgage Corporation (UMC) corporation of all or part of its assets to another
Helveri which had among its assets 1000 shares of corporation, if immediately after the transfer the
ng Monitor Securities Corporation. To be able to transferor or its stockholders or both are in
215
I`
(1935) transfer the 1000 Monitor shares to herself, control of the transferee corporation. In this
and eventually be able to sell them at a profit, situation, there would be no considered “gain”,
Gregory sought to bring about a reorganization so taxes may be avoided. The Court explained
under the Revenue Act of 1928. She caused that the creation of Averill had no other
the organization of Averill Corporation, and 3 purpose other than to transfer the shares to
days later UMC transferred to Averill the Gregory, and at the end avoid taxes.
Monitor shares, which were then issued to Reorganization, to be valid must be effected for
Gregory. After 6 days from its organization, a corporate purpose. Since no other purpose
Averill was dissolved and liquidated by was present other than to transfer the said
distributing its assets to the petitioner. Gregory shares to Gregory, the reorganization must
then immediately sold the shares at a profit, be disregarded.
and it was not disputed that if no
“reorganization” was done, she would have
been liable for a much greater amount of tax.
WON THE REORGANIZATION THROUGH

AVERILL CORPORATION MAY BE
DISREGARDED, AND THE PETITIONER
SHOULD BE TAXED AS IF UMC PAID HER
DIVIDENDS — YES
Rulings
RMC This RMC prescribes the period of prescription of rulings under Section 40(C)(2) of the NIRC,
40- which deals with exchange of property. Numerous rulings have been issued by the BIR but are not
2012 immediately enforced or executed.
The prescription period provided is ninety (90) days counted from date of receipt of the ruling by
any of the parties to the exchange transaction. Any violation will be subject to penalties provided in
the tax code, unless an extension has been given by the Commissioner for meritorious cases.
216
I`
14. Administrative Provisions

Accounting Periods and Methods
Consol These are appeals from the amended decision Consolidated was using the Accrual Method.
idated of the Court of Tax Appeals ordering the The language used by the parties in their
Mines, Consolidated Mines, Inc. (CMI) to pay the CIR contract show their intention to compute
Inc. v. deficiency income taxes for the years 1953, Benguet’s 50% share on the excess of actual
CA 1954 and 1956 or the total sum of receipts over disbursements, without considering
(1974) P202,733.99, plus 5% surcharge and 1% the “Accounts Receivable” and “Accounts
monthly interest from the date of finality of the Payable” as factors in the computation. Benguet
decision. The Company used the accrual then did not have a right to share in “Accounts
method of accounting in computing its income. Receivable,” and, correspondingly, CMI did not
One of its expenses is the amount paid to have the liability to pay Benguet any part of that
Benguet as mine operator, which amount is item. And a deduction cannot be accrued until
computed as 50% of “net income.” The an actual liability is incurred, even if payment
Company deducts as an expense 50% of cash has not been made. Since Benguet had no right
receipts minus disbursements, but does not to one-half of the “Accounts Receivable,” CMI
deduct at the end of each calendar year what was correct in not accruing said one-half as a
the Commissioner alleges is “50% of the share deduction.
of Benguet” in the “accounts receivable.”
However, it deducts Benguet’s 50% if and
when the “accounts receivable” are actually
paid. It would seem, therefore, that the
Company has been deducting a portion of this
expense (Benguet’s share as mine operator)
on the “cash & carry” basis.
WON CONSOLIDATED MINES USED A

