SEC. 6.
Local government units shall have a just share, as determined by law, in the
PART I.
1. Give at least 5 Constitutional provisions /limitations that directly affect the power
to tax of the State.
ART. VI. SEC. 28. (1) The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.
(2) The Congress may, by law, authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the
national development program of the Government.
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall be
exempt from taxation.
(4) No law granting any tax exemption shall be passed without the concurrence of a
majority of all the Members of the Congress.
ART. XIV. SEC. 4. (3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational purposes shall be exempt
from taxes and duties. Upon the dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner provided by law.
Proprietary educational institutions, including those cooperatively owned, may
likewise be entitled to such exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for reinvestment.
(4) Subject to conditions prescribed by law, all grants, endowments, donations, or
contributions used actually, directly, and exclusively for educational purposes shall be
exempt from tax.
ART. X. SEC. 5. Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local autonomy.
Such taxes, fees, and charges shall accrue exclusively to the local governments.
national taxes1 which shall be automatically released to them.
SEC. 7. Local governments shall be entitled to an equitable share in the proceeds of the
utilization and development of the national wealth within their respective areas, in the manner
provided by law, including sharing the same with the inhabitants by way of direct benefits.
2. Explain the various inherent limitations of the power to tax of the State
The term "inherent limitations" means that said limitations exist even without any law
mandating it. The four inherent limitations upon the power of taxation are as follows:
(1) The power to tax should be levied only for public purpose.2 – The power to tax exists
for the general welfare of the community in equal measures. Hence, implicit in its power is
the limitation that it should be used only for a public purpose. It would be a robbery for the
State to tax its citizens and use the funds generated for a private purpose. Public purpose is the
heart of the tax law. Public purpose is an elastic concept that can be hammered to fit modern
standards. It does not only pertain to those purposes which are traditionally viewed as
essentially governmental functions, such as building roads and delivery of basic services, but
also includes those purposes designed to promote social justice. While the categories of what
may constitute a public purpose are continually expanding in the light of the expansion of
government functions, the inherent requirement that taxes can only be exacted for a public
purpose still stands.3 Simply, the proceeds of the tax must be used (1) for the support of the
State, or (2) for some recognized objectives of the government, or to directly promote the
welfare of the community.
(2) The power to tax is inherently legislative.4 - General Rule. - The power to tax is
essentially a legislative function in that the power of taxation can only be exercised through the
enactment of tax laws and consequently falls to the Legislature without special assignment as a
part of the more general power of lawmaking. It can only be performed by the Legislature
upon consideration of policy, necessity and public welfare. It belongs to that department to
determine what measures shall be taken for the public welfare, and to provide the revenues for
the support and due administration of the government. The legislature wields the power to
define WHAT tax shall be imposed, WHY it should be imposed, HOW MUCH tax shall be
imposed, AGAINST WHOM it shall be imposed and WHERE it shall be imposed,5 provided
these are all within the State’s territorial jurisdiction.6
1 The Constitution itself set national taxes (not merely national internal revenue taxes) as the base amount from which to
reckon the just share of the LGUs. Mandanas v. Ochoa, GR 199802, April 10, 2019 [Per C.J. BERSAMIN, En Banc]
2Gaston v. Republic Planters Bank, GR L-77194, March 15, 1988 [Per J. MELENCIO-HERRERA, En Banc]; Planters Products,
Inc. v. Fertiphil Corp., GR 166006, March 14, 2008[Per J. REYES, Third Div.]
3 La Suerte Cigar and Cigarette Factory v. CA, GR 125346, Nov. 11, 2014, Per J. LEONEN, En Banc].
4 BQ 2004, 2012; FDCP v. City of Cebu and SM Prime Holdings, Inc., GR 203754/204418, June 16, 2015 [Per J. VELASCO, JR.,
En Banc]
5 CREBA v. Romulo, GR 160756, March 9, 2010 [Per J. CORONA, En Banc]
6 Sison Jr. v. Ancheta, GR L-59431, July 25, 1984[Per CJ FERNANDO, En Banc]
 Exceptions: It is well settled that the power to tax, being inherently legislative, cannot be
delegated to or exercised by the executive or judicial department of the government without
infringing upon the theory of separation of powers, except as may be authorized by the
Constitution. Thus, the three recognized exceptions to this rule, under the Constitution, are as
follows:
(a) Delegation to the President of the Philippines. - By express provision of the
Constitution, Congress may, by law, authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may impose, tariff rates, import or export
quotas, tonnage and wharfage dues, and other duties and imposts within the framework of the
national development program of the Government.7
(b) Delegation to local government units. – Although the power to tax does not inhere to
the local government units, as they are not the sovereign but merely territorial and political
subdivisions of the State, it is a recognized principle that the power to create local governments
or political subdivisions carries with it the power to clothe them with the power to tax. No local
government unit may successfully operate without any taxing power.8 That is why under Art.
X, Sec. 5 of the 1987 Constitution, LGUs are now empowered to create their own sources of
revenue, subject to Congressional guidelines and limitations,9“consistent with the basic policy
of local autonomy.”10
(c) Delegation to administrative agencies. - While the exercise of the taxing power may
not be delegated, some aspects or elements thereof may, without violation of the doctrine of
separation of powers, be vested in an administrative body, provided that a sufficient guide or
standard is laid down by Congress for the guidance of the administrative officers in the
implementation and administration.11 The executive exercises exclusive discretion in matters
pertaining to the implementation and execution of tax laws thru the promulgation of
implementing rules and regulations.
(3) The power to tax is limited within the territorial jurisdiction of the taxing
authority.12 - It only means that a state may lay a personal tax upon persons subject to the
jurisdiction of its sovereignty, a property tax upon properties located within its territory, and
an excise tax upon acts done therein; but, however broad the power of taxation in its character
and searching in its extent, it is necessarily limited to persons, property, or business within its
jurisdiction, to subjects within its jurisdiction, or over which it can exercise dominion.13 The financial
exigencies of the state afford no justification for sustaining a tax on a transaction beyond the
7This is the so-called "flexible tariff clause" conferred to the President of the Philippines found under Sec. 28(2), Art VI, 1987
Phil. Constitution and later under Sec. 401 of the Tariff and Customs Code (now Sec. 1608 of the Customs Modernization and Tariff
Act).
8 Rubi v. Prov. Board of Mindoro, GR L-14078, March 7, 1919[Per J. MALCOLM, En Banc]; Pepsi Cola Bottling Co. v. City of
Butuan, GR L-22814, Aug. 28, 1968[Per C. J. CONCEPCION, En Banc]
9 This is the reason for the enactment of the Local Government Code of 1991. Thus, LGUs can only act as part of the
sovereign. They do not have the inherent power to tax. Their power to tax must be prescribed by law.
10 Art X, Sec. 5, 1987 Phil. Constitution; Demaala v. COA, GR 199752, Feb. 17, 2015[Per J. LEONEN, En Banc]
11 Maceda v. Macaraig, GR 88291, May 31, 1991[Per J. GANCAYCO, En Banc]
12 Quezon City and the City Treasurer of QC v. ABS-CBN Broadcasting Corp. GR 166408, Oct. 6, 2008[Per J. REYES, Third Div.]
13 The fundamental basis of the right to tax is the capacity of the government to provide benefits and protection to the
object of the tax.
borders of the state.14 Within the territorial jurisdiction, the taxing authority may determine the
“place of taxation” or what is known as the “tax situs.” The basic rule is that the state where the
subject to be taxed has a situs may rightfully levy and collect the tax, and the situs is necessarily
in the state which has jurisdiction or which exercises dominion over the subject in question.
This is based on the theory that the tax laws of a state can have no extraterritorial operation.
The imposition of a tax upon person or property or transaction abroad is generally
considered a violation of the Constitutional provision that no person shall be deprived of his
property without due process of law,15 except for certain instances.
(4) The power to tax is subject to international comity.16 – This limitation which is
founded on the principle of reciprocity is designed to maintain a harmonious and productive
relationships among the various states. "International comity" refers to the respect afforded by
one state to another state by virtue of the principle of sovereign equality among states and of
their freedom from suit without their consent, that limits the authority of a government to
effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property
held, and activities undertaken in that capacity. It is admitted that the generally accepted
principles of international law are binding upon nations. One of the settled principles of
international law is that the property of a foreign government may not be taxed by another.
The binding effect of this principle has been recognized and has found its way in our
Constitution which provides that the generally accepted principles of international law shall
form part of the law of the nation.17
Consonant with the principle of international comity, the provision of a tax treaty must take
precedence over and above the provisions of the local taxing statute. Tax treaties are accepted
limitations upon the power of taxation.
3. Explain the following:
A. General rules in the interpretation of tax laws.
General Rule: The hornbook doctrine in the interpretation of tax laws declares that a
statute will not be construed as imposing a tax unless it does so clearly, expressly and
unambiguously. (Verba Legis Doctrine).18 A tax cannot be imposed without clear and express
words for that purpose. Accordingly, the general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act
are not to be extended by implication.19
When a tax provision speaks unequivocally, it is not the province of a Court to scan its
wisdom or its policy.20 The more correct course of dealing with a question of construction is to
14 Vegetable Oil Corp. v. Trinidad, GR L-21475, March 26, 1924 [Per J. OSTRAND, En Banc]
15 Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for
which a tax is supposed to be a compensation.
16 CIR v. Pilipinas Shell Petroleum Corp., GR 188497, April 25, 2012 [Per J. VILLARAMA, Jr., First Div.]
17 Art. II, Sec. 3, 1987 Phil. Constitution.
18 Medicard Philippines, Inc. v. CIR, G.R. 222743, April 5, 2017 [Per J. Reyes, Third Div.]
19 CIR v. Central Luzon Drug Corp., G.R. 159610, June 12, 2008 [Per J. CARPIO, First Div.]
20 CoC v. Manila Star Ferry, Inc., G.R. L- 31776-78, Oct. 21, 1993 [Per J. QUIASON, First Div.]
take the words to mean exactly what they say. Where a provision of law expressly limits its
application to certain transactions, it cannot be extended to other transactions by
interpretation.21
B. Interpretation of law laws on Tax exemptions and exclusions
The basic principle in the construction of laws granting tax exemptions and exclusions
has been very stable. As early as 1916 in the case of Government of the Philippine Islands v. Del
Monte de Piedad,22 this Court has declared that he who claims an exemption from his share of the
common burden of taxation must justify his claim by showing that the Legislature intended to
exempt him by words too plain to be beyond doubt or mistake.
The right to taxation is inherent in the State. It is a prerogative essential to the
perpetuity of the government and he who claims an exemption from the common burden must
justify his claim by the clearest grant of organic or statute law. When exemption is claimed, it
must be shown indubitably to exist. At the outset, every presumption is against it. A well-
founded doubt is fatal to the claim. It is only when the terms of the concession are too explicit
to admit fairly of any other construction that the proposition can be supported.
As a general rule, statutes granting tax exemptions (and exclusions)23 must be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, and if
an exemption (or exclusion) is found to exist, it must not be enlarged by construction.24
C. Rules on non-retroactive applications of tax laws.
As a general rule, tax laws are prospective in application25 and therefore cannot be given
retroactive effect.
Exception: Unless the legislative intent that the statute operate retrospectively is distinctly
expressed or necessarily implied.26 The mere fact, however, that a tax law is retroactive does not make it
invalid or against due process.
Exception to the Exception: But a tax law should not be given retroactive effect even if the
retroactivity is distinctly expressed or implied in the law when retroactivity would be so harsh and
oppressive in its application because in that case, the constitutional limitation of due process would be
violated.27
21 Coca-Cola Phils. Inc. v. CIR, G.R. 222428. Feb. 19, 2018 [Per J. PERALTA, Second Div.]
22 Govt. of the Phil. Islands v. El Monte de Piedad, GR 9959, Dec. 13, 1916 [Per J. RENT, En Banc]
23 "Exclusions" from gross income are considered as exempt from income tax.
24 Kepco Phils. Corp v. CIR, GR 181858, Nov. 24, 2010 [Per J. MENDOZA, Second Div.]
25 Rationale: Because the nature and amount of the tax could not be foreseen and understood by the taxpayer at the time
the transaction which the law seeks to tax was completed.
26 Lorenzo v. Posadas, 64 Phil. 353 (1937)
27 Carmelino F. Pansacola v. BIR, GR 159991, Nov. 16, 2006
A tax statute may be made retroactive in its operation because liability for taxes under retroactive
legislation has been “one of the incidents of social life.”28 But legislative intent that a tax statute should
operate retroactively should be perfectly clear.29 Where a tax law could not have been reasonably foreseen
by the taxpayer, to make it retroactive would be to deny him due process and to render the retroactivity
invalid.30
D. Doctrine of prospectivity of tax laws.
As a general rule, tax laws are prospective in operation, unless the legislative intent that statute
should operate retrospectively is distinctly expressed or necessarily implied.31 This is because
taxes are burdens and should not be imposed without due process of law.32
Where a statute amending a tax law is silent as to whether it operates retroactively, the
amendment will not be given a retroactive effect so as to subject to tax past transactions not
subject to tax under the original act. Every case of doubt must be resolved against its
retroactive effect.33
B. How did the SC explain the “The power to tax is sometimes called the power to
destroy” in the case of Roxas v. CTA?
Taxation is the State’s strongest power; hence it is sometimes called “the power to
destroy.”34- As a general rule, the power to tax is an incident of sovereignty and is unlimited in
its range, acknowledging in its very nature no limits, so that security against its abuse is to be
found only in the responsibility of the legislature which imposes the tax on the constituency
who is to pay it. So potent indeed is the power that it was once opined that ”the power to tax
involves the power to destroy.”35. However, it should be exercised with caution to minimize injury
to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, “lest
the tax collectors kill the hen that lays the golden egg.”36
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence.
Incurring losses because of a tax imposition may be an acceptable consequence but killing the
business of an entity is another matter and should not be allowed. It is counter-productive and
28 Lorenzo v. Posadas, 64 Phil. 353 (1937)
29 Castro v. Collector, GR L-12174, Dec. 28, 1962
30 Republic v. Oasan vda. De Fernandez, 99 Phil. 934; CIR v/ PNB, GR 95247, June 11, 2016.
31 CIR. v. Filipinas Cia. de Seguros, GR L-14880, April 29, 1960 [Per J. BARRERA, En Banc]
32 Belle Corp. v. CIR, G.R.181298, Jan. 10, 2011 [Per J. DEL CASTILLO, First Div.]
33 CIR v. Marubeni Corporation, GR 137377, Dec. 18, 2001, Per J. PUNO, First Div.]
34 BQ 2000
35 Phil. Health Care Providers, Inc. v. CIR, G.R. 167330, Sept. 18, 2009 [Per J. CORONA]
36 Tridharma Marketing Corp. v. CTA, G.R. 215950. June 20, 2016 [Per J. BERSAMIN]
ultimately subversive of the nation's thrust towards a better economy which will ultimately it should be taxed once; it is tantamount to taxing the same person twice by the same
benefit the majority of our people.37 jurisdiction for the same thing.42

