BASIC PRINCIPLES IN TAXATION IN THE
30[E], NIRC)
CONSTITUTION
Constitutional Limitations
Due Process (Sec. 1, Art. III, 1987 Constitution)
The due process clause may be invoked where a taxing
statute is so arbitrary that it finds no support in the
Constitution, as where it can be shown to amount to a
confiscation of property. (Reyes v. Almanzor, G.R. Nos.
L-49839-46 April 26, 1991)
Equal protection of law (Sec. 1, Art. III, 1987
Constitution)
No person or class of persons shall be deprived of the
same protection of laws enjoyed by other persons or
other classes in the same place and in like
circumstances. (Phil. Rural Electric Cooperative
Association, Inc. v. DILG, 403 SCRA 558)
Uniformity and equity in taxation (Sec. 28(1), Art. VI,
1987 Constitution)
All the taxable persons or property of the same class
shall be taxed at the uniform or same rate. There is
uniformity of taxation when the tax operates within the
same force and effect on this subject wherever found.
(Churchill v. Concepcion, 24 Phil 969)
However, the taxing power has the authority to make
reasonable classifications for purposes of taxation.
Inequalities resulting from singling out of one particular
class for taxation or exemption do not infringe any
constitutional limitation. (Chamber of Real Estate and
Builder’s Associations, Inc., v Executive Secretary
Romulo, G.R. No. 160756, March 9, 2010)
Non-infringement of religious freedom (Sec. 5, Art. III,
1987 Constitution)
To require such religious groups to pay taxes would impair
their free exercise and enjoyment of religious freedom and
worship, as well as its rights and dissemination of religious
beliefs. (American Bible Society vs. City of Manila, 101
Phil 396)
Non-appropriation of public funds or property for the
benefit of any church, sect, or system of religion etc.
(Sec. 29(2), Art. VI, 1987 Constitution)
The Constitution strictly prohibits public money from
being appropriated, applied, paid, or used, directly or
indirectly, for the use, benefit, or support of any sect,
church, denomination, sectarian institution, or system of
religion.
Exemption of lands, buildings and improvements
actually, directly and exclusively used for religious,
charitable or educational purposes (Sec. 28(3), Art. VI,
1987 Constitution)
 Charitable, educational and religious institutions are
exempt from property tax on the lands, buildings, and
improvements actually, directly and exclusively used
for charitable, educational and religious purposes.
 Under the NIRC, religious and charitable institutions
are exempt from income tax only for income received
by them as such. Income received from the use of
their properties, real or personal, is subject to income
tax regardless of the disposition. (Sec.
Exemption from taxes of the revenues and assets of
non-profit, non-stock educational institutions including
grants, endowments, donations or contributions for
educational purposes (Sec. 4(3 and 4), Art. XIV, Sec. 28,
Art. VI, 1987 Constitution)
 All of the revenues and assets derived by the non-
stock, nonprofit educational institution will be
exempt from taxation provided they are used
actually, directly and exclusively for educational
purposes.
 The donation is, likewise, exempt from the donor's
tax if actually, directly and exclusively used for
educational purposes, provided not more than 30% of
the donation is used by the donee for administration
purposes. The donee, being a non-stock, nonprofit
educational institution, is a qualified entity to receive
an exempt donation subject to conditions prescribed
by law (Section 4, Par. 4, Article XIV, 1987
Constitution, in relation to section 101(a)(3), NIRC).
 This exemption covers only non-stock, non- profit
educational institution.
 The last paragraph of Section 30 of the NIRC is
declared as unconstitutional ONLY WITH RESPECT
TO A NON-STOCK, NON- PROFIT
EDUCATIONAL INSTITUTION.
 Proprietary Educational institutions are entitled only
to a preferential rate of 10% provided not more than
50% of the income comes from unrelated business
activity.
 This exemption does not cover income taxes derived
by religious or charitable institutions.
Application of 10% Preferential Tax Rate on
Proprietary Educational Institutions
It will apply only if its gross income from unrelated trade,
business, or activity does not exceed 50% of its total gross
income. Otherwise, it will be subject to the regular tax rate
of 30%. (Sec 27, NIRC)
Can a non-profit, non-stock educational institution
refuse to settle the assessment of a local government for
its building permit?
No. While there is incidental revenue to the local
government unit, the imposition of a Building Permit
partakes of a regulatory nature. The imposition of Building
Permit fee is an exercise of police power to ensure
compliance with the standards under the Building Code to
protect the public from any danger. (Angeles University
Foundation v. City of Angeles)
Effect on the tax-exempt status of a charitable or
religious institution if it engages in activities conducted
for profit
It does not lose its tax-exempt status for its non-profit
activities. However, its income from activities conducted
for profit, regardless of its disposition, shall be subject to
income tax. (RMC 67-2012; CIR v. St. Luke’s, 2012)
Concurrence of a majority of all members of congress
for the passage of a law granting tax exemption (Sec.