HYBRID METHOD OF ACCOUNTING WHICH
IS PROHIBITED — NO
Bibian This case involves petitioner Bibiano Bañas As a general rule the whole profit accruing from
o v. who sold a land to Ayala for P2,307,770. The a sale of property is taxable as income in the
Banas, Deed of Sale provided that Ayala should pay year the sale was made. Although profit from an
Jr. v. P460,754. The balance would be paid in 4 installment basis is taxable between or among
CA equal consecutive annual installments. the years the installments are apportioned.
(2000) However in his 1976 income tax return, Section 43 and Section 175 provide for entities
petitioner reported only the P461,754, the who may use the installment method such as a
initial payment, as income. After which, the seller of real property who disposes his property
Revenue Director examined the books of on installment, provided that the initial payment
petitioner for 1976 and concluded that the sale does not exceed 25% of the selling price.
of land should have been taxable wholly and
not only the initial payments. Petitioners insist
Initial payment does not include amounts
that the sale made was on installment basis
received by the vendor in the year of sale from
the disposition to a 3rd person of notes given by
and should be taxable as per installment,
hence, this petition. the vendee as part of the purchase price which
are due and payable in subsequent years.
WON RESPONDENT COURT ERRED IN Where an installment obligation is discounted at
FINDING THAT PETITIONER’S INCOME a bank or finance company, a taxable
FROM THE SALE OF LAND IN 1976 disposition results, even if the seller guarantees
217
I`
SHOULD BE DECLARED AS A CASH its payment, continues to collect on the

TRANSACTION (AND NOT ON installment obligation, or handles repossession
INSTALLMENT) IN HIS TAX RETURN FOR of merchandise in case of default. Thus, by
THE SAME YEAR — NO analogy, all the more would a taxable disposition
result when the discounting of the promissory
note was done by the seller himself.
In this case, although the proceeds of a

discounted promissory note are not considered
part of the initial payment, it is still taxable
income for the year it was converted into cash.
The income should be reported at the time of the
actual gain. Although the proceeds of a
discounted promissory note as not considered
initial payment, still it must be included as
taxable income on the year it was converted to
cash. When petitioner has the promissory notes
covering the succeeding installment payments of
the land issued by Ayala, discounted by Ayala
itself he lost entitlement to report the sale as
sale on installment since a taxable disposition
resulted and petitioner was required by law to
report in his returns the gain. What petitioner did
is tantamount to an attempt to circumvent the
rue on payment of income taxes gained from the
sale of the land.
Returns and Payment of Taxes
RR Subject: New Income Tax Forms
019-11 To: All Revenue Officials, Employees, and Other Concerned
Section 1. Objective.
These Revenue Regulations are issued to prescribe the new BIR Forms that will be used for
Income Tax filing covering and starting with Calendar Year 2011, and to modify Revenue
Memorandum Circular No. 57-2011.
Section 2. Scope.
Pursuant to Section 244 in relation to Sections 6(H), 51(A)(1), and 51(A)(2) of the National Internal
Revenue Code of 1997 (Tax Code), as amended, these Regulations are prescribed to revise BIR
Form Nos. 1700, 1701, and 1702 to reflect the changes in information requested from said BIR
Forms and to enable the said forms to be read by an Optical Character Reader.
Section 3. Filing of New Income Tax Return Forms.