The taxes herein are imposed on two different subject matters. The subject matter of the
FWT is the passive income generated in the form of interest on deposits and yield on deposit
C. Why is compensation or off-setting not allowed or is not feasible in taxation? substitutes, while the subject matter of the GRT is the privilege of engaging in the business of
banking.43
The Doctrine of Compensation and Set-off states that taxes are NOT subject to set-off or
legal compensation because the government and the taxpayer are not mutual creditor and On the other hand, Double taxation in the broad sense is called “indirect double
debtor of each other.38 taxation” or “indirect duplicate taxation” which extends to all cases in which there are two or
more pecuniary impositions, but the ABSENCE OF ONE OR MORE of the above-mentioned
Compensation should take place when two persons in their own right are creditors and elements makes the double taxation indirect. The Constitution does NOT prohibit the
debtors of each other because compensation refers to mutual debts.39 But a claim for taxes is imposition of double taxation in the broad sense because it does not violate the substantive
not such a debt as is allowed to be set-off under the statutes of set-off. There can be no due process since no actual double taxation occur.
offsetting of taxes against the claims that the taxpayer may have against the government.
Taxes and debts cannot be the subject of compensation since they are not mutually creditors
and debtors of each other.40 Neither are they a proper subject of recoupment since they do not E. Explain the difference between the Silkair case and PAL case in the matter of who is the
arise out of the contract or transaction sued on. statutory taxpayer, meaning of direct and indirect taxes and who has the legal standing to
claim for refund.
A person cannot refuse to pay a tax on the ground that the government owes him an
amount equal to or greater than the tax being collected. The rule is that the collection of a tax
cannot await the results of a refund claim against the government. 41
Silkair44 PAL45
Who is the statutory taxpayer The statutory taxpayer (Petron, The said rule should not apply
D. The interest income of a bank is subject to a final tax of 20%, in addition such not Silkair) is the person on to instances where the law
whom the tax is imposed by clearly grants the party to
amount is subject to a Gross Receipts Tax of 5%. Is this a direct double taxation or an law and who paid the same which the economic burden
indirect double taxation? Explain the difference. Is this constitutional? Why? even if he shifts the burden
of the tax is shifted an
thereof to another.
exemption from both direct
No. There is no direct double taxation when the interest income of a bank from its and indirect taxes. In which
1âwphi1