28(4), Art. VI, 1987 Constitution)
 Absolute majority is required for the grant of tax
exemption (majority of all the members).
 However, only relative majority (majority of
quorum) is required in the withdrawal by
Congress of such tax exemption previously
granted.
COMPROMISE OF TAX LIABILITY
Compromise of Civil Liability
As a general rule, the civil liability cannot be
compromised. There are only two exceptions.
First, when the assessment is of doubtful validity, in which
case, the Commissioner can compromise to not less than
40% of the basic assessed tax. And second, when the
taxpayer is financially incapable to pay the liability, in
which case, it can be compromised to not less than 10% of
the basic assessed tax.
The law allows compromises lower- than-the-above rates
but the approval of a collegial board called the National
Evaluation Board composed of the four deputy
commissioners and the commissioner is required. The
same is true for all compromises, where the basic tax
involved exceeds P1 million. (Section 204, NIRC)
Compromise of Criminal Liability
The general rule is all criminal liabilities can be
compromised. There are only two exceptions, i.e., first,
when a case is already filed in court and, second, when the
case involves fraud. (Section 204, NIRC)
Can the President compromise taxes?
No. The National Internal Revenue Code vests in the
Commissioner of Internal Revenue the power and
authority to compromise tax liability. (Section 204, NIRC)
TAX EXEMPTION
Statutes granting tax exemptions are construed strictissimi
juris against the taxpayer and liberally in favor of the
taxing authority. A claim of tax exemption must be clearly
shown and based on language in law too plain to be
mistaken (Diageo Philippines, Inc. vs. CIR, 685 SCRA
168, November 12, 2012).
A claim for a tax refund/credit is in the nature of a claim
for an exemption and the law is construed in strictissimi
juris against the one claiming it and in favor of the taxing
authority. (Metro Manila Shopping Mecca Corp. vs.
Toledo, 697 SCRA 425, June 05, 2013)
TAXING AUTHORITY
Jurisdiction, power, and functions of the Commissioner
of Internal Revenue
Powers and Duties of the BIR
1. To assess and collect national internal revenue
taxes, fees and charges;
2. To enforce all forfeiture, penalties, and fines
connected with the assessment and collection
of taxes, fees and charges;
3. To execute judgment in all cases decided in its
favor by the CTA and the ordinary courts; and
4. To effect and administer the supervisory and
police powers conferred upon it by the NIRC
and other special laws (Sec. 2, NIRC).
Powers of the Commissioner of Internal Revenue (CIR)
1. Power to interpret tax laws and decide tax
cases (Sec. 4, NIRC);
2. Power to obtain information and to
summon/examine and take testimony of
persons (Sec. 5, NIRC); and
3. Power to make assessments and prescribe
additional requirements for tax administration
and enforcement (Sec. 6, NIRC).
Power to decide tax cases includes the power to decide:
1. Disputed assessments;
2. Refunds of internal revenue taxes, fees or
other charges;
3. Penalties imposed in relation to the
above; and
4. Other matters arising under the NIRC.
Note: Decisions of the CIR are subject to the exclusive
appellate jurisdiction of the CTA.
Power to inquire bank deposits by the Commissioner of
Internal Revenue
As a general rule, bank deposits of an individual taxpayer
may not be disclosed by a commercial bank to the
Commissioner. However, the Commissioner is authorized
to look into the bank deposits of:
 A decedent, to determine his gross estate
 Any taxpayer who has filed an application for
compromise of his tax liability by reason of
financial incapacity to pay his tax liability.
 A specific taxpayer or taxpayers subject of a
request for the supply of tax information from a
foreign tax authority pursuant to an international
convention or agreement on tax matters to which
the Philippines is a signatory or a party of:
Provided, That the information obtained from the
banks and other financial institutions may be used
by the Bureau of Internal Revenue for tax
assessment, verification, audit and enforcement
purposes. (Sec. 3, RA 10021)
Power of the Commissioner that cannot be delegated
(R-I-C-A)
 Power to recommend the promulgation of rules
and regulations by the Secretary of Finance
 Power to issue rulings of first impressions or to
reverse, revoke, or modify any existing ruling of
the Bureau
  Power to compromise or abate tax liability
except matters which may be compromised by the
Regional Evaluation Board and National
Evaluation Board
 Power to assign or reassign internal revenue
officer to establishments where articles subject to
excise tax are produced or kept (Sec. 7, NIRC)
Can the power of the Commissioner to issue ruling of
first impression be delegated?