All taxpayers required to file their Income Tax returns under section 51(A)(1) of the Tax code, and
those not required to file under section 51(A)(2) but who nevertheless opt to do so, covering and
staring with calendar year 2011 – due for filing on or before April 15, 2012, should use the
following revised forms:
1. BIR Form 1700 version November 2011 (Annual Income Tax Return for Individuals
Earning Purely Compensation Income);
218
I`
2. BIR Form 1701 version November 2011 (Annual Income Tax Return for Self-Employed
Individuals, Estates and Trusts); and
3. BIR Form 1702 version November 2011 (Annual Income Tax Return for Corporation,
Partnership and Other Non-Individual Taxpayer).
All juridical entities following fiscal year of reporting are likewise required to use the new BIR Form
1702 starting with those covered under fiscal year ending January 31, 2012.
Systra This is a case where a second motion for It was in the year 2000 that petitioner derived
Philipp reconsideration was filed by petitioner. Systra excess tax credits and exercised the irrevocable
ines, likewise questioned the substantive aspect of option to carry them over as tax credits for the
Inc. v. CTA decisions. Petitioner had creditable taxes next taxable year. The excess credits will only
CIR which they opted to carry over to the be applied “against income tax due for the
(2007) succeeding year 2001. In 2001 ITR, it indicated taxable quarters of the succeeding taxable
that creditable withholding taxes will also be years.”
carried over to next year’s tax as credit.
However, on August 9, 2001, petitioner Section 76 of the present tax code formulates an
instituted a claim for refund of its unutilized irrevocability rule which stresses and fortifies the
creditable withholding taxes. Due to BIR’s nature of the remedies or options as alternative,
inaction, petitioner filed a petition for review. not cumulative. It also provides that the excess
CTA partially granted the petition but denied tax credits may be carried over and credited
claim for refund because petitioner was against the estimated quarterly income tax
precluded from claiming a refund. Once it was liabilities for the taxable quarters of the
made for a particular taxable period, the option succeeding taxable years until fully utilized.
to carry over becomes irrevocable. Nevertheless, the amount will not be forfeited in
favor of the government but will remain in the
WON THE EXERCISE OF THE OPTION TO taxpayer’s account.
CARRY-OVER EXCESS INCOME TAX
CREDITS UNDER SECTION 76 OF THE TAX
CODE BARS A TAXPAYER FROM
CLAIMING THE EXCESS TAX CREDITS FOR
REFUND EVEN IF THE AMOUNT REMAINS
UNUTILIZED IN THE SUCCEEDING
TAXABLE YEAR — YES
Philam Petitioner, Philam Asset Management, Inc., 1997 CWTs: It did not apply the excess
Asset acts as the investment manager of both creditable taxes in any of its quarterly returns for
Manag Philippine Fund, Inc. (PFI) and Philam Bond 1998 did it apply the excess creditable taxes.
ement, Fund, Inc. (PBFI), which are open-end Thus, petitioner is entitled to a tax refund of its
Inc. v. investment companies. It also acts as its 1997 excess tax credits.
CIR principal distributor. To pay the petitioner for its
(2005) services and facilities, a monthly management 1998 CWTs: Once the carry-over option has
fee is imposed from which PFI and PBFI been chosen, no application for a tax refund or
withheld the amount equivalent to a 5% issuance of a tax credit certificate shall then be
creditable tax. allowed. The fact that it filled out the portion
“Prior Year’s Excess Credits” in its 1999 FAR
In G.R. No. 156637, petitioner filed its annual means that it categorically availed itself of the
corporate income tax return for the taxable carry-over option.
year 1997 representing a net loss.
Consequently, it failed to utilize the
creditable tax withheld; thus, petitioner filed a
219
I`
claim for refund for the unutilized tax credit. In

G.R. No. 156637, petitioner filed its annual
corporate income tax return for the taxable
year 1998 representing a net loss. Likewise,
petitioner had an unapplied creditable
withholding tax. Petitioner declared in its
1999 tax return the representation of its prior
excess credit for taxable year 1998.
Petitioner claims for a refund with respect to
the unapplied creditable withholding tax,
stating that there is still an unapplied amount.
WON THE PETITIONER IS ENTITLED TO A