bank deposits which had been subjected to the 20% final withholding tax (which is a passive case, the latter must be allowed
income and a direct tax), is again subjected to the 5% gross receipts tax (which is considered as to claim a tax refund even if it is
business tax and indirect tax) because the first tax is income tax, while the second tax is not considered as the statutory
business tax. taxpayer under the law.
Meaning of direct and indirect Based on the possibility of In view of PAL’s payment of
taxes shifting the incidence of either the basic corporate
(a) Double taxation means taxing the same property twice when it should be taxed only taxation, or as to who shall bear income tax or franchise tax,
once; that is, "xxx taxing the same person twice by the same jurisdiction for the same thing." It is the burden of taxation, taxes whichever is lower, PAL is
obnoxious when the taxpayer is taxed twice, when it should be taxed but once. Otherwise may be classified into either
EXEMPT from paying: (a)
direct tax or indirect tax.
described as "direct duplicate taxation," the two taxes must be imposed on the same subject taxes DIRECTLY DUE FROM
matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during In context, direct taxes are or imposable upon it as the
the same taxing period; and they must be of the same kind or character. This is the so-called those that are exacted from the purchaser of the subject
“direct double taxation” which is objectionable because it is a violation of the substantive due very person who, it is intended petroleum products; and (b)
process under the Constitution since the same property or subject matter is taxed twice when or desired, should pay them; the cost of the taxes billed or
they are impositions for which a passed on to it by the seller,
taxpayer is directly liable on the producer, manufacturer, or
37 Roxas v. CTA, 23 SCRA 276, cited in Tridharma Marketing Corp. v. CTA, G.R. 215950, June 20, 2016 [Per J. BERSAMIN]
38 Republic v. Mambulao Lumber Co., GR L-17725, Feb. 28, 1962 [Per J. BARRERA, En Banc] 42 La Suerte Cigar and Cigarette Factory v. CA, GR 125346, Nov. 11, 2014 [Per J. LEONEN, En Banc]
39 Art. 1278, NCC 43 CIR v. Bank of Commerce, GR 149636, June 8, 2005 [Per J. CALLEJO, Sr., Second Div.]
40 Francia v. IAC, GR L-67649, June 28, 1988 [Per J. GUTIERREZ, JR.., Third Div.] 44 Silkair(Singapore) Pte. Ltd. V. CIR, GR 184398, Feb. 25, 2010 [Per J. Leonardo-De Castro, First Div.].
41 Air Canada v. CIR, GR 169507, Jan. 11, 2016 [Per J. LEONEN, Second Div.] 45 PAL v. CIR, GR 198759, July 1, 2013 [Per J. Perlas-Bernabe, Second Division]
 transaction or business he is
engaged in.
On the other hand, indirect
taxes are those that are
demanded, in the first instance,
from, or are paid by, one person
in the expectation and intention
that he can shift the burden to
someone else. Stated elsewise,
indirect taxes are taxes wherein
the liability for the payment of
the tax falls on one person but
the burden thereof can be
shifted or passed on to another
person, such as when the tax is
imposed upon goods before
reaching the consumer who
ultimately pays for it. When the
seller passes on the tax to his
buyer, he, in effect, shifts the
tax burden, not the liability to
pay it, to the purchaser as part
of the purchase price of goods
sold or services rendered.
Who has the legal standing to The proper party to question, or
claim a refund seek a refund of, an indirect tax
is the statutory taxpayer, the
person on whom the tax is
imposed by law and who paid
the same even if he shifts the
burden thereof to another.
Section 130 (A) (2) of the NIRC
provides that "[u]nless
otherwise specifically allowed,
the return shall be filed and the
excise tax paid by the
manufacturer or producer before
removal of domestic products
from place of production." Thus,
Petron Corporation, not Silkair,
is the statutory taxpayer which
is entitled to claim a refund
based on Section 135 of the
NIRC of 1997 and Article 4(2) of
the Air Transport Agreement
between RP and Singapore.
F. Idenfify the differences between tax avoidance and tax evasion in terms of the
means in achieving it; the purpose why it is done and the penalty if found guilty of the
same.
Tax Avoidance
importer of the said products
either as part of the purchase
price or by mutual agreement
or other arrangement.
Meaning, it is exempt from
paying both direct and indirect
taxes.
Therefore, given the foregoing
direct and indirect tax
exemptions under its franchise,
and applying the principles as
above-discussed, PAL is
endowed with the legal
standing to file the subject
tax refund claim,
notwithstanding the fact that it
is not the statutory taxpayer as
contemplated by law.
Tax Evasion
As to means in achieving “Tax avoidance” is a tax saving “Tax evasion” is the use of illegal
it device wherein the taxpayer or fraudulent means to evade or
uses legal means to reduce tax defeat the payment of the tax.
liability within the means
sanctioned by law, hence
legal.46
The purpose why it is It is used by the taxpayer in It connotes fraud through the
done good faith and at arm's length. use of pretenses and forbidden
devices to lessen or defeat the
payment of correct taxes.
Penalty if found guilty of Taxpayer is not subjected to When availed of, it usually
the same civil or criminal liabilities subjects the taxpayer to
because it is a legal tax saving additional civil or criminal
device. liabilities.
G. Distinction between tax amnesty and tax exemption, in terms of the scope of immunity; to
whom granted; when applied; and as to the implication to revenue loss.
Tax amnesty operates as a general pardon or the intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of violating a tax evasion or a tax law.
It is an absolute forgiveness or waiver by the govt. of its right to collect what is due it and to
give tax evaders who wish to relent a chance to start with a clean slate.47
Tax amnesty, much like tax exemption, is never favored or presumed in law. The grant of tax
amnesty, similar to tax exemption, must be construed strictly against the taxpayer and liberally
in favor of the taxing authority.48
Tax Amnesty Tax Exemption
Scope of immunity Tax amnesty is an immunity Tax exemption is an immunity or
from all criminal, civil and privilege, a freedom from a charge or
administrative liabilities burden to which OTHERS are subjected.
arising from non-payment of
taxes.
To whom granted It is a general pardon given
It is granted only to those taxpayers
to ALL taxpayers. covered by the specific tax exemption
statute.
When applied It applies only to past tax It is generally prospective in application.
periods, hence of retroactive
application.49
As to implication to In a tax amnesty, however, In tax exemption, there is no revenue
46 Heng Tong Textiles Co., Inc. v. CIR, GR L-19737, Aug. 26, 1968 [Per J. MAKALINTAL, En Banc]
47CIR vs. Transfield Phils., Inc. , G.R. No. 211449, Jan. 16, 2019, Per J. REYES, JR. ; CIR v. Covanta Energy Phil. Holdings,
Inc.; G.R. No. 203160, Jan. 24, 2018 REYES, JR., J.;
48 Asia Intl. Auctioneers v. CIR, GR 179115, Sept. 26, 2012, Per J. Perlas-Bernabe
49 People v. Castaneda, GR L-46881, Sept. 15, 1988, FELICIANO, J.
revenue loss there will be a revenue loss loss because there were no actual taxes
since there were actually due as the person or transaction is
taxes due but the collection protected by tax exemption.
was just waived by the
Government.
PART II
I.
Whether sack of rice given to employees are additional compensation or fringe benefits.
No. There is no legal basis for the assessment made by the BIR that the sack of rice is
considered as additional compensation for the rank and file employees and additional fringe
benefits for the supervisors and managers. Rather, said sack of rice, whether given to the rank
and file employees or to the managers and supervisors are classified as “de minimis benefits”
which are facilities and privileges of relatively small value furnished or offered by an employer
to his employees and are not considered as compensation subject to income tax and
consequently to withholding tax pursuant to Rev. Regulations No. 2-98, as amended by RR 11-
2018.
II.
WON the action of the accounting dept. of People’s Support, a domestic corporation with
office in Dubai, of deducting from John’s salary (as a senior engineer assigned in Dubai from
July 2016 up to present) an amount as withholding tax representing the income tax that John is
supposed to pay in the Philippines, is correct.
No. The action of the accounting department of People’s Support of withholding from
John’s salary representing the income tax that John is supposed to pay to the Philippine
Government is not correct.
Insofar as the taxability of the income derived from the performance of services is
concerned, the source of the income is considered as the place of performance of the service.
The services rendered by John abroad as a senior engineer in favor of a domestic corporation is
not subject to income tax in the Philippines especially considering that John had been working
