!"#"$%&'()"*(+,-%,*('&$,.

(
- Atty. Francis J. Sababan -
COVERAGE OF TAXATION LAW REVIEW 1. Income Taxpayers
2. Income Taxes
I. Basic Principles of Constitutional 3. Sources of Income sec. 42 of NIRC
Limitations - Income Taxpayers
a) Due process clause which a) Individuals
could be either substantive b) Corporation
due process and c) Estates and Trusts –
procedural due process -Individuals are classified
clause • Resident Citizens sec. 23 (A), sec
b) Equal protection clause 24 (A) (a)
Read: • Non-Resident Citizens sec 23 (B),
• Ormoc Sugar Central vs. 24 (A) (b) 22 (E)
City Treasurer 22 SCRA • Overseas Contract Workers Sec.
603 23 (C), 24 (A) (b)
• Tiu vs. CA 301 SCRA 178 • Resident Aliens Rev. Reg. sec 5,
c) Article III sec. 1 of the 23 (D), 24 (A) (c)
1987 Constitution – non- • Non-Resident Aliens Engaged in
impairment clause trade or business sections 25 (A)
d) Article III sec. 5 – freedom (1)
of religion • Non-Resident Aliens Not Engaged
e) Article III sec. 20 – non- in trade or business sec. 25 (B)
payment of poll tax • Aliens Employed in Multi-
f) Article VI sec. 28 par. 2 – National Corporations sec. 25 (C)
flexible tariff clause and Rev. Reg. 12-2001
g) Article VI sec. 28 par. 3 – • Aliens Employed in Offshore
exemption from real Banking Units sec 25 (D)
property tax • Aliens Employed in petroleum
Read: Service Contractors &
• Herrera vs. Quezon City 3 Subcontractors sec. 25 (E)
SCRA 186 -Corporate Income Taxpayers
• Abra vs. Hernando 107 SCRA • Domestic Corporations sec. 23 (E),
104 and sec 27 of NIRC
• Abra Valley vs. Aquino 52 • Resident Foreign Corporations sec. 22
SCRA 106 (H) and (28)A
• Philippine Lung Center vs. • Non-Resident Foreign Corporations
Quezon City 433 SCRA 119 sec. 22 (1) and 28 (B)
h) Article VI sec. 28 par. 4 – -Estates and Trusts sec. 60-66 of NIRC
qualified majority in tax
exemption Different Kinds of Income Tax
i) International double 1. Net Income Tax secs. 24 (A), 25
taxation (A) (1), 26, 27 (A) (B) (C), 28 (A) up
• CIR vs. Johnson 309 SCRA to 3rd par. 31 and 32 (A)
87 2. Gross Income Tax secs. 25 (B) first
j) Doctrine of equitable recoupment part and 28 (B) (1)
k) Doctrine of Set-off or compensation in 3. Final Income Taxes sec. 57 (A)
taxation 4. Minimum Corporate Income Tax
• Republic vs. Mambulao 4 SCRA 622 of 2% of the Gross Income secs.
• Domingo vs. Garlitos 8 SCRA 443 27 (E), 28 (A) (2)
• Francia vs. IAC 162 SCRA 753 5. Improperly Accumulated Earnings
• Caltex vs. COA 208 SCRA 726 Tax of 10% of its taxable income
• Philex vs. CIR 294 SCRA 687 sec. 29 NIRC Rev. Reg. 2-2001
• Optional Corporate Income Tax of
II. Income Tax Law 15% of its gross income sections
Section 22-26 of the National Internal 27 (A) 4th to 10th par. And 28 A(1)
Revenue Code but only up to the 4th paragraph
a) Read in the commentaries or magic
notes the different kinds of:

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 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
-Proceed to section 42 and 23 of the then sections 27 (E) and 28 (A) (2)
NIRC -Go to sec. 28 (A) (3) read RR 15-2002
• NDC vs. Comm 151 SCRA 472 -Go to sec. 28 (A) (4) see RA 9337
• Comm. Vs. IAC 127 SCRA 9 -Then see sec 28 (A) (5) see Marubeni vs.
-Then go to sec. 39 of NIRC Comm 177 SCRA 500
• Calazans vs. Comm. 144 SCRA -Proceed to sec. 28(B) (5) (a) and sec 32 (B)
664 RR 7-2003 (7) (a)
-Then proceed to sec. 24 (A), 25 (A) • Read Mitsubishi vs. Comm 181 SCRA
(1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1), 214
28 (A) (6) and sec 51 (D) -Then go to sec. 29 and Rev. Reg. 2-2001
-Then continue to sec 24 B 1, 25 -Upon reading sec. 32 (B) 1 and 2, read sec.
B,C,D,E; 27 (D) (1) 85 par (e), sec. 108A and sec. 123 of the
-Then go to se. 24 (B) (2) sec. 73 NIRC
• Comm. Vs. Manning 66 SCRA 14 -Proceed to sec. 33 read Rev. Reg. 3-98
• Anscor vs. Comm. 301 SCRA 152 -then go to sec. 34 (A) (1) (a) see Aguinaldo
-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4); vs. Comm. 112 SCRA 136, RR 10-2002
28 (A) (7) (D); 32 B (7) (a) -Under Sec. 34 (B) read RR 13-2000
-Upon reading sec. 49 read Banas vs. CA
- Then you go to sec. 24 C, 25A (3); 25 B, 325 SCRA 259 and Filipina vs. Comm. 316
C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5) SCRA 480
(C) RA 7717 sec. 127 NIRC -Upon reading sec. 60-66, read Ona vs.
- Then you go to sec. 24 D (1); 25 (A) (3); Bautista 45 SCRA 74
25 (B) last par. 27 (D) (5)
• China Bank vs. Court of Appeals 336 III. Estate Tax
SCRA ___; RR 7-2003 -Sections 84-97 see sec. 104
-Upon reading sec. 24 (D) (2) read RR 13- -Upon reading sec. 85 (B) read Vidal
1999 de Roces vs. Posadas 58 Phil. 108
Dizon vs. Posadas 57 Phil 465
-Upon reading sec. 27 (A) go to sec. 22 (B) -Sec. 85 (G) compare with sec. 100
• Batangas vs. Collector 102 Phil. 822 -sec. 85 (H) compare with sec. 86 (C)
• Evangelista vs. Collector 102 Phil 140 -Upon reading sec. 86 see RR 2-2003
• Reyes vs. Comm. 24 SCRA 198 -Upon reading sec. 94 see Marcos vs.
• Ona vs. Bautista 45 SCRA 74 Sandiganbayan 273 SCRA 47
• Obillos vs. Comm 139 SCRA 436
• Pascua vs. Comm. 166 SCRA 560 IV. Donors Tax Law
• Afisco vs. Comm. 302 SCRA 1 - Sections 98-104
- G and Cumulative methods of filing
-Upon reading sec. 27 (C) of NIRC see RA donor’s tax returns sections 99 (A), 103
9337 then go to sec. 32 (B) (7) (b) of NIRC, (A) (1) and RR 2-2003
sec. 133 par (o) of LGC, sec. 154 of the LGC. - Sections 100 and 85 (9)
• Pagcor vs. Basco 197 SCRA 52
• Mactan vs. Cebu 261 SCRA 667 V. Value Added Tax
• LRT vs. City of Manila 342 SCRA 692 - Sections 105-115
-Read RA 9337
-Proceed to sections 27 (D) (1), 27 (D) (2), -Read ABAKADA vs Comm.
27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 GR 168056, Sept. 1, 2005
(B) (5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B)
(5) (b) VI. Remedies Under the Internal Revenue
• Marubeni vs. CIR 177 SCRA 500 Code
• Proctor & Gamble vs. Comm 160 SCRA -Sections 202-229
560 -RR 12-99
• Same case Proctor and Gamble on the • Phoenix vs Comm 14 SCRA 52
Motion for Reconsideration 204 SCRA • Basilan vs. Comm. 21 SCRA 17
377 • Yabut vs. Flojo 115 SCRA 278
• Wonder vs. Comm 160 SCRA 573 • Union Shipping vs. Comm 185 SCRA
547
-Proceed to sec. 27(D) (5) • Comm. vs. TMX 205 SCRA 184

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 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
• Comm. vs. Philamlife 244 SCRA - Regukar Customs Duty sec. 104 of TCC
• Comm. vs. CA & BPI 301 SCRA 435 - RA 7631
• BPI vs. Comm. 363 SCRA 840
-Prescription sections 203 and 222 of
NIRC, sec. 194 of the LGC, sec. 270 of X. Court of Tax Appeals
the LGC, sec. 1603 of Tariff and - RA 1125 as amended by RA 9282
Customs Code
-Protest sec. 228 of NIRC and RR 12-99
sec. 195 of LGC, 252 LGC, sec. 2313 of
Tariff & Customs Code and RA 7651

VII. Local Taxation

- Sections 128-196 of LGC
-Proceed 1st to sec. 186 read Bulacan
vs. CA 299 SCRA 442
-Then proceed to 187
-Then to 151
-128
-Under sec. 133 (e) read Palma vs.
Malangas 413 SCRA 572
-Under 133 (h) read Pililia vs. Petron
198 SCRA 82
-Under 133 (i) read First Holdings Co.
vs. batangas City 300 SCRA 661
-Under 133 (l) read Butuan vs. LTO
322 SCRA 805
-Under 137 read sec. 193 of LGC
• Misamis vs. Cagayan de Oro 181
SCRA 38
• Reyes vs. San Pablo City 305
SCRA 353
• Meralco vs. Laguna 306 SCRA
750
• PLDT vs. Davao City 363 SCRA
522

- Co-relate sec. 139 and 147 of LGC

- Under sec. 140 of the LGC see sec.
125 of the Internal Revenue Code
- Under sec. 150 of the LGC read the
following:
• Phil. Match vs. Cebu 81 SCRA 99
• Allied Thread vs. Manila 133
SCRA 338
• Sipocat vs. Shell 105 Phil. 1263
• Iloilo Bottles vs. Iloilo City 164
SCRA 607

VIII. Real Property Tax

- Sections 197-294
- Sec. 235
• LRT vs. Manila 342 SCRA 692
• Cebu City vs. Mactan 261 SCRA 667

IX. Tariff & Customs Code

- Special Customs Duty sec. 301-304 of
TCC

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 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
Rules in the Classroom: legislation for the exercise of the power to
1. do not be absent tax by the national government.
! if you are absent, you have to
transcribe what happened in class when Q: Do local governments exercise this
you were out. inherent power?
! The next meeting you attend class, A: No. Only the National Government
consider yourself a resident of balic-balic, exercises the inherent power to impose
babalikbalikan ka sa recit. taxes.
! Exception: if you get married.
2. read the assignment. Wag zapote ang Q: The taxing power of local governments is
aral. a DELAGATED power. Delegated by whom?
3. holiday – make up class probably on a A: Delegated by Congress through law in
Sunday case of autonomous regions, and delegated
4. allowed to glance at your notes, wag lang by the constitution in case of LGUs not
pahalata/garapal considered an autonomous region.
5. materials:
! codal " Cities, provinces and municipalities !
! commentaries (any author will do) power granted under Art. X Sec. 5&6 of the
! magic notes (Sababan Lecture and Constitution
Q&A)
! Book stand ! Autonomous Regions ! power conferred
by Congress through law. Art. X Sec. 20 #2
Coverage of Taxation Law Review: of the Constitution is a non-self-executing
1. Basic Principles including Constitutional provision. Thus the power is granted by
Provisions Congress because said provision requires an
2. Income Tax enabling law.
3. Estate Tax
4. Donor’s Tax " Article X, Section 5 is self-executing thus
5. Remedies the power is granted by the constitution.
6. Local Tax
7. Real Property Tax CONSTITUTIONAL LIMITATIONS
8. Tariff and Customs Code
9. Court of Tax Appeals Due Process Clause
10. VAT (although not part of the coverage of
the Bar Exams, questions have been asked Q: why is it a limitation to the power to tax?
since 1999) A: The due process clause as a limitation to
the power to tax refers both to substantive
! Title 5,6 and 7 are always included in the and procedural due process. Substantive due
coverage process requires that a tax statute must be
! No computations in the bar within the constitutional authority of
! There are only 1 or 2 questions in the Bar Congress to pass and that it be reasonable,
about Basic Principles fair and just.
! What are the favorite topics in the Bar? Procedural due process, on the other
! 12 questions on Income Tax hand, requires notice and hearing or at least
! 8-10 questions on remedies the opportunity to be heard.
! 8-10 questions allocated to the 7 topics Ex: On Substantive Due Process- when the
Congress passes a law exempting the 13th
BASIC PRINCIPLES: month pay from tax but with the concurrence
only of the majority of the quorum – law
" Taxation is an inherent power of the would be invalid because the Constitution
State. provides that any grant of tax exemption
shall be passed with the concurrence of the
Q: What do you mean by INHERENT? majority of all the members of the Congress.
A: The power to tax is not provided for in
the law, statute or constitution; it depends on Q: Does it follow that the adverse party must
the existence of the state. No law or always be notified?