REFUND OF ITS CREDITABLE TAXES
WITHHELD FOR TAXABLE YEAR 1997 —
YES
WON THE PETITIONER IS ENTITLED TO A

REFUND OF ITS CREDITABLE TAXES
WITHHELD FOR TAXABLE YEAR 1998 —
NO
CIR v. Far East Bank filed a claim for refund of 3 essential requirements for a claim for refund of
Far overpaid creditable withholding taxes, which this nature to prosper are:
East included CWT on rental income allegedly 1. filing the same within the 2-year period;
Bank & earned by the Bank as lessor. CTA found that 2. establishing the fact of withholding with
Trust respondent failed to prove that the income copies of the CWT certificates; and
Compa derived from rentals and sale of real property 3. showing that the income received was
ny from which the taxes were withheld were declared as part of gross income.
(2010) reflected in its 1994 Annual Income Tax
Return. The CA found otherwise. Here the Petitioner failed to prove (2) as the
return in fact showed “Not Applicable” under the
WON FAR EASTERN BANK CAN CLAIM portion referring to Rental Income. In addition,
FOR REFUND NOTWITHSTANDING ITS some certificates were likewise not submitted as
FAILURE TO SHOW IN THE RETURN THAT evidence.
INCOME UPON WHICH THE CREDITABLE
TAXES WITHHELD WERE BASED WAS IN
FACT REPORTED — NO
Weinbr Petitioner filed its Annual Income Tax Return In ruling for the petitioner, the Court held that to
enner for CY 2003. Two years after, it applied for the prove that no carry-over has been made does
& Inigo administrative tax credit/refund of its unutilized not absolutely require the presentation of the
Insura CWT for CY 2003. According to the CIR, its quarterly ITRs.
nce claim should not be granted because it was not
Broker able to present the quarterly Income Tax What Section 76 requires, just like in all civil
s, Inc. Returns for CY 2004 to prove no carry-over of cases, is to prove the prima facie entitlement
v. CIR the unutilized and excess CWT was made. The to a claim, including the fact of not having
(2015) CIR cited Section 76 of the NIRC: carried over the excess credits to the
SEC. 76. Final Adjustment Return. – subsequent quarters or taxable year. It does
Every corporation liable to tax under not say that to prove such a fact, succeeding
220
I`
Section 27 shall file an adjustment quarterly ITRs are absolutely needed. Any
return covering the total taxable income document, other than quarterly ITRs may be
for the preceding calendar or fiscal year. used to establish that indeed the non-carry over
If the sum of the quarterly tax payments clause has been complied with, provided that
made during the said taxable year is not such is competent, relevant and part of the
equal to the total tax due on the entire records.
taxable income of that year, the
corporation shall either: An annual ITR contains the total taxable income
a. Pay the balance of tax still due; or earned for the four (4) quarters of a taxable year,
b. Carry-over the excess credits; or as well as deductions and tax credits previously
c. Be credited or refunded with the reported or carried over in the quarterly income
excess amount paid, as the case tax returns for the subject period. Thus, it can
may be. sufficiently reveal whether carry over has been
made in subsequent quarters.
In case the corporation is entitled to a
tax credit or refund of the excess It must be remembered that taxes computed
estimated quarterly income taxes paid, in the quarterly returns are mere estimates. It
the excess amount shown on its final is the annual ITR which shows the aggregate
adjustment return may be carried over amounts of income, deductions, and credits
and credited against the estimated for all quarters of the taxable year. It is the
quarterly income tax liabilities for the final adjustment return which shows whether
taxable quarters of the succeeding a corporation incurred a loss or gained a
taxable years. Once the option to carry- profit during the taxable quarter.
over and apply the excess quarterly
income tax against income tax due for The Court does not, and cannot, however, grant
the taxable quarters of the succeeding the entire claimed amount as it finds no error in
taxable years has been made, such the original decision of the CTA Division granting
option shall be considered irrevocable refund to the reduced amount of P2,737,903.34.
for that taxable period and no
application for cash refund or issuance
of a tax credit certificate shall be allowed
therefor.
Petitioner argues that it was able to present its

Annual Income Tax Return for 2004 which
shows that it has not carried over the unutilized
CWT. CTA Division partially granted
petitioner’s claim. CTA En Banc reversed CTA
Division and sided with the CIR.
WON PRESENTATION OF THE ITRS OF