NO. Section 7 of the Tax Code of 1997, as amended,
explicitly provides for the non-delegability of the
Commissioner’s power to issue rulings of first impression
or to reverse, revoke or modify any existing ruling of the
BIR. These refer to the rulings, opinions and
interpretations of the Commissioner with respect to the
provisions of the NIRC and other tax laws without
established precedents. (RAO No. 1-99, February 5, 1999)
It is a legislative policy to include all income not expressly
exempted within the class of taxable income under our
laws. (Commissioner of Internal Revenue vs. British
Overseas Airways Corp, G.R. Nos. L-65773-74, 30 April
1987)
What is the doctrine of situs of taxation?
A: No state may tax anything not within its jurisdiction
without violating the due process clause of the
constitution. The taxing power of a state does not extend
beyond its territorial limits, but within such limits it may
tax persons, property, income, or business (Manila Gas
Corporation v. Collector of Internal Revenue, G.R. No.
42780, 17 January 1936)
Sources of income (Section 42, NIRC)
Items of Gross Situs of Taxation (Source of
Income income)

INCOME TAX Interest Residence of the debtor or obligor

Criteria in imposing Philippine income tax Dividends If received from a domestic

corporation – income within the
1. Citizenship Principle – A citizen of the Philippines Philippines
residing in the Philippines is taxable on all income derived
from sources within and without the Philippines while a If received from a foreign
nonresident citizen is taxable only on income derived from corporation – income within the
sources within the Philippines. Philippines unless less than 50% of
the gross income of such foreign
2. Residence Principle – All income derived by persons corporation for the 3-year period
residing in the Philippines, whether citizens or aliens, ending with the close of its taxable
whether domestic or foreign corporations, shall be subject year preceding the declaration of
to income tax on the income derived from sources within such dividends was derived from
the Philippines. sources within the Philippines
3. Source principle – All income derived from sources Services Place of performance of services
within the Philippines shall be subject to income tax.
Rentals and Location or use of the property or
General Principles of Income Taxation in the Royalties interest in such property
Philippines (Section 23, NIRC)
Sale of Real Location of real property
Taxpayer Within (taxable Without Property
sources of (taxable
income) sources of Sale of TANGIBLE
income) Personal
Property PRODUCER/MANUFACTURER
Resident Citizen ✓ ✓
 Partly Within, Partly
Non-resident ✓ Without – if
Citizen manufactured/produced
within, but sold without
Resident Alien ✓
or Non-resident  Partly Within, Partly
Alien Without – if
manufactured/produced
Domestic ✓ ✓ without but sold within
Corporation
PURCHASE/SOLD
Foreign ✓
Corporation  Place of sale (Without):
(whether Purchased within and sold
engaged or not without
in trade in the
 Place of sale (Within):
Philippines)
Purchased without and sold within

INTANGIBLE
What is the concept of “income from whatever source
derived or income from any source whatever?”  General Rule: Place of sale
  Exception: Gain on sale of
shares of stock in a
domestic corporation
Gain on sale of Income within the Philippines
shares of stock regardless of where the shares are
in a domestic sold
corporation
2015 BAR QUESTION
Q: Ms. C, a resident citizen, bought ready-to-wear goods
from Ms. B, a nonresident citizen. a) If the goods were
produced from Ms. B's factory in the Philippines, is Ms.
B's income from the sale to Ms. C taxable in the
Philippines? Explain. b) If Ms. B is an alien individual and
the goods were produced in her factory in China, is Ms.
B's income from the sale of the goods to Ms. C taxable in
the Philippines? Explain.
A: a) Yes, Ms. B’s income from sale of ready-to-wear-
goods to Ms. C is taxable within the Philippines. Under
Section 23 (B) of the NIRC, a non-resident citizen is
taxable only on income derived from sources within the
Philippines. Since the goods are produced and sold within
the Philippines, then under the NIRC, the source of income
of Ms. B is within the Philippines. Hence, Ms. B’s income
from sale of ready-to-wear-goods is taxable within the
Philippines.
A: b) Yes, but only proportionate part of the income.
Under Section 42 (E) of the NIRC, gains, profits, and
income from the sale of personal property produced by the
taxpayer without and sold within the Philippines, shall be
treated as derived partly from sources within and partly
without the Philippines. Since, Ms. B is an alien
individual, then under the NIRC, she is only taxable on her
income derived from sources within the Philippines.
Hence, only proportionate part of the income from the sale
of ready-to-wear-goods of Ms. B is taxable within the
Philippines which is the income partly within the
Philippines.