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- Atty. Francis J. Sababan -
A: No. As a rule, notice and hearing or the
opportunity to be heard is necessary only
when expressly required by law. Where there
is no such requirement, notice and the
opportunity to be heard are dispensable.
Ex. Before Oct. 1, 1995, you can secure a
TRO without notifying the adverse party. If
you are a suspect in a criminal case, you have
the right to have an opportunity to be heard
(if there is a law).
Before July 1, 1998, no notice need be
given to a party declared in default. After the
amendment, the party declared in default has
to be notified of subsequent proceedings
albeit without the right to participate therein.
In the case of a search warrant, the
person to be searched was not notified. The
person searched cannot claim that there was
a violation of due process because there is no
law requiring that the person to be searched
should be notified.
Regarding delinquent tax payers,
before levy, there must be notice.
REASON:
No provision of law requires notice to the
adverse party. If the adverse party is notified,
he may abscond. Thus, in adversarial
proceedings, in connection with procedural
due process, the adverse party need not be
notified all the time.
Equal Protection Clause
" As a rule, taxpayers of the same footing
are treated alike, both as to privileges
conferred and liabilities imposed. Difference
in treatment is allowed only when based on
substantial distinction. Difference in
treatment not based on substantial
distinction is frowned upon as “class
legislation.” This is violated when taxpayers
belonging to the same classification are
treated differently form one another; and
taxpayers belonging different classifications
are treated alike.
Requirements of Reasonable Classification:
1) There must be substantial distinctions
that make a real difference.
2) It must be germane or relevant to the
purpose of the law.
3) The distinction or classification must
apply not only to the present but also
to future situations.
4) The distinction must apply to
persons, things and transactions
belonging to the same class.
Ex: In one case, a tax ordinance was
assailed on the ground that the ordinance
failed to distinguish a worker form casual,
permanent or temporary. The SC said that
the ordinance was invalid because of the
failure to state the said classification.
In PEOPLE v. CAYAT the Supreme Court
mandated the requisites for a valid
classification.
TIU v. COURT OF APPEALS (301 SCRA 278)
Q: what happened in the city of Olonggapo?
A: The Congress, with the approval of the
President, passed RA 7227, an act
creating the conversion of the military
bases into other productive uses.
Q: Who was the President at that time?
A: President Ramos
Q: What were signed?
A: RA 7227, EO 97 and EO 97-A
! The first led to the creation of the
Subic Special Economic Zone (SSEZ). The
latter set the limitations and boundaries
of the application of the incentives (no
taxes, local and national, shall be
imposed within SSEZ. In lieu thereof, 3%
of the Gross Income shall be remitted to
the national gov’t) to those operating
their businesses within the said area.
Q: Who are the petitioners and what was
their contention?
A: The petitioners are Filipino businessmen
who are operating their business outside
the secured area. The petitioners
contended that the law in question was
violative of their right to equal protection
of laws since they are also Filipino
businessmen.
H: The Supreme Court ruled that there
was no violation since the classification
was based on a substantial distinction.
The element invoked here is element
#1 that there must be substantial
distinction in the classification of
taxpayers on whom the tax will be
imposed.
The Court observed that those foreign
businessmen operating within the
secured area have to give a larger capital
to operate in the secured area (to spur
economic growth and guarantee
employment).
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 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
ORMOC SUGAR CENTRAL vs. CIR
Q: What did the municipality of Ormoc do?
A: The City Council of Ormoc passed a
Municipal Ordinance No.4 imposing upon
any and all centrifugal sugar milled at the
Ormoc Sugar Central a municipal tax on
the net sale of the same to the United
States and other foreign countries.
Q: Did the owner accept this imposition?
A: No. the tax due was paid under protest,
then filed a complaint against the City of
Ormoc.
H: The Supreme Court said there was a
violation of the equal protection clause.
The element invoked here was element
#3, that it must be applicable to both
present and future circumstances. The
Supreme Court said that one must go to
the provision itself, in the case at bar,
there was a violation of element #3
because the law was worded in such a
way that it only applies to Ormoc Sugar
Central alone and to the exclusion of all
other sugar centrals to be established in
the future.
TAKE NOTE: People vs. Cayat
Freedom of Religion
It Involves 3 Things:
1. freedom to choose religion
2. freedom to exercise one’s religion
3. prohibition upon the national
government to establish a national religion
Q: Which one limits the power to tax?
A: Prohibition upon the national government
to establish a national religion because this
will require a special appropriation of money
coming from the national treasury which is
funded by the taxes paid by the people.
Non-impairment Clause
Q: What are the sources of obligation in the
Civil Code?
A: Law, Contracts, Quasi-Contracts, Delict,
Quasi-Delict.
Q: What is the obligation contemplated in
this limitation?
A: Those obligations arising from contracts.
General Rule: The power to tax is pursuant
to law, therefore, the obligation to pay taxes
is imposed by law, thus the non-impairment
clause does not apply.
" You have to determine first the source of
obligation:
1. If the law merely provides for the
fulfillment of the obligation then the law is
not the source of the obligation.
2. When the law merely recognizes or
acknowledges the existence of an obligation
created by an act which may constitute a
contract, quasi-contract, delict, and quasi-
delict, and its only purpose is to regulate
such obligation, then the act itself is the
source of the obligation, not the law.
When the law establishes the obligation
and also provides for its fulfillment, then the
law itself is the source of the obligation
Q: So, in what instance does the non-
impairment of contracts clause becomes a
limitation to the power to tax?
A: it is when the taxpayer enters into a
compromise agreement with the government.
In this instance, the obligation to pay the tax
is now based on the contract between the
taxpayer and the government pursuant to
their compromise agreement.
Take Note: the requirement for its
application: the parties are the government
and private individual.
Poll Tax
Q: What is a poll tax?
A: It is a tax of a fixed amount on individuals
residing within a particular territory, whether
citizens or not, without regard to their
property or to the occupation in which they
may be engaged.
It is a tax imposed on persons without
any qualifications. persons may be allowed to
pay even if they are not qualified as to age or
property ownership.
Example of Poll Tax: Community Tax
Certificate under Section 162 of the Local
Government Code.
Q: Why is it a limitation to the power to tax?
A: It is a limitation to the power to tax
because Congress is prohibited from passing
a law penalizing with imprisonment a person
who does not pay poll tax. (funds for sending
a person to jail is taken from the national
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 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
treasury which is funded by the taxes paid by
the people)
Exemption from payment of Real Estate
Tax
Q: What is the requirement for exemption
from payment of real property tax under the
1935, 1973 and 1987 Constitution?
A: Art. 6, Sec 22 (3), 1935 Constitution –
Cemeteries, churches and parsonages or
convents appurtenant thereto, and all lands,
buildings and improvements used
EXCLUSIVELY for RELIGIOUS, CHARITABLE or
EDUCATIONAL purposes shall be exempt for
taxation.
Art. 8, Sec. 17 (3), 1973 Constitution –
charitable institutions, churches, parsonages
or convents appurtenant thereto, mosque,
and non-profit cemeteries, and all lands,
buildings, and improvements ACTUALLY,
DIRECTLY, and EXCLUSIVELY used for
RELIGIOUS and CHARITABLE purposes shall
be exempt from taxation.
Art. 6, Sec. 28 (3), 1987 Constitution –
charitable institutions, churches, and
parsonages or convents appurtenant thereto,
mosque, non-profit cemeteries, and all lands,
buildings, and improvements ACTUALLY,
DIRECTLY and EXCLUSIVELY used for
RELIGIOUS, EDUCATIONAL and CHARITABLE
purposes shall be exempt from taxation.
HERRERA v. QC-BOARD OF ASSESSMENT
(1935 Constitution)
Q: What is involved in this case?
A: A charitable institution, St.
Catherine’s Hospital. The hospital was
previously exempt from taxation until it
was reclassified and subsequently
assessed for the payment of real property
tax.
The contention of the respondent is
that the hospital was no longer a
charitable institution because it accepts
pay-patients, it also operates a school for
midwifery and nursing, and a dormitory.
Since it is not exclusively used for
charitable purposes it is not exempt from
taxation.
H: The Court ruled that petitioner is not
liable for the payment of real estate
taxes. It is a charitable institution, thus
exempt from the payment of such tax.
The hospital, schools and dormitory
are all exempt fro taxation because they
are incidental to the primary purpose of
the hospital.
NOTE: this arose during the 1935
Constitution.
“Exempted by virtue of incidental
purpose” was merely coined by the Supreme
Court. Thus, it does not apply to other taxes
except Real Estate Tax.
PROVINCE OF ABRA v. HERNANDO
Q: What is involved in this case?
A A religious institution was involved in
this case, the Roman Catholic Bishop of
Bangued, Inc. (bishop filed declaratory
relief after assessed for payment of tax).
The respondent judge granted the
exemption from taxes of said church
based only on the allegations of the
complaint without conducting a
hearing/trial. The assistant prosecutor
filed a complaint contending that
petitioner was deprived of its right to due
process.
SC: the Court ordered that the case be
remanded to the lower court for further
proceedings. The Court observed that the
cause action arose under the 1973
Constitution, not under the 1935
Constitution (note the difference). Tax
exemption is not presumed. It must be
strictly construed against the taxpayer and
liberally construed in favor of the
government.
ABRA VALLEY COLLEGE INC. v. AQUINO
Q: What is involved in this case?
A: An educational institution is involved
in this case. The ground floor of the
school was leased to Northern Marketing
Corp., a domestic corporation. The 2nd
floor thereof was used as the residence of
the school director and his family.
The Province of Abra now contends
that since the school is not exclusively
used for educational purposes, the school
is now liable to pay real estate tax.
H: The Court held that the school is
PARTIALLY liable for real estate tax.
1. Residence – exempt by virtue of
incidental purpose; justified because
it is necessary.
2. Commercial – not exempt because it
is not pursuant to the primary
purpose; not for educational
purposes.
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 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
Q: is the doctrine in the case of Herrera the
same with this case?
A: NO. in the Herrera case, the exemption
was granted to all the real property (hospital,
school and dorm). But in this case, the
Supreme Court made a qualification. The
Supreme Court said it depends.
NOTE: both cases arose under the 1935
Constitution despite having been decided in
1988.
Q: At present, do we still apply the
exemption from tax by virtue of the Doctrine
of Incidental Purpose?
A: Not anymore. The cause of action in said
case arose under the 1935 Constitution and
it does not apply to the provisions of the
1987 Constitution.
PHILIPPINE LUNG CENTER v. QUEZON CITY
Q: What is involved in this case?
A: A charitable institution, a hospital. It
is provided in the charter of the Lung
Center of the Philippines is a charitable
institution. However, part of its building
was leased to private individuals and the
vacant portion of its lot was rented out to
Elliptical Orchids. Respondent contends
that since the hospital is not used
actually, directly, an d exclusively for
charitable purposes, it is liable to pay real
estate taxes.
H: The Supreme Court held that the
petitioner is liable to pay tax for those
parts leased to private individuals for
commercial purposes. For the part of the
hospital used for charitable purposes
(whether for pay or non-pay patients),
petitioner is exempt from payment of real
estate tax.
NOTE: petitioner contended that the profits
derived from the lease of its premises were
used for the operation of the hospital. The
Court held that the use of the profits does
not determine exemption, rather it is the use
of the property that determines exemption.
The case of Herrera does not apply
because said case arose under the 1935
Constitution and the present case arose
under the 1987 Constitution. The
requirements for exemption are different. In
the 1935 Constitution, the property must be
EXCLUSIVELY used for religious, educational
or charitable purposes. Under the 1987
Constitution, the property must be used
ACTUALLY, DIRECTLY, and EXCLUSIVELY for
religious, educational and charitable
purposes.
Q: Was the doctrine laid down in Abra Valley
affirmed in the Lung Center case?
A: Yes. The Supreme Court unconsciously
applied a doctrine laid down by the 1935
Constitution. The Supreme Court reiterated
the ruling in the Abra Valley case which arose
under the 1935 Constitution. The Supreme
Court made a qualification, it held that it
depends on whether or not the use is
incidental to the primary purpose of the
institution.
NOTE: at present, “exemption from tax by
virtue of incidental purpose” is not applicable
to all taxes including real estate tax.
COMM v. SC JOHNSON and SONS, INC.
Important :
1. international double taxation
2. importance of international tax treaty
3. implication of most favored nation
clause
Q: What is the corporation involved in this
case?
A: A domestic corporation (DC).
SC Johnson and Sons, Inc. entered
into a license agreement with SC Johnson
and Sons U.S.A (Non-Resident Foreign
Corp, NRFC) whereby the former was
allowed to use the latter’s trademark and
facilities to manufacture its products. In
return, the DC will pay the NRFC royalties
as well as payment of withholding tax.
A case for refund of overpaid
withholding tax was filed. Apparently, the
DC should have paid only 10% under the
most favored nation clause.
H: The Supreme Court coined the term
International Double Taxation or
International Juridical Double Taxation.
Q: What prompted the SC to coin such
term?
A: Because a single income (tax royalties
paid by a DC) was subjected to tax by two
countries, the Philippines income tax and
the U.S. tax.
International Juridical Double
Taxation applies only to countries where
the tax liabilities of its nationals are
imposed on income derived from sources
coming from within and without.
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 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
Q: Is there an instance where
international double taxation does not
apply?
A: Yes. If it involves nationals of
countries wherein the tax liability is
imposed only from income derive from
sources within and not including those
derived from sources without.
(Ex: Switzerland)
! The controversy in the case at bar
involves the income tax paid in the
Philippines.
After paying 25%, the US firm
discovered that they are entitled to 10%
under the most favored nation clause.
The question is: was the tax paid under
similar circumstances with that of the RP-
West Germany Treaty?
The CTA and Court of Appeals ruled
that it was paid under similar
circumstances. The phrase referred to the
royalties in payment of income tax. The
Supreme Court ruled that the lower
courts’ interpretation of the phrase was
erroneous. Rather, the phrase applies to
the application of matching credit.
Q: What is matching tax credit?
A: RP-Germany Treaty provides for that
20% of the tax paid in the Philippines
shall be credited to their tax due to be
paid in Germany.
The 10% does not apply because there
is no matching credit. Thus, there is no
similarity in the circumstances.
EQUITABLE RECOUPMENT AND DOCTRINE
OF SET-OFF
Equitable Recoupment
This doctrine provides that a claim for
refund barred by prescription may be allowed
to offset unsettled tax liabilities. This is not
allowed in this jurisdiction, because of
common law origin. If allowed, both the
collecting agency and the taxpayer might be
tempted to delay and neglect the pursuit of
their respective claims within the period
prescribed by law.
Q: What is the doctrine of Equitable
Recoupment?
A: When the claim for refund is barred by
prescription, the same is allowed to be
credited to unsettled tax liabilities.
(Sir gives an illustration found in page 3 of
magic notes)
Q: Is the rule absolute? Reason
A: Yes, the rule is absolute. The rationale
behind this is to prevent the taxpayer and
government official from being negligent in
the payment and collection of taxes.
(furthermore, you have to be honest for this
to work, hence, the government is preventing
corruption)
There is no exception at all otherwise, the
BIR would be flooded with so many claims.
Set-off
Presupposes mutual obligation between
the parties. In taxation, the concept of set-
off arises where a taxpayer is liable to pay
tax but the government, for one reason or
another, is indebted to the said taxpayer.
Q: What do you mean by SET-OFF?
A: This presupposes mutual obligations
between the parties, and that they are mutual
creditors and debtors of each other. In
taxation, the concept of taxation arises
where a taxpayer is liable to pay taxes but
the government, for one reason or another, is
INDEBTED to said taxpayer.
REPUBLIC v. MAMBULAO LUMBER CO.
Q: What is the liability of Mambulao?
A: They are liable to pay forest charges
(under the old tax code).
NOTE: under our present tax code, the NIRC,
we do not have forest charges as the
same was abolished by President Aquino.
Q: What did the lumber company do?
A: The lumber company claimed that
since the government did not use the
reforestation charges it paid for
reforestation of the denuded land
covered by its license, the amount paid
should be reimbursed to them or at least
compensated or applied to their liability
to pay forest charges.
H: The Court ruled that the reforestation
charges paid is in the nature of taxes.
The principle of compensation does
not apply in this case because the parties
are not mutually creditors and debtors of
each other. A claim for taxes is not a
debt, demand, contract or judgment as is
allowed to be set-off under the statute of
set-off which is construed uniformly, in
the light of public policy, to exclude the
9
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- Atty. Francis J. Sababan -
remedy in connection or any
indebtedness of the State or any
municipality to one who is liable for
taxes. Neither are they a proper subject
for recoupment since they do not arise
out of contract or the same transaction
sued on.
General Rule: no set-off is admissible against
demands for taxes levied in general or local
governmental purposes.
Reason: Taxes are not in the nature of
contracts or debts between the taxpayer and
the government, but arises out of a duty to,
and are positive acts of the government to
the making and enforcing of which, the
consent of the individual is not required.
Taxes cannot be the subject matter of
compensation.
DOMINGO v. GARLITOS
Q: What is being collected in this case?
A: Estate and inheritance taxes.
NOTE: we do not have inheritance taxes
anymore because the same was abolished
by Lolo Macoy.
Q: Who is the administratrix?
A: The surviving spouse.
Q: What did the surviving spouse do?
A: The surviving spouse suggested that
the compensation to which the decedent
was entitled to as an employee of the
Bureau of Lands be set-off from the
estate and inheritance taxes imposed
upon the estate of the deceased.
H: Both the claim of the government for
estate and inheritance taxes and the
claim of the (intestate) for the services
rendered have already become overdue
hence demandable as well as fully
liquidated, compensation therefore takes
place by operation of law, in accordance
with Art. 1279 and 1290 of the Civil Code
and both debts are extinguished to the
concurrent amount.
Compelling Reason: Congress has
enacted RA 2700, allocating a certain
sum of money to the estate of the
deceased.
FRANCIA v. IAC
Q: This happened in what city?
A: Pasay City
Q: What is the tax being collected? Who is
collecting the same?
A: Payment for real estate taxes for the
property of Francia. It appears that
petitioner was delinquent in the payment
of his real estate tax liability. The same is
being collected by the Treasurer of Pasay.
Q: What is the suggestion of petitioner?
A: Suggested that the just compensation
for the payment of his expropriated
property be set-off from his unpaid real
estate taxes. (the other part of his
property was sold at a public auction)
H: The factual milieu of the case does
not justify legal compensation.
The Court has consistently ruled that
there can be no off-setting of taxes
against the claims that the taxpayer may
have against the government. A taxpayer
cannot refuse to pay a tax on the ground
that the government owes him an
amount.
Internal Revenue taxes cannot be the
subject of compensation because the
government and the taxpayer are not
mutually creditors and debtors of each
other, and a claim for taxes is not a debt,
demand, contract or judgment as is
allowed to be compensated or set-off.
Furthermore, the payment of just
compensation was already deposited with
PNB Pasay, and the taxes were collected
by a local government, the property was
expropriated by the national government.
(diff parties, not mutual creditors and
debtors of each other.)
CALTEX PHIL v. COA
Q: What is being collected?
A: Caltex’s contribution to the Oil Price
Stabilization Fund (OPSF).
COA sent a letter to Caltex asking the
latter to settle its unremitted collection
stating that until the same is paid, its
claim for reimbursement from the OPSF
will be held in abeyance.
Q: Why is Caltex entitled to reimbursement?
A: Because of the fluctuation of the oil
prices in the Middle East and Europe.
Caltex wanted to off-set its unremitted
collection from its reimbursements.
H: The Court did not allow the set-off,
and reiterated its ruling in the case of
Mambulao and Francia. Furthermore, RA
6952 expressly prohibits set-off from the
collection of contributions to the OPSF.
The Court likewise stated that Caltex
merely acted as agent of the government
in collecting contributions for the OPSF
10
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- Atty. Francis J. Sababan -
because such is being shouldered by the
consumers when they purchase
petroleum products of oil companies,
such as Caltex.
Taxation is no longer envisioned as a
measure merely to raise revenues to
support the existence of the government.
Taxes may be levied for regulatory
purposes such as to provide means for
the rehabilitation and stabilization of a
threatened industry which is vested with
public interest, a concern which is within
the police power of the State to address.
PHILEX MINING CORP v. COMM
The petitioner is liable for the payment of
excise taxes, which it wanted to be set-off
from its pending claim for a VAT Input
credit/refund.
The Court did not allow set-off. Taxes
cannot be the subject of compensation for
the simple reason that the government and
taxpayer are not mutual creditors and
debtors of each other. Taxes are not debts.
Furthermore, in the instant case, the
claim for VAT refund is still pending. The
collection of a tax cannot await the results of
a lawsuit against the government.
DOUBLE TAXATION
Double taxation is allowed because there
is no prohibition in the Constitution or
statute.
Obnoxious double taxation is the
synonym of double taxation.
Elements of Double Taxation:
1) Levied by the same taxing authority
2) For the same subject matter
3) For the same taxing period and
4) For the same purpose
There is no double taxation if the tax is
levied by the LGU and another by the national
government. The two (2) are different taxing
authorities.
LGUs are expressly prohibited by the
provisions of RA 7160 or the LGC of 1991
from levying tax upon: (1) the National
Government; (2) its agencies and
instrumentalities; (3) LGUs (sec.113(o)).
The National Government, pursuant to
the provisions of RA 8424 of the Tax Reform
Act of 1997, can levy tax upon GOCCs,
agencies and instrumentalities (Section 27
c)), although income received by the
Government form:
1) any public utility or
2) the exercise of any essential
governmental function
is exempt from tax.
KINDS OF INCOME TAXPAYERS
Q: Generally, how many kinds of income
taxpayers are there?
A: Under section 22A of NIRC, there are
three (3), namely:
1. individual;
2. corporate;
3. estate and trust.
I. INDIVIDUAL TAXPAYER
Q: How many kinds of individual taxpayers
are there?
A: There are seven (7). Namely:
1. Resident Citizen (§23A and 24A);
2. Nonresident Citizen (§23B and 24A);
3. OCW and Seaman (§23C and 24A);
4. Resident Alien (§22F, 23D and 24A);
5. Nonresident Alien Engaged in Trade
or Business (§22G, 23D and 25A)
6. Nonresident Alien NOT Engaged in
Trade or Business (§22G, 23D and
25B)
7. Aliens Engaged in Multinational
Companies, Offshore Banking Units,
Petroleum Service Contractors
(§25C,D and E)
Resident Citizen (RC)
Q: How many types of RC?
A: There are two (2), namely:
1. RC residing in the Philippines; and
2. Filipino living abroad with no
intention to reside permanently
therein.
Q: If you are abroad, and you have the
intention to permanently reside therein, can
you still be considered a RC?
A: Yes. If such intention to permanently
reside therein was not manifested to the
Commissioner and the fact of your physical
presence therein, you may still be considered
a RC.
OCW and Seamen