there from July 2016 up to the present. John here is already considered as a nonresident Filipino
citizen because he works and derives income from abroad most of the time during the taxable
year. The term “most of the time” means 183 or 184 days in one taxable calendar year as the
case may be (as to whether it is a normal year or a leap year). An individual is considered as
nonresident citizen when he leaves the Philippines for employment requiring him to be
physically present abroad most of the time during the taxable year.50 Thus, his salaries and
allowances received abroad are considered compensation for services rendered outside of the
Philippines which are not subject to Philippine income tax.
50 Sec. 22(E ),NIRC
However, John is subject only to income tax on the income that he derived here in the
Philippines from January 1 up to June 30, 2016 (if he was already employed by People’s Support
during that time) considering that compensation for labor or personal services actually
performed within the Philippines is considered as income derived from within which is subject
to the Philippine income tax pursuant to Sec. 42 of the Tax Code.51
III.
1. WON the RDO has the authority or discretion to use the FMV as the basis for determining
the CGT and not the ZV as determined by the CIR.
No. For internal revenue tax purposes, the RDO has no authority to unilaterally use a
fair market value other than that prescribed in the Tax Code. The fair market value prescribed
for the computation of any internal revenue tax shall be, whichever is the higher of
(1) The fair market value as determined by the CIR (referring to the zonal value); or the
consideration as stated in the transfer document; or
(2) The fair market value as shown in the schedule of values of the provincial and city
assessors (referring to the fair market value as per Tax Declaration).52
The use of the fair market value based only on the ocular inspection that the property
should have a higher zonal valuation because the area is already a commercial area is not
allowed for purposes of computing internal revenue taxes.
And while the CIR has the authority to prescribe real property values and divide the
Philippines into zones, the law is clear that the same has to be done upon consultation with
competent appraisers both from the public and private sectors. The CIR cannot reclassify
properties from residential to commercial without first complying with the procedures
prescribed by law. 53
2. According to the amendments under the TRAIN Law, what are the rules on determining the
zonal value?
The amendments under the TRAIN Law regarding the rules on determining the zonal
value are as follows”
“The Commissioner is hereby authorized to divide the Philippines into different zones or
areas and shall, upon mandatory consultation with competent appraisers both from the private
and public sectors, and with prior notice to affected taxpayers, determine the fair market
value of real properties located in each zone or area, subject to automatic adjustment once
every three (3) years through rules and regulations issued by the Secretary of Finance
based on the current Philippine valuation standards: Provided, That no adjustment in
51 CIR v. Baier-Nickel, GR 153793, Aug. 29, 2006 [Per J. Ynares-Santiago, First Div.]
52 Sec. 6(E), NIRC
53 Republic.v. Aquafresh Seafoods, Inc., G.R. 170389, Oct. 20, 2010 [Per J. Peralta, Second Div.]
zonal valuation shall be valid unless published in a newspaper of general circulation in
the province, city or municipality concerned, or in the absence thereof, shall be posted in
the provincial capitol, city or municipal hall and in two (2) other conspicuous public
places therein: Provided, further, That the basis of any valuation, including the records
of consultations done, shall be public records open to the inquiry of any taxpayer. 54 For
purposes of computing any internal revenue tax, the value of the property shall be, whichever is
the higher of:
(1) the fair market value as determined by the Commissioner; or
(2) the fair market value as shown in the schedule of values of the Provincial and
City Assessors.”
IV.
1. Are the separation benefits considered part of the gross income of affected employees
subject to income tax?
No. If the separation benefits given to the affected employees of Next Gen are the result
of a VALID retrenchment, said separation benefits should not be considered as part of the gross
income subject to income tax of the said affected employees and therefore, not subject to the
withholding tax on compensation.
Here, the payment of separation pay was given on account of an authorized cause.
When the termination of employment is due to a valid retrenchment program to prevent losses,
or to closure or cessation of operations of establishment or undertaking not due to serious
business losses or financial reverses, the separation pay is only an equivalent of "one (1) month
pay or at least one-half (1/2) month pay for every year of service, whichever is higher," and
those other benefits that the affected employees may have been entitled thereto under the
retrenchment program.55
Separation pay56 received by an official or employee or by his heirs from the employer as
a consequence of separation of such official or employee from the service of the employer
because of death, sickness or other physical disability or for any cause beyond the control57
of the said official or employee will not be considered as part of the gross income of the
affected employees and therefore exempt from income tax.
2. Are the cash equivalent of the unused vacation leave also subject to income tax?
For the cash equivalent of the unused vacation leave credits given to Joseph Antonio as
part of his separation benefits due to a valid retrenchment, only the portion of the unused 10
54 As amended by RA 10963 (TRAIN Law)
55 Beralde v. Lapanday, GR Nos. 205685, June 22, 2015 [Per J. Peralta, Third Div.]
56 A separation pay is given during one’s employable years, while retirement benefits are given during one’s unemployable
years. Betoy v. NPC, GR 156556-57, Oct. 4, 2011 [Per J. Peralta, En Banc]
57There should be no inkling of “voluntariness” on the part of the employee who will be separated from employment.
Otherwise, the separation benefits will be subject to withholding tax, and consequently to income tax.
days vacation leave credits shall be exempt from income tax, and the excess shall be subject to
income tax. This is because under Revenue Regulations No. 2-98, as last amended by RR 11-
2018, an employee who is working in the private sector is entitled only to the de minimis
benefit of a monetized value of not exceeding 10 days unused vacation leave credits which
shall be exempt from income tax.
3. Can the expenses incurred by Next Gen in providing the separation benefits and the cash equivalent
of the unused vacation leave be considered as deductible from gross income as ordinary and necessary
trade or business expense of the company?
Yes. The said expenses incurred by Next Gen can be considered as deductible from its
gross income as ordinary and necessary business expenses if it is using the Itemized Deductions.
It is an ordinary expense because separation benefits given to affected employees who will be
laid off connotes a payment which is normal and usual 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 the particular taxpayer affected.
On the other hand, an expense will be considered "necessary" where the expenditure is
appropriate and helpful in the development of the taxpayer's business.
Whether an ordinary and necessary expense is deductible expense must be determined
from the nature of the expenditure itself, which in turn depends on the extent and permanency
of the work accomplished by the expenditure.58
V.
Are the gross income of GGMAP subject to the regular corporate tax?
Based on its registration with the SEC as a nonstock nonprofit organization, it seems that
GGMAP is a “Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare” falling under Sec. 30(G) of the Tax Code.
Non-stock non-profit organization falling under the provision of Sec. 30 of the Tax Code
are exempt from income tax on the income they derived as such organization. Thus,
membership fees and special assessment dues collected from the members and other fees of
similar nature which only constitute contributions to and/or replenishment of the funds for the
maintenance and operations of the organization, which represents funds “held in trust” by the
organization for the members and used for administrative expenses or for the specific activities
being organized by the association only constitute infusion of capital, and therefore not subject
to income tax.
In order to constitute "income," there must be realized "gain."59 Clearly, because of the
nature of membership fees and assessment dues collected from the members as funds
58 Atlas Consolidated Mining & Dev’t. Corp. v. CIR, 102 SCRA 246 (1981)
59 Chamber of Real Estate and Builders' Associations, Inc. v. Romulo, 628 Phil. 508, 531 (2010).