THE SUCCEEDING QUARTERS OF A
TAXABLE YEAR IS INDISPENSABLE IN A
CLAIM FOR REFUND
— NO
BPI v. Prior to its merger with petitioner BPI on July 1, In case of the dissolution of a corporation, the
CIR 1985, the Family Bank and Trust Co.(FBTC) period of prescription should be reckoned from
(2000) earned income from rentals from its leased the date of filing of the return required by Sec 78
221
I`
properties and interest from treasury notes and (now 52) of the Tax Code. Petitioner’s
withheld the appropriate taxes. Upon FBTC’s contention that the prescriptive period
dissolution, it had an excess tax credit of commenced only after it had filed FBTC’s Final
P2,146,072 from the year prior and P174,065 Adjustment Return is of no merit. This provision
for the current year (Total refundable amount = applies only to instances in which the
P2,320,138.24). As FBTC’s successor in corporation remains subsisting but in instances
interest, petitioner BPI claimed the amount as where the corporation is contemplating
tax refund but respondent CIR refunded only dissolution, 78 (52) applies. When FBTC ceased
the amount of P2,146,072, leaving out the operations, its taxable year was shortened to 6
balance of P174,065. BPI then filed a petition months. Thus after FBTC ceased operations on
for review with the Court of Tax Appeals on June 30, 1985 it became necessary for FBTC to
December 29, 1987 but the same was file its income tax return within 30 days after
dismissed on the ground that the claim had approval by the SEC of its plan of dissolution.
already prescribed. BPI contends that the 2- As the petition for review before the Tax
year prescriptive period should only have been Court was filed only on December 29, 1987—
deemed commenced after it had filed FBTC’s more than 2 years from July 31, 1985 (the
Final Adjustment Return on April 15, 1986 date the tax return should have been filed)—
pursuant to 46(a) of the 1977 NIRC (law the claim had prescribed.
applicable at the time of the transaction) but
the Court of Tax Appeals ruled that the
prescriptive period begins 30 days after the
approval by the SEC of the plan of dissolution,
pursuant to Sec 78 (now Sec 52) of the same
Code, so July 31, 1986.
WON PETITIONER’S CLAIM IS BARRED BY

PRESCRIPTION — YES
PDIC v. BIR, one of the creditors of RBTI, intervened in
The BIR ignores the New Central Bank Act and
BIR the liquidation proceedings of RBTI. BIR
the Civil Code. The Supreme Court does not
(2013) prayed that the proceedings be suspended
agree. Section 52(C) of the Tax Code of 1997 is
until PDIC has secured a tax clearance
not applicable to banks ordered placed under
required under the Tax Code of 1997,
liquidation by the Monetary Board. A tax
providing in Section 52(C) that the dissolving
clearance is not a prerequisite to the
or reorganizing corporation shall, prior to the
approval of the project of distribution of the
issuance by the SEC of the Certificate of
assets of a bank under liquidation by the
Dissolution or Reorganization, as may be
PDIC. Banks under liquidation by the PDIC as
defined by rules and regulations prescribed by
ordered by the Monetary Board constitute a
the Secretary of Finance, upon
special case governed by the special rules and
recommendation of the Commissioner, secure
procedures provided under Section 30 of the
a certificate of tax clearance from the
New Central Bank Act, which does not require
Bureau of Internal Revenue which that a tax clearance be secured from the BIR. It
certificate shall be submitted to the SEC.
is unreasonable for the liquidation court to
require that a tax clearance be first secured as a
WON A BANK PLACED UNDER condition for the approval of project of
LIQUIDATION HAS TO SECURE A TAX distribution of a bank under liquidation. It will be
CLEARANCE FROM THE BIR BEFORE THE a chicken-and-egg dilemma. The BIR can only
PROJECT OF DISTRIBUTION OF THE issue a certificate of tax clearance when the
ASSETS OF THE BANK CAN BE taxpayer had completely paid off his tax
222
I`
APPROVED BY THE LIQUIDATION COURT liabilities. Should the BIR find that RBBI still had
— NO outstanding tax liabilities, PDIC will not be able
to pay the same because the Project of
Distribution of the assets of RBBI remains
unapproved by the RTC; and, if RBBI still had
outstanding tax liabilities, the BIR will not issue a
tax clearance; but, without the tax clearance, the
Project of Distribution of assets, which allocates
the payment for the tax liabilities, will not be
approved by the RTC.
United United Airlines filed with respondent a claim for In ruling for the CIR, the Court noted the
Airline tax refund the amount of P5,028,813.23 erroneous deductions made by United
s, Inc. allegedly representing income taxes paid in Airlines. Petitioner’s return was found
v. CIR 1999 on passenger revenue from tickets sold erroneous as it understated its gross cargo
(2010) in the Philippines, the uplifts of which did not revenue for the same taxable year due to
originate in the Philippines. Petitioner argued deductions of two (2) items consisting of
that since it no longer operated passenger commission and other incentives of its agent.
flights originating from the Philippines The CTA therefore correctly denied the claim for
beginning February 21, 1998, its passenger tax refund after determining the proper
revenue for 1999, 2000 and 2001 cannot be assessment and the tax due. The general rule of
considered as income from sources within the Section 72 of the NIRC provides that fraudulent
Philippines, and hence should not be subject to returns, or returns which contain any
Philippine income tax under Article 96 of the understatement or undervaluation shall not be
RP-US Tax Treaty. It agreed that petitioner subject of any suit for recovery (tax refund). The
cannot be taxed on its 1999 passenger CTA found that petitioner had underpaid its GPB
revenue from flights originating outside the tax for 1999 because petitioner had made
Philippines. However, in reporting a cargo deductions from its gross cargo revenues in the
revenue of P740.33 million in 1999, it was income tax return it filed for the taxable year
found that petitioner deducted two (2) items 1999, the amount of underpayment even greater
from its gross cargo revenue of P2.84 billion: than the refund sought for erroneously paid GPB
P141.79 million as commission and P1.98 tax on passenger revenues for the same taxable
billion as other incentives of its agent. period. Hence, the CTA ruled petitioner is not
entitled to a tax refund.
WHETHER OR NOT THE PETITIONER IS
ENTITLED TO A REFUND OF THE AMOUNT
OF P5,028,813.23 IT PAID AS INCOME TAX
ON ITS PASSENGER REVENUES IN 1999 —
NO
223