11
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- Atty. Francis J. Sababan -
OCW was used and not OFW in the CTRP,
because the classification shall cover only
those Filipino citizens working abroad with a
contract. TNTs are not covered.
A Filipino seaman is deemed to be an
OCW for purposes of taxation if he receives
compensation for services rendered abroad
as a member of the complement of a vessel
engaged exclusively in international trade.
Consequently, if he is not a member of
the complement or even if he is but the
vessel where he works is not exclusively
engaged in international trade, said seaman
is not deemed to be an OCW. He is either a
RC or a NRC depending on where he stays
most of the time during the taxable year.
If he stays in the Philippines most of the
time during the taxable year, he is
considered a RC, otherwise, a NCR.
If you are a seaman in the US Navy, you
are not the one being referred to.
The importance of ascertaining whether
or not a seaman is a RC or a NRC, is that if he
is a RCm he is taxable on ALL income derived
from all sources within and without. If he is a
NRC, he is taxable only on income derived
form sources within the Philippines.
Q: What is the significance of using OCW?
A: It only covers Filipinos who works abroad
with a contract. It does not cover TNTs.
Q: What is the status of a TNT?
A: Since they are not covered by this
classification, they are considered RC
because they work abroad without a contract
and they have not manifested their intention
to permanently reside abroad. (distinguish
from an immigrant)
Requirements for a seaman to be considered
an OCW:
1. must be a member of the compliment of
a vessel;
2. the vessel must be exclusively engaged in
international trade or commerce.
Resident Alien (RA)
An individual whose residence is within
the Philippines and who is not a citizen
thereof.
Intention to reside permanently in the
Philippines is not a requirement on the part
of the alien.
The requirement under RR#2 is that he is
actually present in the Philippines, neither a
sojourner, a traveler, not a tourist.
Whether he’s a transient or not is
determined by his intent as to the nature and
length of his stay.
Q: Is the intention to permanently reside in
the Philippines necessary?
A: No, so long as he is not a sojourner,
tourist or a traveler.
Non-Resident Alien Engaged in Trade or
Business (NRAETB)
A foreigner not residing in the Philippines
but who is engaged in trade or business
here.
RR 2-98 has expanded the coverage of
the term, “engaged in trade or business” to
include the exercise of a profession.
Furthermore, by the express provision of the
law, a NRA who is neither a businessman nor
a professional but who come to and stays in
the Philippines for an aggregate period of
more than 180 days during any calendar year
is deemed to a NRAETB in the Philippines.
Q: How many types?
A: There are three (3) types, namely:
1. NRA engaged in trade or business
(25a1);
2. NRA who practices a profession
(Revenue Regulation 2-98);
3. foreigner who comes and stays in the
Philippines for an aggregate period of
MORE THAN 180 days during any
calendar year.
Q: What is the status of a Chinese who stays
here for 200 days in 2001?
A: NRAETB
Q: Suppose he stayed here for 100 days in
2000 and another 100 days in 2001?
A: He is not a NRAETB. To be considered as
such, he must stay for an aggregate period of
more than 180 days during a calendar year.
Q: What is the income tax applicable to said
taxpayer?
12
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
A: Net Income Tax (NIT) on all its income
derived form sources within the Philippines. II. CORPORATE TAXPAYER

Non-Resident Alien Not Engaged in 1. Domestic Corporation (DC) – created

Trade or Business or organized under Philippine laws.
2. Resident Foreign Corporation (RFC) –
Q: How many kinds? corporation created under foreign
A: Only one. law, and engaged in trade or
business.
The reason why the NRANETB are 3. Nonresident Foreign Corporation
included in any income tax law is because (NRFC) – created under foreign law,
they may be deriving income form sources and NOT engaged in trade or
within the Philippines. business.
They are subject to tax based on their
GROSS INCOME received form all sources Q: What are deemed corporations under the
within the Philippines. NIRC?
A: The term corporation shall include
Aliens Employed by Regional or Area partnerships, no matter how created or
Headquarters & Regional Operating organized, joint stock companies, joint
Headquarters of Multinational accounts, associations, or insurance
Companies/ Aliens Employed by companies, but DOES NOT includes general
Offshore Banking Units (Aliens professional partnerships and a joint venture
Employed by MOP) or consortium formed of the purpose of
undertaking construction projects or
" Status: either a RA or NRA depending on operations pursuant to or engaging in
their stay here in the Philippines. petroleum, coal, geothermal or consortium
agreement under a service contract with the
" Their status may either be RA or NRA Government.
because Section 25 C and D does not 1. Partnerships and others no matter how
distinguish. created
2. Joint Stock Companies
" Liable to pay 15% from Gross Income 3. Joint Accounts
received from their employer 4. Associations
5. Insurance Companies
" Income earned from all OTHER sources
shall be subject to the pertinent income tax,
as the case may be. CIR v. COURT OF APPEALS
The phrase no “matter how created or
Aliens Employed in Multinational and organized” was interpreted.
Offshore Banking Units Even if the partnership was pursuant to
law or not, whether nonstick, nonprofit, it is
Q: How are they classified? still deemed a corporation.
A: If they derived income from other sources Reason: because of the possibility of
aside from their employer, you may classify earning profits form sources within the
them either as RA, NRAETB, or NRANETB. Philippines.

Aliens Employed in Petroleum Service Q: Are partnerships always considered

Contractors and Subcontractors corporations? Is there no exception?
A: General Rule: a partnership is a
" Status: ALWAYS NRA. If they derive corporation.
income from other sources, such income
shall be subject to the pertinent income tax, Exception: General Professional Partnerships
as the case may be. (GPP)

" Income derived or coming from their Q: What is a GPP?

employer shall be subject to a tax of 15% of A: It is a partnership formed by persons for
the gross. the sole purpose of exercising their

13
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
profession, no part of the income of which in
derived from any trade or business. (what if a
partner has other businesses not related to
the GPP? > read section 26 quoted hereunder)
Two (2) Kinds of GPP formed for:
1) Exercise of a profession – not a
corporation; exempt from Corporate
Income Tax (CIT)
2) Exercise of a profession and engaged
in trade or business – a corporation;
subject to CIT
TAN v. DEL ROSARIO
general rule: a partnership is a
corporation
exception: GPP
exception to the exception: if the GPP
derives income from other sources, it is
considered a corporation, thus liable to pay
corporate income tax.
Rule:
1. if the income is derived from other
sources and such income is subject to NET
INCOME TAX, it is not exempt and it is
considered a corporation.
2. if the income is derived from other
sources and such income is subject to FINAL
INCOME TAX, it is still EXEMPT and it is not
deemed a corporation. ( separate return for
this. It will not reflect in the GPP’s ITR)
» This is pursuant to the fact that FIT will
not reflect in the ITR of the GPP since the
withholding agent is liable for the payment of
the FIT.
Q: What is the importance of knowing
whether the corporation is exempt or not?
A: To determine their tax liability. This is
important to determine the tax liability of the
individual partners of the GPP.
" Section 26 (1st paragraph) provides: “a
GPP as such shall not be subject to the Net
Income Tax…” however, “…persons engaging
in business as partners in a GPP shall be
liable for income tax only in their separate
and individual capacities.”
In short, each partner will be paying NIT,
and the distributive shares they will be
receiving from the net income of the GPP will
be included in the gross income of the
partner.
Q: If the GPP is deemed a corporation, will
the partners have to pay for the income tax?
A: No. as far as the share of the GPP is
concerned, it is considered a taxable
dividend which is subject to FIT.
Q: Is a joint venture a corporation?
A: Generally, yes, it is a corporation.
Q: Corporation X and Corporation Y joined
together. How many corporations do we
have?
A: Three, namely Corporation X, Y, and X+Y.
the joint venture has a separate and distinct
personality from the two corporations.
Q: When is a joint venture not considered a
corporation?
A: It is not deemed a corporation when it is
formed for the purpose of undertaking a
(“construction?) project or engaging in
petroleum, gas, and other energy operations
pursuant to “?” or consortium agreement
under a service contract with the
government.
Domestic Corporation
Is one created or organized in the
Philippines or under its laws.
Taxable on all income derived from
sources within or without the Philippines.
Resident Foreign Corporation
Foreign corporations engaged in trade or
business in the Philippines.
Taxable for income derived within the
Philippines.
Non-Resident Foreign Corporation
Foreign corporations not engaged in
trade or business in the Philippines.
Taxable for income derived within the
Philippines.
Both DC and RFC are liable for the
payment of the following:
1) NIT – Net Income Tax
2) FIT – Final Income Tax
3) 10% income tax on corporations with
properly accumulated earnings.
4) MCIT (Minimum Corporate Income
Tax) of 2% of the Gross Income
14
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
5) Optional Corporate Income Tax of
15% of the Gross Income
A NRFC is liable for payment of the ff:
1) GIT- Gross Income Tax
2) FIT – Final Income Tax
III. TRUST AND ESTATE
Q: How many for each?
A: Seven (7) kinds for each because the trust
or estate will be determined by the status of
the trustor, grantor, or creator, or of the
decedent.
The status of the estate is determined by
the status of the decedent at the time of his
death; so an estate, as an income taxpayer
can be a citizen or an alien.
When a person who owns property dies,
the following taxes are payable under the
provision of income tax law:
1) Income Tax for Individuals – to cover
the period beginning January to
the time of death.
2) Estate Income Tax – if the property is
transferred to the heirs.
3) If no partition is made, Individual or
Corporate Income Tax, depending
on whether there is or there is no
settlement of the estate. If there
is, depending on whether the
settlement is judicial or
extrajudicial.
Judicial Settlement
1) During the pendency of
settlement, the estate through the
executor, administrator, or heirs is
liable for the payment of ESTATE
INCOME TAX (Sex, 60 (3)).
2) If upon the termination of the judicial
settlement, when the decision of the
court shall have become final and
executory, the heirs still do not divide
the property, the following
possibilities may arise:
a) If the heirs contribute to the
estate money, property
industry with the intention to
divide the profits between and
among themselves,
UNREGISTERED PARTNERSHIP is
created and the estate becomes
liable for payment of
(Evangelista vs. Collector (102 Phil
140))
b) If the heirs without contributing
money, property or industry to
improve the estate, simply divide
the fruits thereof between and
among themselves, a CO-
OWNERSHIP is created and
Individual Income Tax (IIC) is
imposed on the income derived by
each of the heirs, payable in their
separate and individual capacity
(Pascual vs. COMM (165 scra 560)
and Obillos vs. COMM (139 SCRA
436))
Extrajudicial Settlement and if NO Settlement
Some possibilities may arise. The income
tax liability depends on whether or not the
unregistered partnership or co-ownership is
created.
Trust
Trusts can be created by will, by contract
or by agreement. The status of a trust
depends upon the status of the grantor or
trustor or creator of the trust. Hence, a trust
can also be a citizen or an alien.
Q: Where the trust earns income and such
income is not passive, who among the parties
mentioned is liable for payment of income
tax thereon?
A: The TRUST itself, through the trustee or
fiduciary but only if the trust is irrevocable.
If it is revocable, or for the benefit of the
the grantor, the liability for the payment of
income tax devolves upon the trustor himself
in his capacity as individual taxpayer.
KINDS OF INCOME TAX
Q: How many kinds of income tax?
A: There are Six (6), namely:
1. Net Income Tax (NIT);
2. Gross Income Tax (GIT);
3. Final Income Tax (FIT);
or 4. Minimum Corporate Income Tax of
2% of the Gross Income (MCIT)
5. Income Tax on Improperly
an Accumulated Earnings subject to 10%
of the Taxable Income;
6. Optional Corporate Income Tax of
CIT 15% on the Gross Income
15
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- Atty. Francis J. Sababan -
Q: What if the law is silent?
I. NET INCOME TAX A: If the law is silent, it is not subject to
withholding tax.
Q: what is the formula?
A: Gross Income – Deductions and Personal Q: What is another term for withholding tax?
Exemptions = Taxable Income A: It is also known as the creditable
withholding tax system under the income tax
Taxable Income x Tax Rate = Net law.
Income
Q: Do we have to determine if there is an
Taxable Net Income – Tax Credit = actual gain or loss?
Taxable Net Income Due A: Yes because the formula for deductions,
etc.
Net Income means Gross Income less
deductions and Q: If you fail to pay, will you be held liable?
Formula: A: Yes, you will be held liable.
GI
- deductions II. GROSS INCOME TAX (GIT)
Net Income
x Tax Rate Q: What is the formula?
Income Tax Due A: Gross Income x Rate

Q: What is the rate? Q: How many taxpayers pay by way of the

A: Individual: 32%
Corporation: 35%
NOTE: the formula allows for deduction,
personal exemptions and tax credit.
Q: What are the other terms for NIT?
A: NIRC:
a. taxable income
b. gross income (wlang kasunod)
! only income tax from improperly
accumulated earnings does not use this term.
1. CFA: “to be included in the gross
income”
2. Revenue Regulations and Statutes:
a. ordinary way of paying income
tax;
b. normal way of paying income tax .
Characteristics:
Q: Who are not liable to pay NIT?
A: 1. NRANETB (liable for GIT);
2. NRFC (GIT also);
3. With certain modifications, AEMOP, if
they derive income from other
sources;
gross?
A: There are two (2)
individual - NRANETB
corporation - NRFC
NOTE: the formula does not allow any
deduction, personal exemptions and tax
credit.
Characteristics:
" NRANETB and NRFC, though not engaged
in trade or business, are liable to pay by way
of the gross for any income derived in the
Philippines. While not engaged in trade or
business, there is a possibility that they may
earn income in the Philippines.
Q: Is this subject to withholding tax?
A: Yes, it is subject to withholding tax
because the persons liable are foreigners.
This rule is ABSOLUTE
NOTE: there are two (2) ways of paying taxes
depending on which side of the bench you
are.
III. FINAL INCOME TAX (FIT)