inherently dedicated for the maintenance, and upkeep of the organization’s general operations,
nothing is to be gained from their collection. This stands in contrast, however, to the fees that
GGMAP may be receiving from its income-generating activities, such as seminars, training
programs courses, and conferences on good governance and on conducting researches .
The last paragraph of Sec. 30 of the Tax Code provides that the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code. Therefore, the income derived from
these income-generating activities, regardless of the disposition, is subject to the 30% regular
corporate income tax.60
VI.
X X X After 2 years, if ABC Cement Corporation wants to have the US$1 Million considered as
bad debts and therefore make it as a deduction from the gross income of ABC Cement
Corporation, what are the requirements that it must follow to validly do so?
To be able to claim the US$1 Million considered as bad debts and therefore make it as a
deduction from the gross income of ABC Cement Corporation, the following requirements must
be complied with, viz:
(1) There must be an existing indebtedness due to the taxpayer which must be valid and
legally demandable;61
(2) The debt must be connected with the taxpayer's trade, business or practice of
profession;
(3) The debt must be actually ascertained62 to be worthless63 and uncollectible as of the
end of the taxable year and even in the future.64
60 ANPC v. BIR, G.R. 228539, June 26, 2019, Per J. Perlas-Bernabe, Second Div.
61 There must be a bona fide debt meaning that there must exist a debtor-creditor relationship based upon a valid and
enforceable obligation to pay a fixed or determinable sum of money. Philex Mining Corp v. CIR, GR 148187, Apr. 16, 2008.
62 It means the taxpayer had reasonably ascertained its worthlessness and uncollectibility in good faith using sound
business judgment.
63 “Worthless” is not determined by an inflexible formula or slide rule calculation, but upon the exercise of sound, objective
business judgment that there remained no practical, but only vaguely theoretical, prospect that the debt would ever be paid. The
factors to be considered include, but are not limited to, the following:
The debtor has no property nor visible income;
The debtor has been adjudged bankrupt or insolvent;
Collateral shares have become worthless; and
There are numerous debtors with small amounts of debts and further action on the accounts would entail expenses
exceeding the amounts sought to be collected.
Determination of worthlessness must depend upon the particular facts and circumstances of the case. A taxpayer may
not postpone a bad debts deduction on the basis of a mere hope of ultimate collection or because of a continuance of attempts to
collect, where there is no showing that the surrounding circumstances differ from those relating to other notes which were charged
off in the year. Accounts receivable may be written off as bad debts even without conclusive evidence that they had definitely
become worthless when (a) the amount is insignificant; and (b) collection through court action may be more costly to the taxpayer.
64 He must prove that he exerted diligent efforts to collect by (1) sending of statement of accounts; (2) collection letters; (3)
giving the account to a lawyer for collection, (4) Filing the case in court. PRC v. CA, GR 118794, May 8, 1996 (256 SCRA 667)
(4) The debt must be actually charged off65 in the books of accounts of the taxpayer as of
the end of the taxable year;66 and
(5) The debt must not be sustained in a transaction entered into between related parties
enumerated under Sec. 36(B) of the Tax Code of 1997;
(6) The debts are uncollectible despite diligent effort exerted by the taxpayer.67
(7) It must have been reported as receivable in the income tax return of the current or
prior years.68
VII.
Is the interest income from bank deposits (the source of which is the monthly pension of a
retiree) not subject to any tax? Explain.
Athough the monthly pension from GSIS by Cecilia Cruz is exempt from income tax
under the Tax Code, the interest income, however, derived by her for depositing it in the bank
is not exempt from the final withholding tax of 20%. Interest income derived from bank
deposits is one of the sources of gross income which is subject to income tax. The definition of
gross income is broad enough to include all passive incomes69 subject to specific rates or final
withholding taxes. However, since these passive incomes are subject to different tax rates and
to the final withholding tax at source, they are no longer included in the computation of gross
income, which determines taxable income.70
VIII.
1. Is the 5-door apartment a capital asset or an ordinary asset?
The 5-door apartment is an ordinary asset because it is being used in trade or
business, as it is rented out for P5,000 a month per door.
Under Sec. 39 of the Tax Code, ”ordinary assets” shall consist of properties
specifically excluded from the definition of capital assets, and the profits or losses realized
must have to be treated as ordinary gains or ordinary losses, namely:
65 Or “write-off” – a financial accounting concept that allows for the reduction in value of an asset or earnings by the
amount of an expense or loss. Reyna v. COA, 642 SCRA, 210 (2011).
A partial write-off is not allowed (PRC v. CA, GR 118794, May 8, 1996 (256 SCRA 667).
66 It means that the amount of money lent by the taxpayer to his debtor had been recorded in his books of account as a
receivable has actually become worthless as of the end of the taxable year, that the said receivable has been cancelled and written-
off from the taxpayer’s books of accounts. RR 5-99
67 RR 25-2002
68 Sec. 103, Rev. Regs. No. 2
69
“Passive income” – income in which the taxpayer merely waits for the income to come in, which includes, but is not limited to,
interest income, royalty income, dividend income, prizes and winnings. As a general rule, passive income subject to final withholding tax is no
longer included in the computation of the annual taxable income.
70
CIR v. PAL, G.R. 160528, Oct. 9, 2006 (504 SCRA 90)
 (a) Stock in trade71 of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year, or
(b) Property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business,72 or
(c) 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 of the Tax Code;73 or
(d) Real property used in trade or business of the taxpayer.74
2. If Regina Gonzaga sells the house and lot where she lives, will the sale be subject to
capital gains tax or creditable withholding tax?
The sale will be subject to the capital gains tax.
The sale of a real property, including pacto de retro sales75 and other forms of conditional
sales, by an individual, which is located in the Philippines and considered as a capital asset,
will be subject to the capital gains tax of 6% based on the presumed gain, which is the higher
value between the current fair market value/zonal value as determined by the Commissioner
or the fair market value in the tax declaration, or the gross selling price.76 In this case, actual
gain is not required for the imposition of the tax, but rather the presumed gain by fiction of law
which is taxable.77 The return shall be filed and the tax paid within 30 days following the date
of sale or disposition.78
Income realized from the sale of capital assets are not to be reported in the annual
income tax return as they are already subject to final taxes (capital gains tax on the sale of real
property).
IX.
71
72
Refers to the merchandise or materials necessary to or used in trade or business; merchandise in process of manufacture.
Securities being sold by dealers in securities; real property held or being sold by real estate dealers; Collector v. Bautista, L-
12250 & L-12259, May 27, 1959, (105 Phil. 1326)
73 Machinery and equipment subject to depreciation.
74
Sec. 132, Rev. Regs. No. 2; Tomas Calasanz v. CIR, G.R. L-26284, Oct. 8, 1986
Macario Lim Gaw, Jr. v. CIR, G.R.. 222837. July 23, 2018 [J. TIJAM, J., First Div.]
75 The essence of a pacto de retro sale is that title and ownership of the property sold are immediately vested in the vendee a retro,
subject to the resolutory condition of repurchase by the vendor a retro within the stipulated period. Failure of the vendor a retro to perform
said resolutory condition vests upon the vendee by operation of law absolute title and ownership over the property, and failure of the vendee a
retro to consolidate his title does not impair such title or ownership.75 De Guzman v. CA, 156 SCRA 701 (1987.
76
For purposes of determining the gains from the sale of real property, the term “Gross selling price” is the actual selling price or
gross value in money which is the sum stipulated as the equivalent of the thing sold and also every incident taken into consideration for the fixing
of the price, put to the debit of the vendee and agreed to by him.76
But for capital gains tax purposes, the tax base is whichever is the higher value between the gross selling price or the current fair