1999 BAR QUESTION
Q: A Co., a Philippine corporation, has an executive
(P) who is a Filipino citizen. A Co. has a subsidiary in
Hong Kong (HK Co.) and will assign P for an indefinite
period to work full time for HK Co. P will bring his family
to reside in HK and will lease out his residence in the
Philippines. The salary of P will be shouldered 50% by A
Co. while the other 50% plus housing, cost of living and
educational allowances of P's dependents will be
shouldered by HK Co. A Co. will credit the 50% of P's
salary to P's Philippine bank account. P will sign the
contract of employment in the Philippines. P will also be
receiving rental income for the lease of his Philippine
residence. Are these salaries, allowances, and rentals
subject to the Philippine income tax?
A: The salaries and allowances received by P are not
subject to Philippine income tax while the rental income is
subject to Philippines Income tax. Under Section 22(E) of
the NIRC, P qualifies as a non-resident citizen because he
leaves the Philippines for employment requiring him to be
physically present abroad most of the time during the
taxable year.
Since P is a non-resident citizen, under Sec 23 of the
NIRC, he is taxable only for his income derived from
sources within the Philippines.
The salaries and allowances received from being employed
abroad are incomes derived from sources without the
Philippines, because the services were rendered outside of
the Philippines.(Section 42, NIRC). Hence, not taxable in
the Philippines. While the rental income for the lease of
his Philippine residence is an income derived from within
the Philippines, the leased property being located in the
Philippines. (Section 42, NIRC) Hence, taxable.
How does income differ from capital? (1995 Bar
Question)
The essential difference between capital and income is that
capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called an
income. Capital is wealth, while income is the service of
wealth. (Vicente Madrigal vs. James Rafferty, G.R. No. L-
12287, August 7, 1918)
When income is taxable
1. Existence of income – there can never be an income
taxation without the existence of income. A mere
expectation of profit is not an income (Capuno, R., 2020)
2. Realization of income - Mere increase in the value of
property is not considered as income for tax purposes since
it is an unrealized increase in capital. Under the realization
principle, revenue is generally recognized when both of
the following conditions are met:
a. The earning process is complete or virtually complete
b. An exchange has taken place (Manila Mandarin Hotels,
Inc. v. CIR, CTA Case No. 5046, March 24, 1997).
3. Recognition of income - When income is considered
received for Philippines income tax purposes:
a. If actually or physically received by taxpayer; or
b. If constructively received by taxpayer. If and when there
are substantial limitations or conditions under which
payment is to be made, such does not constitute
constructively realized.
What are the tests in determining whether an income is
earned for tax purposes?
1. Realization income/Severance test - There is no
taxable income until there is a separation from
capital of something of exchangeable value,
thereby supplying the realization or transmutation
which would result in the receipt of income.
2. Economic Benefit Test – Any economic benefit
to the employee that increases his net worth,
whatever may have been the mode by which it is
effect, is taxable.
3. Claim of Right Doctrine – a taxable gain is
conditioned upon the presence of a claim of right
to the alleged gain and the absence of a definite
unconditional obligation to return or repay that
which would otherwise constitute a gain.
Cash Method versus Accrual Method of accounting
The accrual method relies upon the taxpayer’s right to
receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which
characterizes the cash method of accounting. Amounts of
income accrue where the right to receive them become
fixed, where there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy
merely of time of payment. (CIR v. Isabela Cultural
Corporation, G.R. No. 172231, 2007)
What are the instances where taxable income shall be
computed on the basis of calendar year method?
1. If the taxpayer's annual accounting period is other than a
fiscal year, as defined in Section 22(Q); or
2. If the taxpayer has no annual accounting period; or
3. If the taxpayer does not keep books; or
4. If the taxpayer is an individual.
(Section 43, NIRC)
Who are not qualified to the option to be taxed at 8%
flat income tax rate?