Q: Is the taxable net income subject to Q: What is the formula?

withholding tax? A: (Each Income) x (Particular Rate)
A: It is subject to withholding tax if the law Unlike in the gross income tax where you
says so. add all the income from all the sources and
multiply the sum thereof by the rate of 25%

16
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
or 35%, as the case may be, in final income
tax, you cannot join all the income in one
group because each income has a particular
rate.
Q: What is the rate?
A: 35% as the case may be.
NOTE: like GIT, the formula does not allow
deductions, personal exemptions, and tax
credit.
Characteristics:
Q: Who are liable to pay FIT?
A: All taxpayers are liable to pay FIT
provided the requisites for its application are
present.
Q: Do you still have to pay NIT?
A: No. if you are liable for FIT, no need to
pay NIT or else there will be double taxation.
NOTE: as time passed by, the number of FIT
increased.
" before 1979 – proceeds from the sale of
real property not exempt, it is subject to NIT
or GIT, as the case may be.
after 1979 – capital gains tax. Proceeds
from the sale of real property is exempt.
Q: If you fail to pay, will you be liable?
A: No. the withholding agent is liable to pay
FIT.
" Case of Juday, Richard and Regine
" For one to be liable for the payment of
NIT, the income must be derived on the basis
of an employer – employee relationship.
Employer – Employee Relationship
(3 Cs):
1. contract;
2. control;
3. compensation;
" However, in the case of celebrities, there
is no employer – employee relationship, they
are merely receiving royalties. Royalties are
subject to final withholding tax, thus the
agent is liable to pay. (so, distinguish nature
of income, whether royalty or compensation)
RULE:
1. for NIT, whether or not subject to
Creditable Withholding Tax (CWT), the
taxpayer is always liable if he fails to
pay.
2. for GIT and FIT, absolute liability to
pay is upon the withholding agent.
Q: Why is it that the rate of withholding is
always lower, and why is it that the rate of
GIT and FIT is always equal?
A:
1. NIT allows deductions;
2. GIT and FIT do not allow deductions.
Q: Do you have to determine whether there
is an actual loss or gain?
A: No need to determine because the
formula does not allow deductions. Gain is
presumed. No liability for final withholding
tax except for the sale of shares of stock. (?)
IV. MINIMUM CORPORATE INCOME TAX
(MCIT)
Q: What is the formula?
A: Gross Income x 2%
Q: Who pays this tax?
A: DC and RFC only.
Q: May it be applied simultaneous with NIT?
A: No. there must be a computation of the
NIT first then apply which ever is higher. The
MCIT is paid in lieu of the NIT.
Reason: to discourage corporations from
claiming too many deductions.
V. OPTIONAL CORPORATE INCOME TAX
Q: Under what section is this found?
A: Section 27A 4th paragraph and Section 28
A(1) 4th paragraph.
Q: Is this applicable now?
A: No. this is not yet implemented.
Q: To what kind of taxpayer does this apply?
A: To DC and RFC.
Q: What kind of taxes are applicable or
imposed upon the 1st five individual
taxpayers?
A: Only two (2) kinds are applicable out of
the six (6) kinds of income taxes.
1. NIT;
2. FIT;
17
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
NOTE: The income taxpayer is not a RC or a
Q: What kind of income tax will apply to DC. Determine if the income came from
AEMOP? sources within or without to know the
A: Generally, only one kind, 15% FIT with taxpayer’s liability.
respect to income derived from their
employer. " If the facts are specific, do not qualify
your answer. Answers must be responsive to
Income from other sources: the question.
1. Determine the status of the AEMOP;
a. NIT Q: Is section 42 relevant to all the taxpayers?
b. FIT A: NO. SECTION 42 IS NOT MATERIAL TO
2. NRANETB ALL taxpayers, particularly the RC and DC
a. GIT because these two are liable for both income
b. FIT within and without.

Q: What kind of income tax applies to DC? " Section 42 is applicable only to taxpayers
A: Only four (4) kinds will apply out of the who are liable for income within, the rest of
six (6) the taxpayers are otherwise exempt.
1. NIT
2. FIT Q: Section 42(A)(1) provides for how many
3. MCIT kinds of interests?
4. Improperly Accumulated Earnings A: It establishes two (2) kinds of interests,
namely:
Q: May all of these be applied 1. interest derived from sources within
simultaneously? the Philippines.
A: No. only the NIT, FIT and Improperly 2. interest on bonds, notes or other
Accumulated Earnings be applied interest bearing obligations of
simultaneously. NIT and MCIT cannot be residents, corporate or otherwise.
applied simultaneously. Only one will apply,
whichever is higher between the two. Q: What is the determining factor in order to
know if the income is from within?
Q: What kind of tax will apply to NRFC?
A:
A: Out of the six (6) kinds, only two (2) will 1. location if the bank is from within the
apply: Philippines (pursuant to a Revenue
1. GIT Reg.)
2. FIT 2. residence of the obligor (whether an
individual or a corp.) – contract of
Q: What is the significance of knowing the loan with respect to the interest
classification of these taxpayers? earned thereon.
A:
1. to determine the kind of income tax " For example the borrower is a NRAETB,
applicable to them; he borrowed money from a RA. The interest
2. to determine their tax liability. earned by the loan will be considered as an
income without. RA is not liable to pay tax
Q: Under Section 23, who are liable for since RA is liable only for income within,
income within and income without? therefore exempt from paying the tax.
A: Only
1. RC NATIONAL DEVELOPMENT CO. v. CIR
2. DC F: The National Development Company
(NDC) entered into a contract with several
" The rest of the taxpayers will be liable for Japanese shipbuilding companies for the
income coming from sources within. construction of 12 ocean-going vessels.
The contract was made and executed in
" Income from sources without, no liability, Tokyo.
therefore exempt. The payments were initially in cash
and irrevocable letters of credit.

18
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
Subsequently, four promissory notes were
signed by NDC guaranteed by the
Government.
Later on, since no tax was withheld
from the interest on the amount due, the
BIR was collecting the amount from NDC.
The NDC contended that the income
was not derived from sources within the
Philippines, and thus they are not liable
to withhold anything. NDC said that since
the contract was entered into and was
executed in Japan, it is an income
without.
H: The government’s right to levy and
collect income tax on interest received by
a foreign corporation not engaged in
trade or business within the Philippines is
not planted upon the condition that the
activity or labor and the sale from which
the income flowed had its situs in the
Philippines. Nothing in the law (Section
42(1)) speaks of the act or activity of
nonresident corporations in the
Philippines, or place where the contract is
signed. The residence of the obligor who
pays the interest rather than the physical
location of the securities, bonds or notes
or the place of payment is the
determining factor of the source of the
income. Accordingly, if the obligor is a
resident of the Philippines, the interest
paid by him can have no other source
than within the Philippines.
Q: Suppose a NRFC, an Indonesian firm,
becomes a stockholder of two corporations, a
DC and a RFC, and both corporations
declared dividends, what is the liability of the
Indonesian firm if the same received the
dividends?
A:
1. Dividends received from DC: the
Indonesian firm is liable to pay taxes.
NRFC, under the law, is liable if the
income is derived from sources
within. (Sec 42a)
2. Dividends received from RFC: the
Indonesian firm’s liability will depend
on amount of gross income from
sources within the Philippines.
The NRFC will be liable to pay income tax if
the following requisites are present:
1. at least 50% is income from sources
within;
2. the 1st requisite is for the three (3)
preceding taxable years from the time
of declaration of the dividends.
" In the absence of any or both
requisites, the income will be considered
from sources without, thus exempting the
Indonesian firm from payment of income tax.
Q: Same scenario, but this time the shares of
stock of the two corporations were being
disposed off. What is the tax liability of the
Indonesian firm?
A:
1. sale of shares of stock of DC: the
Indonesian firm will be liable for the
payment of taxes because the income
is from sources within.
2. sale of shares of stock of RFC: the
liability will depend on where the
shares of stock were sold. (mejo
Malabo sa notes, please be guided
accordingly)
Q: Filipino Executive, assigned to Hong
Kong, receiving two salaries, one from the
Philippines, the other from HK. The
performance of the job was in HK. Is he liable
for both salaries?
A: No, he is not liable for the two incomes.
His status is an OCW (note facts: working in
HK under contract). The compensation he
received is not subject to tax pursuant to
Section 42(c). Compensation for labor or
personal services performed in the
Philippines is considered an income within.
When it comes to services, it is the place
where the same is rendered which is
controlling. In the case at bar, the services
were rendered abroad, thus it is an income
derived from sources without, irrespective of
the place of payment.
Q: Suppose a DC hired a NRFC to advertise
its products abroad. What is the liability of
the NRFC? Will there be a withholding tax
imposed?
A: The income is derived from sources
without since the services in this case were
performed abroad. As such, the NRFC is not
liable and therefore exempt from the
payment of tax. If the NRFC is not subject to
NIT, then it is not also subject to withholding
tax.
Q: What is the controlling factor?
19
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
A: The controlling factor is the place where Q: What is the issue here?
the services were performed and not where A: They cannot determine if the business
the compensation therefore was received. expense was incurred in the Philippines.
Q: if you are the BIR, and the taxpayer is not
RENTALS AND ROYALTIES sure, will you disallow the deduction?
"income from sources within A: No. determine it pro rata.
Q: Granted by who? Formula: GI from within
A: NRFC GI from without

Q: Suppose you are the franchise holder, how Example: 100,000

much is the withholding? 1,000,000
A: 35% (GIT) = 10%
" Hence, 10% is the ratable share in the
Q: if the franchise is granted by RFC, how deduction. If the deduction being asked is
much is the withholding? 100,000 not all of it will be allowed. Only
A: 10% (NIT) and in some cases 15% 10,000 or 10% of 100,000 will be allowed
as deduction.
Section 42(4) MEMORIZE FOR RECIT
(CEKSTTM) CAPITAL GAINS AND LOSSES
Section 39
a. right of, or the right to use
copyright, patents, etc Q: What is capital asset?
b. industrial, commercial, A: Capital asset is an asset held by a
scientific equipment taxpayer which is not an ordinary asset.
c. supply of knowledge
d. supply of services by The following are ordinary assets:
nonresident 1. stock in trade of the taxpayer or other
e. supply of technical assistance property of a kind which would
f. supply of technical advice properly be included in the inventory
g. right to use: motion picture of the taxpayer if on hand at the close
films, etc. of the taxable year;
2. property held by the taxpayer
Q: What is the rule as regards the sale of primarily for sale to customers in the
real property? ordinary course of trade or business;
A: Gains, profits, and income from the sale 3. property used in trade or business of
of real property located within the Philippines a character which is subject to the
considered income within. allowance for depreciation provided in
subsection 1.
Q: What about the sale of personal property, 4. real property used in trade or
what is the rule? business of the taxpayer.
A: Determine first if the property is
produced or merely purchased. All other property not mentioned in the
foregoing are considered capital assets.
1. it the property is manufactured in the
Philippines and sold abroad, or vice- Q: What is a capital gain? What is a capital
versa, it is an income partly within loss?
and partly without. A: Capital gains are gains incurred or
2. if the property is purchased, received from transactions involving property
considered derived entirely from the which are capital assets. Capital losses are
sources within the country where it is losses incurred from transactions involving
sold. capital assets.

EXCEPTION: shares of stock of domestic Q: What is ordinary gain? Ordinary loss?

corporation, it is an income within wherever A: Ordinary gains are those received from
it is sold. transactions involving ordinary assets.
Capital losses are losses incurred in
COMMISSIONER v. IAC transactions involving ordinary assets.

20
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
Q: What is the relevance of making a
distinction?
A: It is relevant because Section 39B,C, and
D apply to capital assets only.
1. time when property was held (39B)
(holding period applies only to
individuals);
2. limitations on capital losses (39C);
3. Net Capital Carry-Over (39D)
I. CAPITAL ASSETS
Q: What is the holding period?
A: If capital asset is sold or exchanged by an
individual taxpayer, only a certain percentage
of the gain is subject to income tax.
It is the length of time or the duration of
the period by which the taxpayer held the
asset.
Q: What is the requirement?
A:
1. the taxpayer must be an individual.
Section 39B states “in case of a
taxpayer, other than a corporation..”
2. property is capital in nature.
Q: What is the term?
A: 100% if the capital asset has been held
for not more than 12 months; (short term)
50% if the capital asset has been held for
more than 12 months. (long term)
NOTE: the holding period applies to both
gains and losses.
Q: Do you include capital gains in your ITR?
A: General rule: yes, include in ITR.
EXCEPT:
1. gains in sales of shares of stock not
traded in stock exchange(section 24);
2. capital gains from sale of real
property(section 24).
Q: When will the holding period not apply?
A:
1. property is an ordinary asset
2. taxpayer is a corporation
3. sale of real property considered as
ordinary asset
II. LIMITATION ON CAPITAL LOSSES
"synonymous to 34D & loss capital rule
" this applies to individual and corporate
taxpayer
Q: What is the loss limitation rule?
A: Pursuant to Section 39 C, losses from
sales or exchange of capital assets may be
deducted only from capital gains, but losses
from the sale or exchange of ordinary assets
may be deducted from capital or ordinary
gains. (applies to individual and corporation)
Q: In connection with 34 D, Losses in
Allowable Deduction, what is the rationale
behind this rule?
A: If it is otherwise, it will run counter with
the rule that the loss should always be
connected with the trade or business, capital
losses are losses not connected to the trade
or business, thus it is not deductible
Q: what is your remedy?
A: 39 D, net capital loss carry-over
Q: What is the rationale in allowing ordinary
loss to be deducted from either the
capital gains or ordinary gains?
A: It is already included in ITR, the gross
income less deductions hence it already
carries with it the deduction
TAKE NOTE: Normally if the loss is an
ordinary loss there is no carry over.
Except: a. 34D3
b. if the loss is more than GI
III. NET CAPITAL LOSS CARRY-OVER
Q: What are the requirements?
A:
1. taxpayer is an individual;
2. paid in the immediately succeeding
year;
3. applies only to short term capital
gain;
4. capital loss should not exceed net
income in the year that it was
incurred.
Q: How does net capital loss carry-over differ
from net operating loss carry-over under
Section 34 D (3)?
A: Under the net capital loss carry-over rule,
the capital loss can be carried over in the
immediate succeeding year. In net operating
loss carry-over rule, capital loss can be
carried over to the next three (3) succeeding
calendar year following the year when the
loss was incurred.
21
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
NOTE: only 15% of the loss will be carried
over, if the loss is greater than the gains.
" In net operating loss carry-over there is
an exception to the 3 year carry-over period.
In case of mines other than oil and gas wells,
the period is up to 5 years.
Q: What is a short sale?
A: Sale of property by which the taxpayer
cannot come into the possession of the
property. EX: shares
CALAZANS v. CIR
F: The taxpayer inherited the property
fro her father and at the tie of the
inheritance it was considered a capital
asset. In order to liquidate the
inheritance, the taxpayer decided to
develop the land to facilitate the sale of
the lots.
I: Was the property converted to
ordinary asset?
H: The conversion from capital asset to
ordinary asset is allowed because Section
39 is silent.
Q: Are you allowed to convert ordinary asset
to capital asset?
A: General rule: it is not allowed. Read
Revenue Regulation 7-2003
The case at bar still applies despite of the
issuance of said Revenue Regulation.
Q: What is the conversion prohibited in the
Revenue Regulation?
A: Conversion of real estate property.
Q: What is the rationale?
A: Section 24 D – final income tax of 6% if
the real estate is capital asset. If it is an
ordinary asset, it will be subject to income
tax of 32% for individual taxpayer, and 35% if
the taxpayer is a corporation.
Q: What are the properties involve in the RR
7-2003?
A: 1. those property for sale by the realtors
2. real property use in trade or business
not necessary realtors
Q: That is the conversion allowed by the
Revenue Regulation? Is there an instance
when an ordinary asset may be converted to
capital asset?
A: Yes, provided that the property is an
asset other the real property, and it has been
idle for two (2) years.
SECTION 24
TAX ON INDIVIDUALS
Q: What is the tax mentioned in section 24?
A: NIT
Q: What is taxable income?
A: (memorize section 31) it is the pertinent
items of gross income specified in the NIRC,
less the deductions and/or personal and
additional exemptions, if any, authorized for
such types of income by the NIRC or other
laws. It refers to NIT because it allows
deductions.
Q: What do you mean by the phrase “other
than B, C, and D”?
A: It means that if the elements of passive
income are present, the taxpayer has to pay
FIT.
Q: Who are the taxpayers mentioned in
section 24?
A:
1. RC
2. NRC
3. OCW
4. RA
" Additionally, under Section 25, NRAETB
Q: What is the tax liability of NRAETB?
A: Section 25(1) NRAETB is subject to
income tax in the same manner as those
individuals mentioned in Section 24.
Q: What about Domestic Corporations?
A:
1. Sec. 27 A,B, and C
2. Sec. 26- GPP is not subject to income
tax.
Q: What about Resident Foreign
Corporations?
A: Sec 28(l) it is subject to 35% Net Income
Tax
Q: What about Non Resident foreign
Corporation and Non Resident Alien not
engaged in Trade or Business?
A: Not Subject to Net Income Tax but they
are liable for Gross Income tax.
22
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
Q: Do legally married husband and wife c. Less than 3 yrs- 20%
need to file separately or jointly?
A: It depends if: Q: Does it apply to all individuals?
1. Pure compensation income- separate A: No! It does not apply to 10 NRFC and NRA
2. Not Pure compensation income- joint and NRAETB because they are liable to GIT.