market value (i.e., zonal value) of the property at the time of sale because of the "presumed gain rule." (Sec. 24(D)(1), in relation to Sec. 6(E ),
NIRC)
77
Sec. 24(D)(1), NIRC, in relation to Sec. 6(E ), NIRC
78 Sec. 51(C )(2)(b), NIRC
1. What are the requirements for a sale of a principal residence to be exempt from payment of
capital gains tax?
The capital gains presumed to have been realized from the sale of principal residence
may not be subject to capital gains tax if the following conditions are complied with:
(1) The property being sold must be the principal residence of a natural person;79
(2) The proceeds from the sale of the said principal residence must be fully utilized in
acquiring or constructing a new principal residence within 18 calendar months from the date of
sale or disposition;
(3) The historical cost80 or adjusted basis of the real property sold or disposed shall be
carried over to the new principal residence built or acquired;
(4) The owner/seller must duly notify the Commissioner within 30 days from the date
of sale or disposition through a prescribed return of his intention to avail of the tax exemption;
(5) The tax exemption can only be availed of once every 10 years;
(6) If there is no full utilization of the proceeds of sale or disposition, the portion of the
gain presumed to have been realized from the sale or disposition shall be subject to capital gains
tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is
higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling
price in order to determine the taxable portion and the tax prescribed under the Tax Code.
(7) The Buyer/Transferee shall withhold from the seller and shall deduct from the
agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or
manager’s check in interest-bearing account with an Authorized Agent Bank (AAB) under an
Escrow81 Agreement between the concerned RDO, the Seller and the Transferee, and the AAB to
the effect that the amount so deposited, including its interest yield, shall only be released to the
seller upon certification by the said RDO that the proceeds of the sale/disposition thereof has,
in fact, been utilized in the acquisition or construction of the Seller/Transferor’s new principal
residence within 18 calendar months from date of the said sale or disposition. The date of sale
or disposition of a property refers to the date of notarization of the document evidencing the
transfer of said property.
(8) After depositing the amount representing the 6% capital gains tax as mentioned
above, the Buyer/Transferee and the Seller, shall jointly file, within 30 days from the date of the
sale or disposition of the principal residence, with the RDO having jurisdiction over the
79 Only citizens and resident aliens are qualified; nonresident aliens are not qualified.
80
In accounting practice, the journal entries for transactions are recorded in historical value or cost. It is common practice that the
values of the accounts recorded at historical value or cost are not increased or decreased due to market forces. PLDT v. NTC, GR 152685, Dec.
4, 2007 (539 SCRA 365).
81
In general, the term “escrow” means a scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a third
person, to be held by the latter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee,
promisee or obligee.
property, in duplicate, the Final Capital Gains Tax Return covering the property bought with no
computed tax due stating that the supposed-tax due/amount so withheld by the buyer is (8) After depositing the amount representing the 6% capital gains tax as mentioned
maintained in an escrow account, which amount will be used to satisfy future tax liability, if above, the Buyer/Transferee and the Seller, shall jointly file, within 30 days from the date of the
any, on the subject transaction. For purposes of the capital gains tax otherwise due on the sale, sale or disposition of the principal residence, with the RDO having jurisdiction over the
exchange or disposition of the said Principal Residence, the execution of the Escrow Agreement property, in duplicate, the Final Capital Gains Tax Return covering the property bought with no
referred to in the immediately preceding paragraph shall be considered sufficient. The tax computed tax due stating that the supposed-tax due/amount so withheld by the buyer is
return so filed in pursuance hereof shall bear the addresses of both the seller and the buyer.82 maintained in an escrow account, which amount will be used to satisfy future tax liability, if
any, on the subject transaction. For purposes of the capital gains tax otherwise due on the sale,
exchange or disposition of the said Principal Residence, the execution of the Escrow Agreement
2. Will the sale of Rosalinda’s Ayala Alabang property qualify? referred to in the immediately preceding paragraph shall be considered sufficient. The tax
return so filed in pursuance hereof shall bear the addresses of both the seller and the buyer.84
Based on the facts, it would seem that Rosalinda Reyes failed to comply with some of (There was no mention as well regarding the filing of this CGT Return.)
the requirements in order to qualify for exemption from capital gains tax on the sale of
Therefore, the sale of Rosalinda’s Ayala-Alabang house and lot will not qualify for
principal residence, namely:
exemption from the payment of capital gains tax on the sale of a principal residence.
(1) The owner/seller must duly notify the Commissioner within 30 days from the date
of sale or disposition through a prescribed return of her intention to avail of the tax exemption; X.
(The intention to avail the tax exemption must already be present at the time of sale of the
1. Can the Associated Union bank be held liable to pay for tax on improperty accumulated
old principal residence and a return must be filed within 30 days from the date of sale.)
earnings tax?
(2) The proceeds from the sale of the said principal residence must be fully utilized in
No. Because improperly accumulated earnings tax is applicable only to closely-held
acquiring or constructing a new principal residence within 18 calendar months from the date of
corporations and not to other corporations, like banks and other non-bank financial
sale or disposition; (No dates were mentioned in the facts.)
intermediaries.
(3) If there is no full utilization of the proceeds of sale or disposition, the portion of the
2. What are valid justifications that a corporate taxpayer can present as a defense to justify
gain presumed to have been realized from the sale or disposition shall be subject to capital gains
accumulation of earnings?
tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is
higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling
The following constitute accumulation of earnings for the reasonable needs of the
price in order to determine the taxable portion and the tax prescribed under the Tax Code.
business:
(Since the proceeds was not fully utilized, Rosalina should have filed and paid the capital
gains tax on the unutilized portion.)
(a) Allowance for the increase in the accumulation of earnings up to 100% of the paid-
up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from
(4) The Buyer/Transferee shall withhold from the seller and shall deduct from the
other years;
agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or
manager’s check in interest-bearing account with an Authorized Agent Bank (AAB) under an
(b) Earnings reserved for definite corporate expansion projects or programs requiring
Escrow83 Agreement between the concerned RDO, the Seller and the Transferee, and the AAB to
considerable capital expenditure as approved by the Board of Directors or equivalent body;
the effect that the amount so deposited, including its interest yield, shall only be released to the
seller upon certification by the said RDO that the proceeds of the sale/disposition thereof has,
(c) Earnings reserved for building, plants or equipment acquisition as approved by the
in fact, been utilized in the acquisition or construction of the Seller/Transferor’s new principal
Board of Directors or equivalent body;
residence within 18 calendar months from date of the said sale or disposition. The date of sale
or disposition of a property refers to the date of notarization of the document evidencing the
(d) Earnings reserved for compliance with any loan covenant or pre-existing obligation
transfer of said property. (There was no mention also about the opening of this Escrow
established under a legitimate business agreement;
account in the Bank.)
82
Sec. 2.57-1(A)(7), RR 2-98, as amended. (e) Earnings required by law or applicable regulations to be retained by the corporation
83
In general, the term “escrow” means a scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a third or in respect of which there is legal prohibition against its distribution;
person, to be held by the latter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee,
promisee or obligee. 84
Sec. 2.57-1(A)(7), RR 2-98, as amended.