The following individuals are not qualified to avail the 8%
Income tax rate and correspondingly shall be taxed based
on the graduated income tax rates prescribed under Section
24 (A) (2) (a) of the NIRC, as amended:
1. Purely Compensation Income Earners; or
2. VAT-registered payer, regardless of the amount of gross
sales/receipts; or
3. Taxpayers exempt from VAT or other percentage taxes
whose gross sales/ receipts and other non-operating
income exceed the P 3Million VAT Threshold during the
taxable year; or
4. Taxpayer who is subject to Other percentage taxes
under Title V of the Tax Code, as amended except those
subject under Section 116 of the same Title; or
5. Partners of a General Professional Partnership; or
6. Individual enjoying income tax exemption; and
7. Individual person who is exempted from income tax
such as those registered Barangay Micro Business
Enterprises (BMBE). (RMC-50-2018; Q: 16: A: 16, RMO-
23-2018)
GROSS INCOME
What is gross income for income tax purposes? (1995
bar question)
Except when otherwise provided in this Title, gross
income means all income derived from whatever source,
including (but not limited to) the following items: (1)
Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions, and similar items; (2) Gross income derived
from the conduct of trade or business or the exercise of a
profession; (3) Gains derived from dealings in property;
(4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8)
Annuities; (9) Prizes and winnings; (10) Pensions; and
(11) Partner's distributive share from the net income of the
general professional partnership. (Section 32 (A), NIRC)
What is meant by taxable income? (2000 bar question)
Taxable income means the pertinent items of gross income
specified in this Code, less the deductions, if any,
authorized for such types of income by this Code or other
special laws. (Section 31 of the NIRC, as amended by
Train Law)
What is meant by Net Income?
Net Income means gross income less allowable
deductions. (Dimaampao, 2018)
1979 BAR QUESTION
Q: Mr. Juan, while relaxing in his living room, picked up
the telephone which had just rung. The voice at the other
end, after asking for the name and address of Mr. Juan,
announced that he, Mr. Juan, had just won a prize of P5,
000. Within the week, his prize arrived through mails.
The program was sponsored by a manufacturing company.
The choice of Mr. Juan was done by the announcer who
picked up the telephone directory, flicked to a page therein
and ran down his fingers to the 29th name on the page.
Is the amount he received considered part of taxable
income as this term is defined in Sec. 31 of the NIRC?
Reason out your answer.
A: Yes, the amount received shall be considered as part of
taxable income. Under Section 31 of the NIRC, as
amended by the TRAIN law, taxable income means the
pertinent items of gross income specified in this Code, less
the deductions, if any, authorized for such types of income
by this Code or other special laws.
The amount of the prize being less than P10, 000 shall not
be subject to final tax. (Sec. 24 (B) (1), NIRC OF 1997)
Rather, it shall be included in gross income of the taxpayer
less the deductions, if any, authorized for such type of
income and shall be subjected to the schedular rate. (Sec.
24 (A) (1) (c))
Condonation of indebtedness
1. Condonation which results to income – If services are
performed for a creditor who, in consideration for those
services, cancels the debt, income equal to the amount of
the cancelled debt is realized by the debtor as
compensation for its services.
2. Condonation which results to a taxable gift – When
the creditor, without receiving any equivalent, renounces
the enforcement of the obligation in favor of the debtor, it
is considered as a gift which shall not be included in the
latter’s gross income but is subject to donor’s tax.
1997 BAR QUESTION
Q: An insolvent company had an outstanding obligation of
P100, 000 from a creditor. Since it could not pay the debt,
the creditor agreed to accept payment through dacion en
pago a property which had a market value of P30, 000. In
the dacion en pago document, the balance of the debt was
condoned.
a. What is the effect of the discharge of the unpaid balance
of the obligation on the debtor corporation?
b. Insofar as the creditor is concerned, how is he affected
tax-wise as a consequence of the transaction?
A: a. The condonation of the unpaid balance of the
obligation has the effect of a donation made on the part of
the creditor. It is obvious that the creditor merely desires to
benefit the debtor and without any consideration therefore
cancels the debt, the amount of the debt cancelled is a gift
from the creditor to the debtor and need not be included in
the latter’s gross income (Sec. 50, Rev. Regs. No. 2).
b. For the difference of P70, 000.00, the creditor shall be
subject to donor’s tax at the applicable rates provided for
under the National Internal Revenue Code (6% based on
net gifts under Train Law).
ORDINARY ASSET VS CAPITAL ASSET
a. Ordinary assets – refer to properties held by the taxpayer
used in connection with his trade or business which
includes the following: [SOUR]
i. Stock in trade of the taxpayer or other property of a kind
which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year;
ii. Property held by the taxpayer primarily for sale to
customers in the ordinary course of trade or business;
iii. Property used in the trade or business of a character
which is subject to the allowance for depreciation provided
in the NIRC; and
iv. Real property used in trade or business of the taxpayer.