Passive Income NOTE: if the depositary is a Non resident it is

Interest, Royalties, prizes and Other winnings exempt

Interest " Resident citizen is liable to pay tax for

bank interest earned abroad (NIT)
Q: Bank Interest, what is the requirement?
A: The bank must be located in the Phils. Q: If the money earns interest in abroad who
because the income must be derived from is liable?
sources w/in. A: RC and DC only by NIT, the rest are
exempt. No FIT abroad because we do not
Q: Do you include this in your ITR? have withholding agent abroad.
A: No! because it is subject already to FIT.
The bank is the one liable for the payment of Q: MCIT applies to DC and RFC in relation to
this. bank interest?
A: If the bank interest is derived abroad, RFC
NOTE: Liability for NIT, GIT, and MCIT will is exempt but DC is liable.
depend on the elements present. Impose NIT if it is higher than the MCIT,
otherwise apply MCIT if it’s higher than the
Q: Who are liable for bank interest? NIT
A:
1. RC } Prizes
2. NRC} Sec. 24 B1
3. RA } Requirements:
4. NRAETB 1. Prizes must be derived from sources
5. NRANETB Sec. 25 (25%) w/in the Phils.
6. AEMOP 2. it must be more than P 10,000
7. DC
8. RFC Q: Who are liable? (FIT)
9. NRFC A:
1. RC
Q: What is the rate of interest? 2. NRC
A: FIT of 20% 3. OCW
4. RA
Q: Is there a lower rate? 5. NRAETB
A: 7 ! % if under EFCDS 6. AEMOP (RC, NRAETB)

Q: What if the depositor is non resident Not Liable

alien?
A:
-W/in – FIT
- W/out- exempt
Q: What is the rule on pre- termination?
A: If it is pre terminated before 5th year a FIT
shall be imposed on the entire income and
shall be deducted and withheld by the
depositary bank from the proceeds of the
long term deposit based on the remaining
maturity thereof
a. 4 yrs to less than 5 yrs – 5%
b. 3 yrs to less than 4 yrs- 12%
1. NRANETB- liable for GIT at 25 %
2. AEMPOP (NRANETB- GIT)
3. DC- NIT 27 D is silent
4. RFC NIT law is silent 28A7a
5. NRFC subject to GIT
Q: When can we apply NIT in Prizes?
A: 1. When the taxpayer is RC, RFC and DC
2. For DC and RC it must be derived
from income abroad RFC it must be
derived from income w/in
3. amount is more than P10,000

23
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
NOTE: If the prize is derived from sources A: Liable for NIT if Income abroad like a
w/in but it is below P 10,000 it is not subject writer for Snoop. While FIT if for April Boy.
to tax. If derived from sources abroad, most
of them are exempt except for RC and DC Q: Who are liable (FIT)?
who are liable w/in and w/out. A:
1. RC
Q; Is it possible for RC and DC to pay MCIT? 2. NRC
A: Yes if MCIT is higher than NIT. 3. OCW
4. RA
Winnings 5. NRAETB
6. AEMOP (RC, NRAETB)
Q: Do we apply the P10, 000 req.?
A: No, we do not apply it only applies to Not Liable?
prizes. It must not pertain to illegal 1. NRANETB
gambling. 2. AEMOP
3. DC
" Thus, the only requirement is it must be 4. RFC
derived from income w/in. 5. NRFC

Q: Who are liable? (FIT) NOTE: Lower rate of 10% applies to all except
A: NRANETB
1. RC
2. NRC Q: When do we apply NIT to Royalties?
3. OCW A:
4. RA 1. TP is RC or DC
5. NRAETB 2. Income is from w/out
6. AEMOP (RA, NRAETB) 3. TP is RF and income is w/in

Not liable to FIT? " If income is from sources abroad all are
1 NRANETB- GIT exempt except RC and DC
2 AEMOP (NRANETB- GIT)
3 DC- law is silent NIT Dividends
4 RFC- law is silent
5 NRFC- GIT " Confined with cash and/or property
dividends.
Q: When does NIT apply to winnings?
A: Q: What are dividends?
1. If Taxpayer is DC or RC A: Any distribution made by Corporation to
2. Income is derived abroad its stockholders outside of its earnings or
3. Taxpayer is RFC and income w/in. profits and payable to its stockholders
whether in money or in property (Sec. 73)
NOTE: If income abroad, most TP are exempt
except DC and RC COMM. vs. MANNING
Q: Where did it come from?
Q: MCIT applies when? A: shares come from another shareholder
A: It is higher than the NIT Q: What are the dividends included?
A: Sec. 24 refers to cash or property
Royalties dividend
H: For stock Dividends to be exempt it must
Requirement: come from the profit of the corporation.
" The income is from w/in
Stock Dividends " it is the transfer of the
" Rate? 20%. Lower rate? 10% on books, surplus profit from the authorized capital
literary works and musical compositions. stocks.

Q: You are a writer for Snoop Dogg are you Q: Assuming that there are 5 Incorporators,
liable for FIT? What if for April Boy? the Corporation has a P5 M Authorized

24
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
Capital stock. It distributed 1 M stock 1. Subj to FIT
dividends, is it taxable? 2. Determine whether there is a loss or a
A: NO, the dividends did not go to the Stock gain because the tax is impose upon
holder but to the Auth Capital Stock. Only the net capital gains realized from the
cash and Prop Stock go to the Stock holder. sale, barter, or exchange or other
disposition of the shares of stock in a
" Sec 24 B does not mention stock domestic corp.
dividends because it is not subject to FIT but 3. It is uniformly imposed on all
it is subject to NIT under Section 73. taxpayer
4. not subj to w/holding tax.
Q: Is there an exception when stock
dividends are not taxable? Requirements:
A: YES, if the shares of stocks are cancelled 1. Shares of stock of a DC
and redeemed meaning it was reacquired by 2. It must be capital asset
the corp. 3. must not be traded in the stock
market
ANSCOR CASE
!the stockholders cannot escape the " 25 R last part: Capital Gains realized by
payment of taxes NRANETB in the Phils. from the sale of shares
of stock in any DC and real prop shall be
Requirement: subj. to the income tax prescribed under Sub
Gen Rule- the dividends must be distributed sec (c) and (d) of Sec. 24.
by a DC.
Except- Regular operating- always a foreign " SEC. 24 B 1&2: If the elements are
corp. present NRANETB and NRFC are liable to pay
GIT.
" What rate: 10% FIT
Except: under 24 C for NRANETB. What do
Q: Who are liable? you mean by the phrase “ the provisions of
A: 39 notwithstanding”?
1. RC
2. NRC " It refers to the holding period. When it
3. OCW comes to capital gains from sale of shares of
4. RA stock not traded and capital gains from the
5. NRAETB sale of real prop. The holding period does
6. AEMOP (RC, NRAETB) not apply because the basis will be those
provided in 24 C & D and not under 39B (GSP
Not liable? or FMV)
1. NRANETB
2. AEMOP ELEMENT #1 The share is a share in DC
3. DC
4. RFC Q: What if the share is from foreign corp?
5. NRFC A: Determine the income considered. If
income w/in read Sec. 42 (E)
" Shares of association and partnership is
taxable " If the shares sold are that of a foreign
corp it is subj to the ff rules:
Q: Determine the tax liability of the a. sold in the Phils= its income w/in
following? b. sold in abroad= w/out
A: c. Shares of stock in a Dc is always
1. DC a Stockholder of DC= Exempt considered an income w/in regardless where
2. RFC stockholder of DC= Exempt also it was sold.
3. DC stockholder of RF= Liable for NIT.
Q: Shares of Foreign Corp sold in Phils.
Capital Gains From Sale of Shares of Stock Who’s liable? What tax?
Not Traded (§24C)

25
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
A: Not subj to FIT because one of the
elements is not present . Shares not being
that of a DC.
Hence: a) RC, NRC, OCW, NRAETB, AEMOP
(RA, NRAETB) will pay NIT. DC and RFC
b) NRANETB and NRFC will pay GIT
Q: Shares of Foreign Corporation sold
abroad?
A: It will be considered an income w/out.
Thus:
most of them will be exempt
except RC and DC liable to pay NIT
ELEMENT # 2 NOT TRADED OR SOLD IN
THE STOCK MARKET
" if sold in the stock market- it is not subj
to FIT
" if sold in the stock market, it will be subj
to percentage tax, in lieu of NIT.
ELEMENT # 3 It must be a capital asset.
Q: When is it considered an ordinary asset?
A: 1. When the broker or dealer
a. used it in trade or business
b. held for sale in the ordinary
course of trade or business
2. to all other assets, it will be
considered a capital asset
NOTE: if all elements are present it will be
subj to FIT
If the shares are ordinary asset
1. Ordinary shares in DC- income w/in
a. Most of the taxpayer will pay NIT
except NRFC and NRANETB
2. Ordinary assets of foreign corporations
a. Income within if sold in the Phils:
most will pay except NRANETB
and NRFC
b. Income w/out if sold abroad: most
will be exempt except RC and DC
MCIT
Q: When is a RFC subj to NIT?
A:
1. Sale of shares of stock of a Foreign
corp in the Phil.
2. sale of shares of stock of DC which
are ordinary asset
" DC and RFC are subj to MCIT which may
be imposed if the NIT is lower than the
MCIT2% MCIT will be imposed if MCIT is
higher than NIT.
Capital Gains From Sale of Real Property
(§24D)
" In 39 B the holding period does not apply
because the basis of income tax is the gross
selling price (GSP) or the Fair market value
(FMV) whichever is higher- 6% FIT
Requirements:
1. The real prop must be sold w/in the
Phils and located in the Phils.
2. It must be a capital asset
3. The seller must be an individual,
estate or trust or a DC
" RFC not liable for FIT but liable to pay NIT
if all the elements are present.
" NRFC liable to pay GIT and not FIT
" NRANETB liable to pay FIT are all
elements are present.
ELEMENT # 3 The real prop must be a
capital asset
Q: When considered a capital asset?
A: Read R.R. 7- 2003
Q: Ordinary asset- shall refer to all real
property specifically excluded from the
definition of capital asset under Sec. 39
A: Other property not mentioned are capital
asset.
Q: What if all the elements are not present?
A:
most will be liable to pay NIT
Except NRANETB and NRFC liable for GIT
Q: May a RC be liable to pay NIT even if all
the elements are present?
A: YES, disposition made to the Govt. Thus,
the taxpayer has the option of paying 32%
NIT or 6% FIT
Q: Which is more advantageous?
A: It depends determine first if there’s a loss
or a gain.
If there’s a gain choose to be taxed at 6%
FIT. In this case the gain is always presumed.
26
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
If there’s a loss choose to be taxed at A: If the proceeds are not fully utilized, the
32% because losses may be considered an portions of the gain is subj to FIT
allowable deduction .
SEC. 27A RATES OF INCOME TAX
Other transactions are covered:
1. sale Q: How many income taxes are paid by a
2. barter DC?
3. exchange A:
4. other disposition 1. NIT
2. MCIT
NOTE: If the prop is under mortgage contract 3. FIT
and the mortgagee is a bank or financial inst, 4. 10%Improperly Accumulated
the FIT does not apply because the property Earnings
is not yet transferred because there’s a 5. Optional corporate income tax of 15%
period of redemption of the gross
If after a year the mortgagor failed to
redeem the property that is the only time that " DC liable for five, but the optional is not
the FIT will apply because there’s now a yet applicable so only 4.
change of ownership. If redeemed w/in 1 yr
period FIT will not apply because there’s no Q: How many can be applied
change of ownership. simultaneously? A: ONLY 3
If the mortgagee is an individual the FIT 1. NIT, FIT and 10% IAE
is imposed whether or not there is a transfer 2. MCIT, FIT, 10% IAE
of ownership.
SEC. 27 (B) PROPRIETARY EDUCATIONAL
Exceptions (§24(D2)) INST. & HOSP.

Q: What if the prop being sold was a movie
house, can he claim for the exception?
A: the prop covered by the exemption is a
residential lot
Q: Who can claim the exemption?
A: Only the taxpayer mentioned in Sec. 24
Requirements:
1. The purpose of the seller is to acquire
new residential real prop
2. the privilege must be availed of w/in
18 mos. From the sale
3. Comm. must be informed w/in 30
days from the date of sale with the
intention to avail of the exemption
4. the adjusted basis or historical cost of
the residence sold shall be carried
over to the new residence.
5. the privilege must be availed only
once every 10 yrs
6. Certification of the brgy. Capt where
the taxpayer resides that indeed the
prop sold is the principal residence of
the tax payer (RR 13- 99)
Q: What if the property is worth 10 M and it
was sold only for 2M, what will happen to the
unused portion or profit?
Who are the taxpayers?
1. Non- Profit Proprietary Educl. Inst and
2. Non Profit Proprietary Hospital
Q: What if the school or hospital is non
profit only, is it exempt?
A: No, subject to 10% on their taxable
income except those covered by subsection
(D)
PROVIDED that gross income from
unrelated business, trade or activity must not
exceed 50% of its total gross income derived
by such educational inst or hospital from all
sources
Requirements:
1. It is a private school or hospital
2. it is stock corp
3. it is non profit
4. that gross income from unrelated
business, trade or activity must not
exceed50% of its total gross income
derived by such educational inst or
hospital from all sources
5. has permit to operate from DECS,
TESDA, or CHED
Q: What do you mean by unrelated trade
business or activity?