(f) In the case of subsidiaries of foreign corporation in the Philippines, all undistributed
earnings intended or reserved for investments within the Philippines as can be proven by
corporate records and/or relevant documentary evidence.85
XI.
1. What is the rule on allowable deductions to arrive at the net estate? Are the medical
expenses, personal loans and mortgages incurred by Casimira deductible from her gross estate?
Explain your answer.
Since the decedent died in 2017, the rule on allowable deductions at the time of her
death, such as the deductibility of the medical expenses, personal loans and mortgages incurred
by Casimira will still be deductible from her gross estate because the rule in estate taxation is
that the law which governs the Estate of the decedent at the time of death shall be the statute in
force at the time of her death.
2. When should the estate tax return be filed and paid?
In this case, the estate tax return should have been filed and the estate tax paid within 5
months from the date of death of the decedent.
3. If the estate of the decedent does not have enough cash to pay for the estate tax on due
date, what can the heirs of Antonia do so that the estate may not be declared delinquent?
In order not to be declared delinquent, the Heirs could have requested for extension to
file the estate tax return and pay the estate tax due not to exceed 5 years in case the estate is
settled through the courts, or 2 years in case the estate is settled extrajudicially. In such case
case, the amount in respect of which the extension is granted shall be paid on or before the date
of the expiration of the period of the extension, and the running of the Statute fo Limitations for
assessment as provided in Sec. 203 of the Tax code shall be suspended for the period of any
such extension.86
XII.
1. Explain the concept of a Minimum Corporate Income Tax or MCIT.
A minimum corporate income tax (MCIT) of 2% of the gross income as of the end of the
taxable year is imposed on a domestic corporation and resident foreign corporation beginning
on the 4th taxable year immediately following the year in which such corporation commenced87
85 Sec. 3, RR 2-2001
86
Sec. 91(B), NIRC of 1997.
87For
purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the
domestic corporation registered with the BIR.
its business operations, when the MCIT is greater than the tax computed for the taxable year
using the 30% regular income tax rate.88
2. Under what circumstances will a corporation be liable for MCIT?
A MCIT of 2% of the gross income as of the end of the taxable year (whether calendar or fiscal
year, depending on the accounting period employed) is hereby imposed upon any domestic
corporation beginning on the 4th taxable year IMMEDIATELY FOLLOWING THE TAXABLE
YEAR IN WHICH SUCH CORPORATION COMMENCED ITS BUSINESS OPERATIONS.89
(1) The MCIT shall be imposed whenever such corporation has zero or negative taxable
income or whenever the amount of MCIT is greater than the normal corporate income tax
(RCIT)90 computed due from such corporation.91
(2) Notwithstanding the above provision, however, the computation and the payment of
MCIT shall likewise apply at the time of filing the quarterly corporate income tax as prescribed
under Sec. 75 and Sec. 77 of the Tax Code, as amended.
(3) Thus, in the computation of the tax due for the taxable quarter, if the computed
quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid for such
taxable quarter at the time of filing the quarterly corporate income tax return shall be the MCIT
which is 2% of the gross income as of the end of the taxable quarter.
(4) In the payment of said quarterly MCIT, excess MCIT from the previous taxable
year/s shall not be allowed to be credited.
(5) Expanded withholding tax, quarterly corporate income tax payments under the
normal income tax, and the MCIT paid in the previous taxable quarter/s are allowed to be
applied against the quarterly MCIT due.92
(6) Quarterly MCIT paid on the Quarterly Income Tax Return shall be credited against
the normal income tax at year end if in the preparation and filing of the annual income tax
return and in the final computation of the annual income tax due, it appears that the normal
income tax due is higher than the computed annual MCIT.
(7) In addition to the quarterly MCIT paid and quarterly normal income tax payments in
the taxable quarters of the same taxable year, excess MCIT in the prior year/s (subject to the
prescriptive period allowed for its creditability), expanded withholding taxes in the current
88 See RR 9-98, as amended by RR 12-2007.
89The intent of Congress relative to the MCIT is to grant a 4-year suspension of tax payment to newly formed
corporations. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in
the industry. Manila Banking Corp. v. CIR, GR 168118, Aug. 28, 2006 [Per J. SANDOVAL-GUTIERREZ, Second Div.]
90The term "regular corporate income tax"(RCIT) means the income tax rate prescribed under Sec. 27(A) and Sec. 28(A)(1)
of the Tax Code, which is 30%.
91 Manila Banking Corp. v. CIR, G.R. 168118, Aug. 28, 2006[Per J. SANDOVAL-GUTIERREZ, Second Div.].
92 Sec. 2.27(E((1), RR 9-98, as amended.
year and excess expanded withholding taxes in the prior year shall be allowed to be credited
against the annual income tax computed under the normal income tax rules.
(8) However, if in the computation of the annual income tax due, the computed annual
MCIT due appears to be higher than the annual normal income tax due, what may be credited
against the annual MCIT due shall only be the quarterly MCIT payments of the current taxable
quarters, the quarterly normal income tax payments in the quarters of the current taxable year,
the expanded withholding taxes in the current year and excess expanded withholding taxes in
the prior year.
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 10% of such income.
(d) Firms that are taxed under a special income tax regime97 such as those in
accordance with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act,
respectively).98