(Sec. 39 [A][1], NIRC)
b. Capital assets - properties of a taxpayer other than
ordinary assets. (Sec. 39 [A][1], NIRC)
In general, the following are the tax consequences when
a capital asset is sold:
1. Sale of Shares of Stock not Traded in the Stock
Exchange – Subject to capital gains tax (final tax) of 15%
based on net capital gains realized during the taxable year
from the sale, barter, exchange, or other disposition of
shares of stock in a domestic corporation, except shares
sold, or disposed of through the stock exchange (Section
24 (C) of the NIRC, as amended by train law) and
Documentary Stamp tax (Section 175 of NIRC, as
amended by Train law)
A loan of shares to another party without any
consideration falls under the "disposition" of shares of
stock which is subject to capital gains tax. (CIR v. Oder,
G.R. No. 192023, November 21, 2018)
2008 BAR QUESTION
Q: John McDonald, a U.S. citizen residing in Makati City,
bought shares of stocks of a domestic corporation whose
shares are listed and traded in the Philippine Stock
Exchange, at the price of P 2, 000,000.00. Yesterday, he
sold the shares of stocks through his favorite Makati
stockbroker at a gain of P 200, 000.
1. Is John McDonald subject to Philippine Income Tax on
the sale of his shares through his stockbroker? Is he liable
for any other tax? Explain
2. If John McDonald directly sold the shares to his best
friend, who is another U.S. Citizen residing in Makati, at a
gain of P200, 000. Is he liable for Philippine Income Tax?
If so, what is the tax base and rate?
A: 1. No, John McDonald is exempt from Philippine
income from his sale of shares of stocks of a domestic
corporation that are listed and traded in the Philippine
Stock Exchange by express provision of law (Sec. 24[c],
NIRC,). However, he is subject to the stock transaction tax
equivalent to six tenth of one percent (6/10 of 1%) of the
gross selling price or gross value in money of the shares of
stock sold or exchanged (Sec. 127[A] of NIRC, as
amended by Train Law).
2. Yes, John McDonald will be subject to Philippine
income tax on the Php 200,000 gain arising from his direct
sale of the listed shares of stocks of a domestic corporation
to his friend residing in Makati. An alien individual,
whether or not a resident of the Philippines, is taxable on
income derived from sources within the Philippines (Sec.
23[D], NIRC). Gain from the sale of shares of stock in a
domestic corporation shall be treated as derived entirely
from sources within Philippines, regardless of where the
said shares are sold (Sec. 42(E), NIRC). The tax base is net
capital gains, and the rate is 15% final tax (capital gains
tax) (Section 24 (c) of NIRC, as amended by Train Law)
2. Sale of Real Property classified as capital asset –
Capital gains tax (final tax) of 6% based on the gross
selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is
higher, is hereby imposed upon capital gains presumed to
have been realized from the sale, exchange, or other
disposition of real property located in the Philippines,
classified as capital assets, including pacto de retro sales
and other forms of conditional sales, by individuals,
including estates and trusts (Section 24 (D) of the NIRC)
and Documentary Stamp Tax (Section 196 of NIRC, as
amended by Train Law)
Presumed gain in case of sale of Real property
classified as capital asset
Gain from sale of real property located in the Philippines
classified as capital asset shall be subject to CGT of 6%
based on the Gross Selling Price (GSP) or Fair Market
Value (FMV), whichever is higher, regardless of whether
or not there is an actual gain or actual loss. This is because
the gain in such sale is presumed by law. (NIRC, Sec. 24
[D])
Sale of Principal Residence
The sale of principal residence, however, is not subject to
CGT provided the proceeds of which are utilized in
acquiring or constructing a new principal residence within
18 calendar months from date of sale or disposition, and
the taxpayer notifies the CIR within 30 days from the date
of sale of his intention to avail the exemption. This can be
availed of only once every 10 years. If there is no full
utilization, the portion of the gains presumed to have been
realized shall be subject to capital gains tax. (R.R. No. 14-
00)
2014 BAR QUESTION
Q: Hopeful Corporation obtained a loan from Generous
Bank and executed a mortgage on its real property to
secure the loan. When Hopeful Corporation failed to pay
the loan, Generous Bank extrajudicially foreclosed the
mortgage on the property and acquired the same as the
highest bidder. A month after the foreclosure, Hopeful
Corporation exercised its right of redemption and was able
to redeem the property. Is Generous Bank liable to pay
capital gains tax as a result of the foreclosure sale?
Explain.
A: No, Generous Bank is not liable to pay capital gains tax
(CGT). In the case of Supreme Transliner, Inc., v. BPI
Family Savings Bank, Inc. G.R. No. 165617, February 25,
2011, 644 SCRA 59, the Supreme Court held that Revenue
Regulations No. 4-99 expressly provides that if a
mortgagor exercises his right of redemption within one
year from the issuance of the certificate of sale, no CGT
shall be imposed because no sale or transfer of real
property was realized. It is only in case of non-redemption
by Hopeful Corporation that the obligation to pay CGT
arises, which shall be based on the bid price of the highest
bidder. The tax will be imposed only upon the
expiration of the one-year period of redemption.