27
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- Atty. Francis J. Sababan -
A: It means any trade, Business, or activity
which is not substantially related to the
exercise or performance by such entity of its
primary purpose or performance
Q: May a school or hospital be exempt from
paying tax? What are the req?
A:
1. It must be non- stock and non- profit
2. the assets property and revenues
must be used actually, directly, and
exclusively fro the primary purpose
Q: Under what law? Is it the constitution or
the NIRC which provides fro the exemption?
A: It is under Sec. 30 of NIRC and not
under Sec.4 Art. 14 of the Constitution. The
provision of the NIRC is the specific law
which prevails over the Constitution which is
the general law.
! exempt from all taxes and custom
duties
Q: What about exemption from real
property tax?
A: Art. 6 Sec. 28 of the Constitution:
charitable institution churches, ….and all
lands buildings, actually directly and
exclusively used for religious, charitable, and
educational purposes shall be exempt from
taxation.
! Not Sec. 4 of Art. 14 of the
Constitution.
Q: You donated a property to a school will
you be liable for donor’s tax?
A: not liable if it falls under Sec. 101 (3) of
the NIRC
REQ. FOR EXEMPTION TO DONORS TAX:
1. it must be non-stock, non-profit
educational inst.
2. not more than 30% of the prop donated
shall be used by such donee for admin
purposes.
3. paying no dividends
4. governed by trustees who don’t receive
any compensation
5. devoting all its income to the
accomplishment and promotion of the
purposes stated in its Articles of
Incorporation
Q: What about exemption from VAT?
A: Sec. 109 (m) of R-VAT
Q: What about exemption fro Loc Gov Code?
A: If its non-stock, non-profit educational
inst. It may be exempted from local taxation.
Q: Is Art 14 Sec. 4 of the Consti obsolete?
A: NO, if the law is silent apply the Consti.
SEC. 23: GOCC, AGENCIES, INST of the
GOVT.
GEN RULE: Subj to tax.
EXCEPTIONS:
1. GSIS
2. SSS
3. PHIC
4. PCSO
" PAGCOR no longer included.
Q: If the GOCC is not one of those
enumerated does it follow all of its income is
automatically subject to tax?
A: NO. Under Sec 32. B (7) income derived
from any public utility or from the exercise of
essential government function accruing to
the Govt of the Phils or to any political subd.
Are therefore exempt from income tax.
Therefore, even if the GOCC is one of
those enumerated under Sec. 27 it may still
be exempt under Sec. 32 b7b if its
performing governmental function
NOTE: Pagcor vs. Basco case
Q: What is the difference between Sec. 27 C
and 32 b7b?
A:
1. Sec 27 C exempts those enumerated
without any qualification.
2. Sec. 32b7b qualification must concur
before it may be exempted.
Q: Can the government impose tax on itself?
A: It depends on who the taxing authority is.
If the taxing authority is the National Govt. as
a rule, YES.
Exceptions
1. those entities enumerated under §27 C
2. those GOCC falling under §32b7b
If the taxing authority is the local
government units, as a rule NO. LGU’s are
expressly prohibited from levying tax
against: (Sec 133(o)
1. National Govt.
2. Its agencies and instrumentalities
28
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- Atty. Francis J. Sababan -
3. local government units A: Normally it is NIT because it is subj under
Exception: Sec 154 of LGC says that LGU’s Sec 27 D3 and 28 A
may fix rate for the operation of public
utilities owned and maintained by the within Q: Who is the income earner?
their jurisdiction. A: Depositary banks

PAL CASE July 20 2006 Q: Exempt from what kind of transaction?

H: The SC used 133 (o)an exception to
pay tax, real estate tax, imposed by City
of PAranaque on NAIA. The SC said that
the airport is not an agency or GOCC but
mere instrumentality of the Govt.
This is Gross ignorance of the law
Sec. 133 (o) is for local taxation not real
property taxation which is the one
involved in the present case.
NOTE: Mactan- Cebu Airport case
A: From foreign currency transaction. If it
involves foreign currency transaction it is not
exempt but subject to 35 % NIT
Q: Who are the other parties?
A:
1. Off shore banking units
2. branches of foreign banks
3. local commercial bank
4. Other depositary banks under EFCDS
5. Non- residents

SEC. 27 D(1) " if the above enumeration are the parties,

then depositary bank will be exempt from
Q: How many possible incomes were paying the NIT
mentioned?
A: Two (2): bank interest and royalties Foreign Currency Loan

REQ: Q: Who is the lender? Borrower?

1. Bank interest must be received by a A: Lender- EFCDS
Domestic Corp Borrower- RC
2. Royalties derived from sources within
EXEMPT
Q: When it comes to bank interest, what is Offshore banking units
the difference if the taxpayer is an individual Other depositary banks under EFCDS
or corporation?
A: If individual, they may be exempt from " exemption of NR from EFCDS:
the payment of interest in case of long term
deposit except NRANETB Q: Who is the income earner?
If DC, they are not exempt from long tem A: Non Residents whether individual or
deposit. Corporations

Q: What about royalties? Q: Derived from whom?

A: If individual, have a lower rate of 10%on A: Depositary Bank under EFCDS
books, other literary and musical
compositions. DC have no lower preferential NOTE: Sec. 24 B Nonresident exempt from
rate. bank interest under EFCDS

SEC 27 D2: CAPITAL GAINS FROM SALE OF Q: What is the difference between 24 b1
SHARES NOT TRADED from 27 D3
A: In 24 B1, NR is exempt only from bank
SEC 27 D3: EFCDS interst derived from EFCDS while 27D3
exempts NR from any income from
Q: What is the expanded foreign currency? transactions with depositary bank under
A: It is a bank authorized by the BSP to EFCDS
transact business in the Philippine Currency
as well as acceptable foreign currency or SEC. 27 D(4)- Inter-corporate dividends-
both. exempt

Q: What is the tax to be paid?

29
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- Atty. Francis J. Sababan -
27 D5 Capital Gains from sale of Real " An intl. carrier doing business in the
Prop. Phils. shall pay 2 ! % on its Gross Phil Billings
(GPB)
Q: What is the tax?
A: 6% FIT Q: Is 28 A3 the Gen. rule or the Exception?
A: It is the general rule because it is under
Q: What is the difference if the seller is an 28 A3
individual and a DC?
A: Individual can sell all kinds of real " GPB is in the nature of FIT, applies only if
property all the requirements are present.
DC can only dispose land and/or
buildings. " RFC will be liable for NIT, hence a RFC
engaged in common carriage does not pay
SEC 27 (E) MCIT GPB but NIT

Q: Applicable to whom? " Income without: EXEMPT

A: DC and RFC
International Carrier:
Q: Can it be applied simultaneously with
NIT? " GPB refers to the amount of revenue
A: NO, imposed in lieu of the NIT, whichever derived from: carriage of persons, excess
is higher. baggage, cargo and mail originating from the
Phils in a continuous and uninterrupted
Q: What is the Rationale? flight, irrespective of the place of sale or
A: to prevent corporations from claiming too issue and the place of payment of the tickets
many deductions or passage document.

Q: When will it be imposed? REQ:

A:
1. On the 4th year immediately ff the year
in which such corp commenced its
business.
2. When the MCIT is higher than the NIT
1. Originating from the Phils.
2. Continuous and uninterrupted flight;
3. Irrespective of the place of sale or
issue and the place of the payment of
tickets or passage document.

Q: What is the carry over rule? Q: Do you consider landing rights to

A: Sec 27 E2 states the carry over rule.
" In order to avail: only in the year where
the MCIT is greater than the NIT.
Sec 28 A1
Q: What Kinds of taxes are paid by the RFC?
A: NIT
MCIT
determine liability? (RR 15-2002)
A:
1. If originates from the Phils and has
landing rights- ONLINE- RFC
2. No landing rights- OFFLINE- NRFC
Q: If there are stopovers, is it still
uninterrupted?
A: YES, provided that the stopover does not
exceed 48 hrs.

Q: When will the place of sale of tickets

Sec. 28 B2 MCIT on RFC matter as to the taxpayers liability?
A: The place of tickets is material only if the
! same with Sec. 27 two other elements are not present to be able
to know if its subj to NIT or exempt.
Sec. 28 A3- INTL CARRIER
Revalidated, exchanged or indorsed tickets
Kind:
1. Air carrier REQ:
2. ships 1. The passenger boards a plane in a
port or point in the Phils.

30
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
2. The tickets must be revalidated, 3. Exempt if income is derived by the
exchanged, or indorsed to another OBU from EFCDS
airline. 4. Parties:
a) local commercial banks
Q: What if it’s the same airline but different b) Foreign bank branch
plane? c) Non Residents
A: GPB does not apply, it must be to another d) OBU in the Phils.
airline
Difference with EFCDS:
Q: What if it did not originate from the EFCDS
Phils.? 1. Acceptable foreign currency, Phil.
A: Determine if its income within or without. Currency or both
if ticket was purchased in the Phils. it is 2. Can be a domestic or foreign
income within hence apply NIT corporation
if purchased outside, it is income without, 3. Exempt if income derived by DC or
hence exempt RFC from EFCDS
4. Parties:
Transshipment a) local commercial banks
b) Foreign bank branch
REQ: c) Non Residents
flight originates from the Phils d) OBU in the Phils
transshipment of passenger takes place e) Other banks under EFCDS
at any port outside the Phils.
the passenger transferred on another FOREIGN CURRENCY LOAN
airline
" 10% FIT
Q: How do you apply GPB? If: Lender- OBU
A: Only the aliquot portion of the cost of the Borrower- Resident Citizen
ticket corresponding to the leg flown from EXCEPT:
the Phils to the point of transshipment shall 1. OBU
from part of the GPB. 2. Local Commercial Banks

Q: Is it liable for the whole flight? Transactions of Non Residents:

A: 1. Income earner: Non- Residents
From the Phils to the point of 2. Lender: OBU’s
transshipment, it is income w/in
From transshipment to final destination, NOTE: Non resident exempt from
its income w/out- EXEMPT transactions with OBU’s and EFCDS

International Shipping SEC. 28 A5 TAX ON BRANCH PROFITS,

" GPB means gross revenue whether from
passenger, cargo, mail
REQ:
it must originate from the Phils.
up to final destination
- regardless of the place of sale or
payments of passenger or freight documents
Sec28 A(4) OFF SHORE BANKING UNITS
OBU’s
1. only acceptable foreign currencies
2. always a foreign corporation (subj to
NIT) except #3
REMITTANCES
" profits based on the total profits applied
or earmarked fro remittance remitted by a
branch to its head office
" Subj to 15% tax
Except: those activities which are registered
with PEZA
NOTE: Interests, Dividends, Rents, Royalties
including remuneration for technical
sevices, salaries, wages, premiums,
annuities, emoluments, or casual gains,
profits, income and capital gains received
by a foreign corporation during each
taxable year from all sources within shall
not be treated as branch profits UNLESS

31
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
the same are effectively connected with " Regional or area headquarters (Sec. 22
the conduct of its trade or business. DD) shall not be subject to tax exempt from
income tax if the requisites are present.
Branch Profit Remittance
Q: What are the requisites?
Two ways to receive income (FC) A:
1. Branch 1. the HQ do not earn or derive income
2. Subsidiaries from the Phils.
2. Acts only as supervisory,
NOTE: communications, coordinating centre
1. When a FC establishes branch, it is for their affiliates, subsidiary or
always a FC branches in the Asia- Pacific Region
2. When a FC establishes DC, it is a RFC and other foreign markets.

Q; It is in addition to NIT- Why? SEC. 28 A6b

A: NIT because it is RFC
Q; What kind of tax is imposed under 28 A5?
A: 15% FIT
Q: How do you apply the rate?
A: multiplied to the total profit applied or
earmarked for remittance w/o deductions
It applies for branches that are:
1. the profit remitted is effectively
connected with the conduct of its
trade or business in the Phils.
2. One not registered with PEZA
MARUBENI CASE
F: A branch was established with AG&P,
there was investment with AG&P
Q: Did the petitioner participate with the
negotiation?
A: NO
Q: What did the petitioner pay?
A: 15% Branch Profit Remittance Tax (BPRT)
10% Intercorporate Dividends
Q: What’s the issue?
A: Petitioner maintains that there was
overpayment of taxes, thus the same was
asking for a refund of tax erroneously
paid.
Q: Is is subj to FIT?
A: NO, exempt if petitioner is RFC
H: -not correct to pay 15%
To be liable for BPRT
1. It is a RFC
2. Branch did not participate in negotiations
SEC. 28 A6a
" Regional Operating HQ are taxable and
liable to pay 10% taxable income.
" Regional Operating HQ is a branch
established in the Phils by a multinational
company engaged in any of the services:
1. Gen. Administration and Planning
2. Business Planning and Coordination
3. Sourcing and procurement of Raw
materials and components.
4. Corporate Finance and Advisory
Services
5. Marketing Control and sales
promotion
6. Training and personal management
7. logistic services
8. research and development services
and product development
9. technical support and maintenance
10. data processing and communication
and business development
Rationale: Why liable? Because the claim for
exemption of resident airlines shall be
minimized
SEC. 28A7a Interests and Royalties:
" 20%FIT
" Interests under EFCDS= 7 ! %
Sec. 28A7b Income derived under EFCDS
1. Income derived from foreign currency
transactions with:
a) Non Residents
b) OBU
c) Local commercial bank
d) Foreign bank branches

32
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- Atty. Francis J. Sababan -
e) Other depository bank under the Elements:
EFCDS 1. Chartered to Filipino Citizens or
Corporations
" As a Gen Rule: the above transaction is 2. Approved by MARINA
Exempt
SEC. B(4) Non Resident Owner or Lessor of
EXCEPTION: Income from such transaction Aircraft, Machiniries, and other
as may be specified by the secretary of Equipments.
Finance, upon recommendation by the
Monetary Board to be subject to regular " liable for 7 1/2 % GIT
income tax payable by any banks.
SEC 28 b5a Interest on Foreign Loans
2. Interest income from foreign currency
loans " Must be read with Sec. 32 B7a

" granted by depository bank under said Interest on Foreign Loans, if the lender is
EFCDS to others shall be subject to 10% FIT 1. NRFC liable to 20% FIT
2. Foreign Govt. Exempt because it is an
Exempt if granted to: exclusion (Sec 32 b7a: income derived
1. Other OBU in the Phils, and by a foreign gov’t from investments in
2. Other depository bank under the the Phils on loans, stocks, bond, and
EFCDS other domestic securities or from
» SEC. 28 A7c: Capital Gains from interest on deposits in banks by:
Shares of Stocks not Traded in the a) Foreign govt.
Stock exchange b) Financing inst owned controlled or
» 5% or 10% as the case maybe enjoying, refinancing from foreign
govt; and
SEC 28A7d: INTERCORPORATE DIVIDENDS c) Inter nation or Regional financial
inst established by foreign govt.
" DC- RFC= EXEMPT, not subj to tax
COMMISIONER OF INTERNAL REV. vs.
SEC 28 B1 MITSUBISHI METAL CORP. (180 SCRA 214)
F: Atlas Mining entered into a Loan and Sales
Q: What kind of tax? Contract with Mitsubishi Metal Corp. ( A
A: 35% GIT on the ff income Japanese Corp.) for the purposes of
1. Interest projected expansion of the productivity
2. Dividends capacity of the former’s mines in Cebu.
3. Rents The contract provides that Mitsibushi will
4. Royalties extend a loan to Atlas in the amount 20
5. Salaries M dollar, so that Atlas will be able install
6. Premiums( except reinsurance a new concentrator for copper
premiums) production.
7. annuities -Mitsubishi to comply with its
8. emoluments obligation, applied for a loan from
9. Other fixed and determinable Gains, Export- Import Bank of Japan (Exim Bank)
profits and income. and from consortium of Japanese banks.
Pursuant to the contract Atlas paid
SEC 28 B2 Non Resident Cinematographic interst to Mitsubishi where the
film owner, lessor or distributor corresponding 15% tax thereon was
withheld and only remitted to the Govt.
" liable for 25% GIT Subsequently Mitsubishi filed a claim
for tax credit requesting that the same be
SEC 28 B3 Non Resident owner or lessor of used as payment for its existing liabilities
Vessels chartered by Philippine Nationals. despite having executed a waiver and
disclaimer of its interest in favor of Atlas
" liable for 4 ! GIT earlier on. It is the contention of
Mitsubishi that it was the mere agent of