(9) Excess MCIT from the previous taxable year/s shall not be allowed to be credited
therefrom as the same can only be applied against normal income tax.93

3. And under what circumstances can a corporation be relieved from being covered?

The Secretary of Finance, upon recommendation of the Commissioner, may suspend the
imposition of the MCIT upon submission of proof by the applicant-corporation, duly verified
by the Commissioner’s authorized representative, under the following conditions.

(1) That the corporation sustained substantial losses on account of prolonged labor dispute,94
or
(2) Because of force majeure,95 or
(3) Because of legitimate business reverses.96

4. Is this applicable to all taxpayers?

No. The MCIT shall apply only to domestic corporations subject to the normal corporate
income tax. Accordingly, the MCIT shall NOT be imposed upon any of the following:

(a) Domestic corporations operating as proprietary educational institutions subject to tax

at 10% on their taxable income.

(b) Domestic corporations engaged in hospital operations which are nonprofit subject to
tax at 10% on their taxable income.

(c) 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

93 Ibid.
94 The term ‘substantial losses from a prolonged labor dispute’ means losses arising from a strike staged by the employees

which lasted for more than six (6) months within a taxable period and which has caused the temporary shutdown of business
operations.
95 The term ‘force majeure’ means a cause due to an irresistible force as by “Act of God” like lightning, earthquake, storm,

flood and the like. This term shall also include armed conflicts like war or insurgency.
96The term “legitimate business reverses” shall include substantial losses sustained due to fire, robbery, theft or 97 PAL IS exempt from MCIT. CIR v. PAL, G.R. 180066, July 7, 2009 [Per J. Chico-Nazario, Third Div.]
embezzlement, or for other economic reason as determined by the Secretary of Finance. 98 Sec. 2.27(E)(8), RR 9-98, as amended by RR 12-2007