Another point: The obligation to pay the CGT would
primarily fall on the mortgagor, Hopeful Corporation, and
not on Generous Bank. Hence, Generous Bank is not liable
to pay CGT.
3. Sale of real property to the government or any of its
political subdivisions or GOCCs by an INDIVIDUAL
taxpayer (not available to a non-individual taxpayer)
The individual taxpayer has the option to treat the capital
gain as subject to CGT or Net Income Tax if the buyer of
the real property is the Government or any of its political
subdivisions or GOCCs. (Section 24 (D), NIRC) and
Documentary stamp tax (Section 196 of NIRC, as
amended by Train Law)
4. Sale of other capital assets (other than section 24 C
and D) – Inclusion of gross income Section 32 (A) Gains
derived from dealings in property.
Holding Period
In case of individual taxpayers, only the following
percentage of the gain or loss recognized upon the sale or
exchange of a capital asset shall be taken into account in
computing the net capital gain, net capital loss, and net
income:
Holding Period Percentage taken into
account
If the capital asset has
been held for not more
than 12 months 100%
If the capital asset has
been held for more than
50%
12 months
(Sec. 39 [B], NIRC)
Holding period is not applicable to the following:
1. In case the taxpayer is a corporation, the capital gain
and loss are to be reported in the full amount regardless of
the number of years the capital asset is held.
2. Shares of stock of Domestic Corporation not traded at
the local stock exchange under Section 24(C) of NIRC.
3. Real properties classified as capital asset under Section
24(D)(1) of NIRC.
4. In case the asset is classified as an ordinary asset
What are tax free exchanges?
Tax-free exchanges refer to those instances enumerated in
Section 40 (C) (2) of the NIRC that are not subject to
Income Tax, Capital Gains Tax, Documentary Stamp Tax
and/or Value-added Tax, as the case may be. In general,
there are two kinds of tax-free exchange:
a. Transfer to a controlled corporation- No gain or loss
shall be recognized if property is transferred to a
corporation by a person in exchange for stock or unit of
participation in such corporation of which as a result of
such exchange said person, alone or together with others,
not exceeding four persons, gains control of said
corporation. (Section 40[C](2), NIRC)
b. Merger or Consolidation- No gain or loss shall be
recognized if in pursuance of a plan of merger or
consolidation:
i. a corporation, which is a party to a merger or
consolidation, exchanges property solely for stock
in a corporation, which is a party to the merger or
consolidation (Property for Stocks); or
ii. a shareholder exchanges stock in a corporation,
which is a party to the merger or consolidation,
solely for the stock of another corporation, a party
to the merger or consolidation (Stocks for Stocks);
or
iii. a security holder of a corporation, which is a
party to the merger or consolidation, exchanges
his securities in such corporation, solely for stock
or securities in another corporation, a party to the
merger or consolidation (Securities for Stocks).
(Section 40[C](2) of the NIRC)
PASSIVE INVESTMENT INCOME
Philippine Airlines, Inc. (PAL) vs Commissioner of
Internal Revenue, G.R. No. 206079-80. Ponente: Justice
Marvic Leonen, (UST Dean’s circle 2019)
Under Presidential Decree No. 1590, as amended by
Section 22 of Republic Act No. 9337, PAL is only subject
to Corporate Income Tax and Value Added Tax and is
exempt from all other taxes, including taxes on interest
earned from deposits. Moreover, Presidential Decree No.
1590 provides that any excess payment over taxes due
from PAL shall either be refunded or credited against its
tax liability for the succeeding taxable year. PAL is
entitled to a tax refund or tax credit if excess payments are
made on top of the taxes due from it. Considering that
PAL is not liable to pay the tax on interest income from
bank deposits, any payments made for that purpose is in
excess of what is due from it. Thus, if PAL erroneously
paid for this tax, it is entitled to a refund.
The taxes on interest income from bank deposits are in
the nature of a withholding tax. When a particular
income is subject to a final withholding tax, it means
that a withholding agent will withhold the tax due from
the income earned to remit it to the Bureau of Internal
Revenue. The liability for remitting the tax is on the
withholding agent. To claim a refund, PAL needs only to
prove that taxes were withheld. Certificates of Final
Taxes Withheld issued by the Agent Banks are sufficient
evidence to establish the withholding of the taxes.