33
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
Exim Bank which is a financing inst
owned and controlled by the Japanese
Govt.
The status of Eximbank as a
government controlled inst became the
basis of the claim fro exemption by
Mitsubishi for the payment of interest on
loans.
I: WON Mitsubishi is a mere agent of
Eximbank
H: NO. The contract between the parties does
not contain any direct reference to Exim
Bank, it is strictly between Mitsubishi as
creditor and Atlas as the seller of copper.
The bank has nothing to do with the sale
of copper to Mitsubishi. Atlas and
Mitsubishi had reciprocal obligations-
Mitsubishi in order to fulfill its obligations
had to obtain a loan, in its independent
capacity with Exim bank. Laws granting
exemption from tax are construed strictly
against the taxpayer and liberally in favor
of the taxing authority.
SEC. 28 D5 b INTERCORPORATE
DIVIDENDS:
" FIT 15% imposed on the amount of cash
and or prop dividends received from a
domestic corporation.
SUBJ TO THE CONDITION: the country where
the NRFC is domiciled allows a credit against
the tax due from the NRFC taxes deemed
paid or deemed to have been paid in the
Phils.
Gen rule: 35 % FIT
Exception: 15% under the “tax deemed paid
rule/ reciprocity rule/ tax sparring rule”
JHONSONS CASE
2 Kinds of Categories:
1st : Japan, US, Germany, Phils liable for
income within and income without
2nd : countries liable only for income within.
MARUBENI Case: 2 Issues
1. Is the payment of 10% FIT correct?
- No because it was a branch and RFC but
still Marubeni was NRFC under the old law
which is liable to pay 35%, but SC said liable
only to 25% because of the tax treaty
" You cannot refund right away ! 15%
BPRT and 10% Inter-corporate Dividends tax
has different basis
In P&G who are involved
- DC (P&G Phil) and NRFC (P&G US)
- DC declares dividends to NRFC
- 35% was withheld and remitted to the BIR
What did they discover? (after paying)
- they discovered that they are liable only
for 15% so they have a refund of 20%
Q: In the 1st case did the SC allowed the
refund?
A: NO, denial anchored on 2 grounds:
1. One claiming for refund was not the
proper party
2. There was a showing or proof as to
the existence of the “tax deemed
paid” rule
Q: In 2nd case was there a refund?
A: YES, the SC reversed itself
1. Income tax is FIT: the withholding
agent is the proper party because he
is liable to pay said taxes
2. actual proof of payment not
necessary, what is necessary is the
law of the domicile of the country
providing fro tax credit equal to 20%
of the tax deemed paid.
Q: What is the rate if the law is silent?
A: 35% FIT
" The rate will only be 15% if there’s a law
recognizing the same but this refers to the
case of those belonging to the first category.
WANDER CASE
Q: Who are the parties?
A: DC(Wander) and FC (Glaxo)- they
belong to different categories
The BIR tried to collect 35% because
the law is totally silent about the tax
credit
H: The SC said that the tax should be 15%
which applies 2 instances:
1. Foreign law do not provide for tax
credit- 35%
2. law provides but the law is silent- 15%
3. law is silent because there is no law-
15%
34
 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
4. law is silent because there’s no law
because the subj matter is not
taxable- 15%
SEC. 29 IAET
Q: What is the rate?
A: 10% of the gross income (taxable income)
" It is imposed upon the improperly
accumulated taxable income of the
corporation
Q: Applies to what Corp?
A: to DC only under RR 2- 2001( classified as
closely held corporations)
Q: Is it in the nature of sanction?
A: Yes, it is imposed to compel the
corporation to declare dividends.
Q: Why?
A: because if profits are distributed to the
shareholders, they will be liable for the
payment of Dividends tax. Now, if the profits
are undistributed the shareholders will not
incur liability on taxes with respect to the
undistributed profits of the Corp.
- In a way it is in the form of deterrent to
the avoidance of tax upon shareholders who
are supposed to pay dividends tax on the
earnings distributed to them.
Q: What is taxable income?
A: SEC. 31 defines taxable income as the
pertinent items of gross income specified in
this Code, less the deductions and/or
personal and additional exemptions, if any,
authorized for such types of income by this
Code or other special law
Q: When not liable to pay IAET?
A: There are 2 groups of DC exempt from
payment of IAET (RR2-2001)
A) Corporations failure to declare dividends
because of reasonable needs of business
" reasonable needs means are construed to
mean immediate needs of the business
including reasonable anticipated needs
Q: What constitutes reasonable accumulation
of the corporation’s earnings? Examples?
A:
1. allowance for the increase in the
accumulation of earnings up to 100%
of the paid- up capital of the
corporation.
2. earnings reserved for the definite
corporate expansion projects or
programs approved by the Board
3. Earnings reserved fro buildings,
plants, or equipment, acquisition
approved by the Board
4. Earnings reserved for compliance with
any loan agreement or pre- existing
obligations
5. Earnings required by law or other
applicable statutes to be retained.
6. In case of subsidiaries of foreign
corporation, all undistributed
earnings or profits intended or
reserved for investments
NOTE: the corporations belonging in the 1st
group are normally liable but they can show
that the accumulation of earnings is justified
for reasonable needs of business, they incur
no liability and exempt from payments of the
same.
B) Corporations which are exempt whether or
not it is for reasonable needs of the business:
1. Banks, and other non- bank financial
intermediaries.
2. Insurance companies
3. Publicly- held corporations
4. Taxable partnerships
5. General Professional Partnerships
6. Non- taxable joint- ventures
7. Enterprises registered with
a) PEZA
b) Bases Conversion Devt Act of 1992
(RA 9227)
c) Special Economic Zone declared by
law
Q: What is a closely- held corporations?
A: Those corporation at least 50% in value of
the outstanding capital stock or at least 50%
of the total combined voting power all
classes of stock entitled to vote is owned
directly, or indirectly by or for not more than
20 individuals
NOTE: Publicly held Corp. has more than 20
shareholders
Q: What is the time for paying this tax?
A: Calendar Year: Jan 25, 2005- Dec 31,
2005. Today is 2006. You have 1 year to
declare after the close of the taxable year.
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- Atty. Francis J. Sababan -
2006 is the grace period. You will pay on
January 2007.
Q: If you’re not mentioned to be exempted,
will you still be liable?
A: No, if you invoke adjustments
SEC 30. EXEEMPTIONS FROM TAX ON
CORPORATIONS
" Determine the Corporations’ exemptions
under Sec. 30 27 C and 22B.
1. Sec 30, the corporations shall not be
taxed under this title (tax on income)
in respect to income receive by them
as such.
2. Sec 27, the corporations enumerated
are always exempt. Thus exemption is
unconditional
3. Sec 22B GPP, as a general rule is not a
corporation
4. except if it earns income from other
business
" Joint Venture w/ service contract w/
government not a corporation, otherwise, it
is liable.
Assignment: Sec. 35
August 21, 2006 – Midterms
August 14, 2006
Q: What is the reason for not including the
corporations exempt under section 27C and
Section 22B under Section 30?
A: Because there is an exemption which
does not apply to all exempt corporation.
The exemption under Section 30 is not
absolute while the exemption under Section
27 C is absolute and without any conditions.
In addition, Section 22B provides that a joint
venture is generally taxable unless it has a
service contract with the government, a
generally taxable corporation cannot be
joined with the group as generally not
taxable corporation. General Professional
Partnership is exempt but the exemption is
not the same as provided by Section 30.
TAKE NOTE: Las Paragraph of Section 30.
" exemption to the exemption: income of
whatever kind and character of the foregoing
organizations from:
1. any of their properties, real or
personal;
2. any activities conducted for profit
" regardless of the disposition of said
income, shall be subject to tax.
Q: Enumerate the exempt corporations
under Section 30; What is the requirement?
A:
1. Labor, agricultural or horticultural
organization not organized principally
for profit;
2. Mutual savings bank not having a
capital stock represented by shares,
and cooperative bank without capital
stock organized and operated for
mutual purpose and without profit;
3. a beneficiary society, order or
association, operating for the
exclusive benefit of the members
such as fraternal organization
operating under lodge system. (lodge
system: operating world wide) or a
mutual old association or a non-stock
corporation:
a. organized by employees;
b. providing for the payment of life,
sickness, accident or other exclusive
benefits to its employees and their
dependents;
4. Cemetery (a) company owned and (b)
operated exclusively for the benefit of
its members;
5. Non-stock corporation or association
organized and operated exclusively
for Religious, Charitable, Scientific,
Artistic or Cultural purposes, or for
the Rehabilitation of Veterans
(RCSACR), no part of its net income or
asset shall belong ot or inure to the
benefit of any member, organizer,
officer, or any specific person;
6. Business league, chamber of
commerce, or Board of trade, (a) not
organized for profit and (b) no part of
the net income of which inures to the
benefit of any stock holder or
individual;
7. Civil league or organization not
organized for profit but operated
exclusively for the promotion of social
welfare.
CIR vs. YMCA
Q: What is the basis of Manila BIR for the
imposition of the tax?
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- Atty. Francis J. Sababan -
A: last paragraph of Section 30, because
YMCA was conducting an activity for
profit.
F: the CTA and the CA invoked the doctrine
laid down in Herrera and Abra Valley case
which involves an exemption from the
payment of Real property Tax.
H: The SC revised the ruling. YMCVA is
liable to pay income tax applying the last
paragraph of Section 30.
YMCA Is exempt from the payment of
property tax, but not to income tax on
rentals from its property.
The tax code specifically mandates
that the income of exempt organizations
(under section 30) from any of their
properties, real or personal, shall be
subject to tax, including the rent income
of the YMCA from its real prop.
8. a non-stock and non profit educational
institution;
9. gov’t educational institution;
10. Farmer’s or other mutual typhoon or
fire insurance company, mutual ditch
or irrigation company, or like
organization of a purely local
character, the income of which
consists solely of assessment, dues
and fees, collected from members for
the sole purpose of meeting its
expenses;
11. Farmer’s, fruit grower’s 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.
TAKE NOTE: income of sales agent is exempt.
Section 31: TAXABLE INCOME
CHAPTER VI: COMPUTATION OF GROSS
INCOME
SECTION 32: GROSS INCOME
Q: What is the tax treatment? Are these
taxable income? Are these included in the
gross income? Is it included in the ITR? Is it
subject to NIT?
A: Sec. 32 A answers the questions.
Q: What is the income tax referred to here?
A: NIT. The section refers only to the
payment of NIT. It speaks of the NIT.
Q: If the is mentioned under Section 32 A,
does it follow that it is automatically included
in the GIT?
A: No, Section 32 A states “Except when
otherwise provided in this title”
Q: What are the income that are not
included, not subject to NIT?
A:
1. Income that are subject to FIT.
2. Income that are considered an
exclusion; and
3. Income that are exempt.
Q: When do you not apply Sec. 32 A?
A: it applies to all except:
1. NRANETB
2. NRFC
» they do not pay NIT, they pay by way of
GIT.
Q: What are included in the Gross income?
A:
1. Compensation for services in whatever
form paid including but nor limited to
fees, salaries, wages, commissions, and
similar items. [Sec. 32 A (1)]
Q: What is compensation?
A: all remuneration for services performed
by an employee for his employer under an
employer-employee relationship.
TAKE NOTE: compensation is included in the
ITR if the taxpayer is not liable for NIT. Thus,
if subject to NIT, included in the ITR.
Q: Is there an instance where the salaries of
a RC is not included in the ITR?
A: Yes, if the salary is subject to FIT, like
when the RC is employed in Multinational,
offshore banking, and petroleum companies.
2. Gross Income derived from the
conduct of trade or business or the
exercise of a profession; [Sec. 32 A (2)]
Q: What is the income tax here?
A: NIT, included in the ITR.
37
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- Atty. Francis J. Sababan -
3. Gains derived from dealings
property. [Sec. 32 A (3)]
Q: Did the law distinguished?
A: No, the law did not distinguished
between real and personal property.
TAKE NOTE:
1. Sale of real property
2. Sale of shares of stock (personal prop.)
" if the elements are present, subject to
FIT. Thus, it is not included in the ITR, the
withholding agent will be responsible for
this.
Q: Income form the sale of property, do you
include this in the ITR?
A: it depends
a. if subject to FIT, not included.
Withholding agent accomplish the forms
! subject to FIT if the following elements
are present:
1. it is a capital asset;
2. located in the Phil.: and
3. sold by individual, trust, estate, DC.
b. if subject to NIT, included in the ITR.
! Elements are not present, like when
the real prop. is an ordinary asset or when it
is capital asset if the taxpayer is RFC.
TAKE NOTE: R-R 17-2003
" Real property sale subject to FWT, the
buyer accomplishes the ITR.
4. interest; [Sec. 32 A (4)]
Q: What interest is being referred to here?
A: interest which is included in the
computation of gross income is interest
earned from lending money and interest from
bank deposit which does not constitute
passive income.
Bank interest from sources, without or
abroad.
Q: Bank interest from Solid Bank, is it
included in the ITR?
A: No, because it is included or considered
an income within, thus subject to FIT. Thus,
not included in the ITR.
5. Rents. [Sec. 32 A (5)]
" subject to NIT, included in the ITR.
in 6. Royalties; [Sec. 32 A (6)]
Q: What is being referred to here?
A: royalties which does not constitute
passive income. Royalties derived from
income without. – subject to NIT. Thus not
included in the ITR.
Q: Who are the taxpayers?
A: Liable from income w/in and w/out and
the rest are exempt.
1. RC
2. DC
7. Dividends. [Sec. 32 A (7)]
Q: What kind of dividends?
A: one that does not constitute a passive
income.
TAKE NOTE:
1. DC individual taxpayer = FIT
2. DC – DC & RFC = EXEMPT
3. DC – NRFC = FWT
" only dividends issued by a FC to an
individual taxpayer (RC OR RA) is included in
the computation of the gross income. Thus,
included in the ITR.
8. Annuities. [Sec. 32 A (8)]
Q: What kind of annuities?
A: annuities which are not exempt from tax
are included in the computation of the gross
income. (included in the ITR)
9. Prizes and Winnings [Sec. 32 A (9)]
Q: What kind of prizes and winnings?
A:
a. those that does not constitute passive
income; and
b. those that are not considered as an
exclusion. Thus, exempt.
Passive Income
1. Prizes – derived from sources within
and over 10,000.00
2. Winnings – derived from sources
within.
Exempt:
a. winnings: PCSO and Lotto winnings.
38
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- Atty. Francis J. Sababan -
b. prizes:
" those primarily for recognition of
(1)religious, (2)charitable, (3)scientific,
(4)educational, (5)artistic, (6)literary, (7)civic
achievement are exempt PROVIDED:
1. the recipient was selected without any
action on his part to enter the contest
or proceedings; and
2. the recipient is not required to render
substantial future services as a
condition to receiving the prize or
award.
" prizes and awards granted to athletes are
also exempted provided:
1. local or international sports
competition or tournament;
2. held in the Philippines or abroad; and
3. sanctioned by the national sports
association.
Q: When is a prize subject to NIT?
A: 1. when derived from income without;
2. when less than 10,000.00;
3. when the income earner is a DC or RC.
Q: When is winning subject to NIT?
A: 1. When derived from income without;
2. when the income earner is a DC or
RC.
TAKE NOTE: Exemptions, exclusions,
deductions, have the same characteristics !
all tax do not apply.
1. Life insurance [Sec. 31 B (1)]
Q: What is the requirement?
A: only one requirement for exemption: that
the proceeds of the life insurance be payable
upon the death of the insured.
Q: Does it matter who the beneficiary is or
paid in a lump sun or single sum?
A: No. it does not matter.
Exception: amounts held by the insurer under
an agreement to pay interest thereon, the
interest payment shall be included in the
gross income.
2. Amount received by insured as
return of premium [Sec. 32 B (2)]
Q: if the insurance is payable within a certain
time, say 10 years and thereafter the insured
did not die, how much will be excluded?
A: only the amount received by the insured
as a return of the premiums.
Ex. 1 M – 100 thousand = capital
It is exempt (100K)

10. Pensions [Sec. 32 A (10)] 900K is taxable.

Q: What kind of pension? Q: Why is it excluded?

A: Included in the gross income if not
exempt
» never subject to fit (?)
11. Partner’s distributive share from the
net income of the general professional
partnership (GPP).
Q: What is being referred to?
A: GPP exempt from payment of corporate
income tax
" shares of partners subject to NIT – Sec.
26
SEC 32 B EXCLUSIONS FROM
INCOME
Q: What do you mean by exclusions? Are
these exempt from income tax?
A: these are not included in the gross
income, THUS, exempt.
A: because the amount received merely
represents a return of capital.
Q: is this subject to Estate Tax under Sec. 85
E? do we have the same requirement?
A: no, the requirement for exemption is not
the same under Section 85 E.
3. Proceeds of life insurance: decedent
insured himself, inclusion or exclusion
will depend on who the beneficiary is.
a. the beneficiary is the estate.
» subject to Estate tax, included in the
GROSS gross estate regardless of whether or not
the designation of the beneficiary is
revocable or irrevocable.
b. the beneficiary is a third person other than
the estate.
b.1 Revocable Designation ! subject to
estate tax, included in the gross estate.