Person - Orporation: Income Tax

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Person - Orporation: Income Tax

Uploaded by

Copyright:

Available Formats

I`

Case Summary Doctrine

Case Summary Doctrine

trade / business) but does NOT include :

Sections TAX ON NONRESIDENT ALIEN INDIVIDUALS

Case Summary Doctrine

exemption by virtue of the RP-US Military

Case Summary Doctrine

Case Summary Doctrine

In consideration of such protection, the flow of

Since you will be a nonresident citizen, [after

2.MCIT – only applies to one person corporation

Case Summary Doctrine

4. Donations – threshold for corporations are higher than individual

5. Optional standard deduction threshold in OPC and sole proprietorship

Case Summary Doctrine

Rules of Distribution annexed to the Pool

Although there was clear evidence of co-

Case Summary Doctrine

subsequently selling them do not make them

Recall partnership law: Civil Code, Art. 1769(3)

Case Summary Doctrine

ed Although the project of partition was

Based on these facts, CIR decided that

WON THERE WAS A CO-OWNERSHIP

Joint ventures or consortiums formed for the purpose of undertaking construction

Case Summary Doctrine

Joint ventures with foreign contractors may be treated as a non-taxable corporation,

4 stages of a JV The allocation of saleable units between

Case Summary Doctrine

(corporate) income tax at the rate of 30%, and to

2. With regard to Avida’s undertaking (as provided

Case Summary Doctrine

To be taxable, the amount must be income first!

Requisites for taxability of income:

Case Summary Doctrine

• To recapitulate, Vicente wants to half his

The wife of Vicente has an inchoate right in the

Case Summary Doctrine

stockholder has received nothing out of the

The stockholder who receives a stock dividend

A certificate of stock represented by the stock

Case Summary Doctrine

WON LIMPAN IS JUSTIFIED IN NOT

Case Summary Doctrine

exchange transactions, and are not included in

Revenue Memorandum Circular Nos. 7-71 10

Petitioners argue that since there were no

Case Summary Doctrine

$324,529.94 represented punitive punishment for unlawful conduct cannot

WINDFALL GAIN is also part of income ELEMENTS OF INCOME

Case Summary Doctrine

Case Summary Doctrine

and was described as Awards to Players’ Thunderbirds should be included in Hornung’s

Citing Commissioner v. Banks, the court noted

Case Summary Doctrine

extends broadly to all economic gains.”

ELEMENTS THAT DON’T MAKE THE CUT Calamansi tree

Need not arise from capital / investment

Case Summary Doctrine

In Conwi v. Court of Tax Appeals,49 the Court

The membership fees, assessment dues, and

There was no realized “gain.”