39
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- Atty. Francis J. Sababan -
Reason: because of the insured’s power
to modify or change the beneficiary.
b.2 Irrevocable Designation ! not subject
to Estate tax, not included in the gross
estate.
Reason: the insured loses the power to
control, modify and change the
beneficiary.
Q: Is it subject to VAT?
A: 1. Non-life insurance – yes, subject to
VAT under 108 (A).
2. Life insurance – NO, subject to
percentage tax under Sec. 123 of the Tax
Code.
4. Gifts, Bequest and Devises [Sec. 32
B (3)]
Q: Why is the donee exempt from income
tax?
A: Because the law classify it as an
exclusion, not important to know whether
property is real or personal.
What is exempted is the “value of
property acquired by gift, bequest or devise”
TAKE NOTE:
A. GIFTS are excluded because they are
subject to donor’s tax.
B. BEQUEST and DEVISE are excluded
because they are subject to ESTATE tax.
Q: what is included in the gross income?
A: income from such property.
" gift, bequest, devise or descent of income
from any property in case of transfers of
divided interest.
5. Compensation for injuries or
sickness [Sec. 32 B (4)]
Q: is this the same as those provided under
the workmen’s compensation act (wca)?
A: YES. There are 3 groups:
a. Health or accident insurance or those
under workmen’s compensation.
b. personal injuries and sickness; and
c. Damages to prevent injuries and
sickness.
Q: What does injury include?
A: The term injury includes death, even if
not injured, if the person dies this will be
available.
Q: when will the damages recovered be
exempt?
A: General Rule: all damages awarded are
tax exempt.
Exception: damages representing loss of
income.
Q: Why is it considered an exclusion?
A: because this is just an indemnification for
the injuries or damages suffered.
6. Income exempt under a treaty [Sec.
32 B (5)]
Q: What is excluded?
A: income of any kind required by treaty
binding upon the Phil. Government.
7. Retirement benefits, pensions,
gratuities [Sec. 32 B (6)]
Q: Why do we need to distinguish retirement
pay, separation pay and terminal leave pay?
A: because they have different requirements
for exemption.
Q: What is retirement pay?
A: the sum of money received upon reaching
the maximum age of employment.
a. Under RA4917 (with Retirement Plan)
1. the private benefit plan is approved
by the BIR (RR2-98);
2. the retiring official or employee has
been in the service of the same
employer for the last 10 years;
3. he is at least 50 years old at the time
of retirement; and
4. the official or employee avails
himself/herself of the benefit only
once.
b. Under RA7641 (without retirement plan)
1. the retiring official employee is at
least 60 years old but not more than
65 years old;
2. the employee or official must have
served the company for at least 5
years;
» entitled to 15 days salary and ! of the
13th month pay for every year of service.
TAKE NOTE: the retirement benefits under
RA4917 and RA7641 are exempt from
income tax provided the requirements are
present.
40
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- Atty. Francis J. Sababan -
SEC. 32 B(6)(c) b. within employee’s control – included.

" retirement benefits given by foreign Examples:

government, foreign corporation, public as
well as private to RC, NRC, RA residing
permanently in the Philippines - exempt
without further qualifications – automatic
exclusions.
1. registration – CBA provides separation
pay, within the control = included.
2. installation of labor saving devises or
bankruptcy – beyond the control =
excluded.

SEC. 32 B(6)(d,e,f) Q: What is terminal leave pay?

A: the accumulated vacation leave and sick
" retirement benefits given by the leave benefits converted to cash or money to
Philippine Gov’t through the GSIS, SSS and be given either every year or upon retirement
PVAO are exempt without further or separation.
qualifications = automatic exclusions.
Terminal Leave Pay granted upon retirement
August 21, 2006. or separation:
- midterms 6-8 pm until sec 32 B(6) NIRC. » uder PD220, TLP in the Gov’t or in the
Private Sector shall be exempt from
August 28, 2006. income tax if given or granted upon
retirement or separation.
ANSWERS = MIDTERMS TLP granted on a yearly basis:
1. employee in the private sector:
" Gross Income include both capital and a. accumulated sick leave – subject
ordinary gains, Sec. 31 says gross income- to income tax.
deductions, that which is ordinary loss. b. Accumulated vacation leave: if
- may be deducted from capital gains and more than 10 days (meaning 11
ordinary gains. pataas) – subject to income tax;
»If 10 days or less – exempt.
Q: What is separation pay? 2. Gov’t Employee:
A: on given when one is terminated from the » governing law: EO 291 of Pres. Estrada,
service because of (1) illness, (2)death, (3) RMC 16-2000.
physical incapacity or injury, or (4) causes
beyond the control of the employee. Rule: Gov’t workers (both officers or non-
officers) granted TLP on a yearly basis !
Q: Are there any requirement for separation exempt from income tax.
pay granted by foreign gov’t or corp? ! there is no qualification as to vacation or
A: None, the separation pay granted by the sick leave.
aforementioned institutions are exempt
without further qualifications (“other similar " Take Note of 3 cases.
benefits”). » be reminded of EO 291, Sec. 2. 78.2
par. 97, RR2-98, RR16-200 (3).
Q: is separation pay an exclusion, therefore,
exempt? Case of Zialcita
A: No. " retired from DOJ, contention: TLP should
GENERAL RULE: Separation pay not be exempt from income tax pursuant to the
exempt (?) old law.
Exception: SC: on a different ground – TLP is exempt
1. Automatic exclusions, thus exempt if due because it is similar to Retirement pay, thus
to: exempt but the ruling’s application is limited
a. illness only to DOJ employees.
b. death
c. physical incapacity or injury. Borromeo case:
" Same as the Zialcita case
2. Conditional exclusion Issues: WON the TLP is subject to income tax
a. causes beyond the control of the and WON COLA and RATA are included?
employee- excluded SC: RULED TLP is Exempt!

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- Atty. Francis J. Sababan -
Modified: the rule applies not only to DOJ TAKE NOTE: if plain foreign corp., subject to
officers but also to CSC commissioners. FIT 20%.

COMMISSIONER v. CASTAÑEDA EXAMPLES of exclusions:

- Castañeda –DFA officer in Phil. Embassy in
England.
1. TLP is exempt.
2. Ruling applies to DFA officers.
Q: Does the rule or decision applies to Gov’t
officials only?
A: No. PD220: Exemption applies to both
private and public sectors(?)
it does not matter if TLP is vacation or
sick leave.
RR2-98, Sec. 2.78.1 par. (a)(7)
» JAN, 1998 – the rule applies to both
private and public sectors.
EO291 (SEPT., 2000)
» Officer in gov’t receiving TLP is always
exempt whether or not vacation or sick leave
is granted.
Modified RR2-98:
» TLP will only apply to private sectors
» if granted on a yearly basis – may be
subject to tax: VACATION LEAVE
1. MORE THAN 10 DAYS = TAXABLE
2. LESS THAN 10 DAYS = EXEMPT
a. Brunei Gov’t earns interest by depositing
money in Makati Bank – Exclusion.
b. SMC- Stock dividends to 3. Brunei Gov’t.
exclusion
c. Income derived by the Gov’t or its
political subdivisions (Sec. 32 B (7) (b)
a. exercise of public utility
b. exercise of any essential gov’t
function.
» accruing to the gov’t.
d prizes and awards (Sec. 32 B 7 c)
» primarily for religious, charitable,
scientific, educational, artistic, literary or
civic achievements:
1. recipient was selected without any
action on his part to enter the contest
or proceedings;
2. the recipient was not required to
render substantial future services as a
condition to receive the prize or
award.
D. prizes and awards in sports (Sec. 32B 7 d)
1. granted to athletes;
2. local or int’l competitions;
3. held here or abroad;
4. sanctioned by the nat’l sports associations.

8. Miscellaneous items (Sec. 32 B (7) E. 13th month pay and other benefits (Sec.
(a) income derived by foreign Gov’t 32B 7 e)
[Sec. 32 B (7) (a)]
Q: Do you include Christmas bonus in your
Q: What kind of income? ITR?
A: A: No, because the law says 13th month pay
1. investments in: and “other benefits”/”similar benefits” – xmas
a. loans bonus is included in the category.
b. stocks
c. bonds Q: Who can increase the 30,000 limit?
d. other domestic securities A: The Sec. of Finance.
2. interest from deposits in Banks in the
Philippines. Q: Applicable to whom?
A:
Q: Who are income earners? 1. gov’t; and
A: 2. Private institutions.
1. foreign government
2. financing institutions owned, F. GSIS, SSS, Medicare and other
controlled or enjoying re-financing contributions (Sec. 32 B 7 f)
from foreign gov’ts; and " must be deducted from the GI not NIT
3. int’l or regional financial institutions because it is an exclusion.
established by foreign gov’ts -creditable withholding tax is an exclusion-
(established in the Philippines) must be deducted first from the GI before
you compute the NIT. Otherwise, you are

42
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- Atty. Francis J. Sababan -
including in the GI something that is
excluded from the same.
G. Gains from the Sale of bonds, debentures,
or other Certificate of indebtedness. (Sec. 32
B 7 g)
Q: Why 5 years?
A: certificate of indebtedness is similar to
Bank Interest in a long term deposit.
- Sec. 32 B 7 g is similar or the same as 24 B
in long term deposit.
H. Gains from redemption of shares in
mutual fund (Sec. 32 B 7 h)
1. Fiscal Year – means an accounting period
of 12 months ending on the last day of any
month other than December.
2. Calendar year – a period of 12 months
beginning on January and ending on
December.
Q: Business expense incurred in February
2006, is it possible to include it for April
2006?
A: yes, it is possible or it is possible if fiscal
year is employed, if it falls under the fiscal
year and all the elements are present.
- related to trade or business.
REASON: Capital loss has no connection to
the trade or business.
TAKE NOTE:
" for taxpayers liable for income within and
without (RC & DC)), they can claim
deduction for expenses incurred within
and without.
" for taxpayers who are liable only for
income within, they can claim a deduction
for expenses incurred within the
Philippines.
Sec. 34 A EXPENSES
1. For those business expenses not
enumerated under A. You need to prove that
it is an ordinary and necessary expense.
2. For those enumerated under A, all you
have to prove is that it is incurred during the
taxable year.
Feb. 12, 2007 (Sec. 34 A, Expenses)
Q: Did the law define what is reasonable?
A: No. for salaries and wages all that is
required by law is for it to be reasonable.
- for other forms of compensation, there
must be services actually rendered.
AGUINLDO Case
F: involves a corporation engaged in selling
fish nets, and the corporation have a land
sold through a broker.
"there was substantial profits gained from
the sale of a land which was sold by a broker.
The profit was in turn given to the workers as
special bonus.
"the corporation claimed the bonus as a
deduction.
ISSUE: Should the deduction be allowed?
H: The SC did not allow the deduction, for
other forms of compensation, it must be
made or given for services actually rendered.
"in this case, it was proven that the sale was
not made by the employees, no effort or
services actually rendered by them because
the sale was made through a broker.
"
Q: Reasonable Travel Expenses, What is the
requirement?
A:
1. Travel must be in pursuit of business,
trade or profession.
2. Travel expense while away from home.
Q: Is there a travel expense which was not in
pursuit of business?
A: yes, those which are considered as fringe
benefits (FB), expenses for foreign travel is
considered a FB only if it is not in pursuit of
the trade or business.
Q: can you claim it under Sec. 34 A (1)(a)(ii)?
A: No, you can claim it under Sec. 34 A
(1)(a)(i) last paragraph.
Q: Reasonable Allowances for rentals for
meralco bills, requirements?
A:
1. required as a condition for the
continued use or possession, for the
43
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- Atty. Francis J. Sababan -
purpose of the trade, business or • taxpayer’s allowable deduction for
possession of the property. interest expense shall be deducted by an
2. taxpayer has not taken any title or no amount equal to 42% (RR 10-2000) of the
equity other than a lessor. interest income subject to FIT.

Q: Reasonable allowance for entertainment, Q: Who claims this deduction?

amusement and recreation expenses, what is
the requirement?
A:
1. connected with the development,
management, and operation of the trade
(DOM);
2. Does not exceed the limits or ceiling
set by the Secretary of Finance; and
3. Not contrary to law, morals, good
customs, public policy or public order.
Q: How about bribe, kickbacks, and other
similar payments
A: even without this provisions, kickbacks will
not pass the requirement of (i) ordinary and
(ii) necessary hence not deductible
EXPENSES ALLOWABLE TO PRIVATE
EDUCATIONAL INSTITUTION
Q: Why only private educational institution is
mentioned and no other taxpayers?
A: it refers to section 27 for Private
Educational Institution given to the
educational institution.
GENERAL RULE: 36 A (2) and 36 A (3)
expenditures for capital outlays not
deductible as business expense
EXCEPTION: Private Educ. Institution
claim it under Sec. 34 A (2)
BUSINESS EXPENSE vs. ALLOWANCE FOR
DEPRECIATION
BUSINESS EXPENSE
1. No carry-over
2. can be claimed for one year only.
3. if the amount of capital outlay is
substantial, it cannot accommodate all of the
expenses incurred.
ALLOWANCE FOR DEPRECIATION
1. There is carry over
2. you can claim it for a longer period
depending on the life span of the property.
3. it can accommodate all of the expenses
incurred.
A: the debtor claims this deduction.
Q: What kind of interest is this?
A: interest on loan.
"interest on debt - when one borrows money
to finance his business interest in connection
with the taxpayer’s profession trade or
business.
REDISCOUNTING OF PAPERS : (Sec. 34 B 2 a)
"a borrower or taxpayer can claim the
interest paid in advance as itemized
deduction when he filed his income tax
return (ITR) depending on whether or not the
principal obligation has been paid.
1. if the entire amount or entire principal
obligation has been paid – the entire amount
of interest can be claimed as itemized
deduction.
2. if only ! of the obligation had been paid,
then the entire amount of ! of that interest
can be claimed as a deduction.
3. if no payment had been paid on the
principal obligation, the advance interest
paid cannot be claimed as a deduction on the
can years that it was paid.
REQUIREMENTS FOR REDISCOUNTING OF
PAPERS:
1. incurred within the taxable year.
2. individual taxpayer reporting income on a
cash basis.
• No deduction shall be allowed in respect
to the following interest:
1. if within the taxable year an individual
taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest
is paid in advance or through discount or
otherwise.
2. if both taxpayer and the person to whom
the payments has been made or is to be
made are persons specified under Sec. 36 (B):

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 !"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
a. member of a family
b. bet. an individual and a corp., more than
50% in advance of the outstanding stock of
which is owned directly or indirectly by or for
such individual;
c. Bet. 2 corp., more than 50% in value of the
outstanding stock of each of which is owned,
directly or indirectly, by or for the same
individual.
d. bet. the grantor and a fiduciary of any
trust;
e. bet. 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. bet. a fiduciary of trust and a beneficiary of
such trust.
Q: Who are not allowed to claim interest
under sec 36 B?
A: interest incurred between related parties.
Q: What if half-brother?
A: not allowed to claim deduction for
interest.
TAKE NOTE: interest incurred from the
exploration of petroleum refers not just in
interest incurred on loan of money but also
interest incurred for installment payments.
Q: Who are related parties?
A: individuals and corporations.
OPTIONAL TREATMENT OF INTEREST
EXPENSE:
1. interest incurred to acquire property used
in trade, business or exercise of profession
can be claimed a an itemize deduction…
a. on interest; or
b. depreciation (as capital expenditure?)
Q: What is this interest income?
A: the money borrowed was deposited in a
bank so that it will warn interest. (RR13-
2000)
ILLUSTRATION:
1. loan of 1M from a bank with an interest of
20%
2. 20% of 1M is Php200,000 but you cannot
claim this whole amount as a deduction.
3. when you deposited the 1M in the bank, it
earned a bank interest subject to FIT worth
Php10,000.00.
4. 42% (RR) of 10,000 = 4,200 (RR 9337)
5. Php200K-4,200= Php195,800/ this is the
amount you can claim as a deduction.
34 C TAXES:
REQUISITES:
1. taxes must paid or incurred within the
taxable year
2. it must be incurred in connection with
trade or business.
3. can be claimed as:
a. a deduction; or 34 C 1&2
b. tax credit 34 C 3&7
Q: Where should it be deducted?
A:
1. if claimed as a deduction, it should be
deducted from the gross income;
2. if claimed as a tax credit, it should be
deducted from the Net Income Tax due
(bottom of the formula)
MERCURY DRUG CASE
- Discount of senior citizens
SC: discount claimed by senior citizens shall
create a tax credit and must be deducted at
the bottom of the formula.
Q: What is a tax deduction? Example?
A: example is business tax.
"tax deduction is allowed if the taxes were
paid or incurred within the taxable year and
it must be connected to the trade, business
or profession of the tax payer.
Q: Who are entitled to claim it?
A: those liable to pay NIT. (Tax credit only for
NIT)
Q: What is a tax credit?
A: refers to the taxpayer’s right to deduct
from the income tax due the amount of
tax the taxpayer paid to foreign country,
subject to limitations.
Q: What is the tax credit being referred to
under 34 C (3)?
A: credit against taxes for taxes of foreign
country.
Q: What are the other tax credit under the
code?
A:
1. RA 6452 – selling goods and commodities
to senior citizens, the discount claimed is
treated as a tax credit.
2. income tax paid to foreign country.
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