Applying the pronouncement in the case of
Commissioner of Internal Revenue v. Philippine
National Bank, PAL need not prove the remittance to
the Bureau of Internal Revenue of the final
withholding tax on its interest from currency bank
deposits to be entitled to tax refund. The same
principles used to rationalize the ruling apply to final
withholding taxes: (i) the payor-withholding agent is
responsible for the withholding and remitting of the
income taxes; (ii) the payee-refund claimant has no
control over the remittance of the taxes withheld from
its income; (iii) the Certificates of Final Tax Withheld
at Source issued by the withholding agents of the
government are prima facie proof of actual payment by
payee-refund claimant to the government itself and are
declared under perjury.
the exclusion of life insurance proceeds from gross
income:
a. Proceeds of life insurance policies;
b. Paid to the Heirs or beneficiaries;
c. Upon the Death of the insured;
d. Whether in a single Sum or otherwise.
If the insured outlives the policy, and no such death
occurs, the proceeds of life insurance in excess of the
amount of the premium are taxable (Sec. 32 [B](2),
NIRC). Also, if the amounts of the life insurance proceeds
are held by the insurer under an agreement to pay interest
thereon, the interest payments shall be included in the
gross income.
2. Amount received by insured as return of premium
(Sec. 32 [B][2], NIRC)

EXCLUSIONS FROM GROSS INCOME The amount of premium returned is not income but mere
return of capital. If the insured dies and the beneficiary
What is the rationale for exclusion? receives the life insurance proceeds, these are not taxable
income because they are excluded from gross income as
They are exclusions from the gross income either because
proceeds from life insurance. But if the insured does not
they are:
die and survives the designated period, the amount
1. Exempt from income tax under the law; or pertaining to the premiums he paid are excluded from
gross income, but the excess shall be considered part of his
2. Exempt from income tax under a tax treaty; or gross income.
3. Mere returns of capital. 3. Gifts, bequests and devises (Sec. 32 [B][3], NIRC)
Who may avail exclusions? Only the value of property acquired by gift, bequest,
All kinds of taxpayers, whether individuals, estates, trusts devise, or descent is excluded from gross income. The
or corporations, may avail of the exclusions. income derived from such property shall be included in
gross income.
EXCLUSIONS DEDUCTION
However, income from such property in cases of transfers
(Sec. 32 [B], NIRC) (Sec. 34, NIRC) of divided interest, is included in gross income.

It refers to a flow of It refers to amounts which 4. Compensation for injuries or sickness (NIRC, Sec. 32
wealth to the taxpayer the law allows to be B [4])
which are not treated as deducted from gross
The NIRC expressly excludes from gross income the
part of gross income, for income in order to arrive
amounts received through accident or health insurance or
purposes of computing the at net income.
Workmen’s Compensation Act as compensation for
taxpayer’s taxable
personal injuries or sickness, and the amounts of any
income.
damages received whether by suit or agreement on account
of such injuries or sickness. They are not income and are
merely compensation for injuries or sickness suffered.
Pertains to the Pertains to the
computation of gross computation of net Examples of non-taxable and taxable compensation for
income income damages:

Something received or Something spent or paid Non-taxable Taxable compensation

earned by the taxpayer
which do not form part of
gross income
EXCLUSIONS UNDER THE NIRC
1. Life insurance proceeds (Sec. 32 [B] [1], NIRC)
in earning gross income
compensation for for damages
damages
Personal (physical) Actual damages for loss
injuries or sickness (e.g. of anticipated profits (e.g.
hospital bills shouldered salary loss awarded by the
by the employer on court on account of
account of the employee’s injuries or sickness)
accident)

They are not considered as income because they partake

5. Income exempt under treaty (NIRC, Sec. 32 B [5])
the nature of an indemnity or compensation rather than
gain to the recipient. The following are the conditions for
Income of any kind, to the extent required by any treaty Retiring employee shall
obligation binding upon the Government of the not have previously
Philippines. availed of the privilege
under a retirement benefit
Most Favored Nation Clause plan of the same or
This grants to the contracting party treatment not less another employer.
favorable than which has been or may be granted to the
The employer maintains a
most favored among other countries. It allows the taxpayer
reasonable private benefit
in one state to avail of more liberal provisions granted in
plan which is registered
another tax treaty to which the country of residence of
with and approved by the
such taxpayer is also a party; provided that the subject
BIR.
matter of taxation is the same as that in the tax treaty under
which the taxpayer is liable (CIR v. SC Johnson and Son
Inc., G.R. No. 127105, June 25, 1999).
Terminal pay/ Separation pay (Sec. 32 [B][6][b],
The similarity in the circumstances of payment of taxes is NIRC)
a condition for the enjoyment of most favored nation
treatment precisely to underscore the need for equality of Any amount received by an official or employee or by his
treatment. heirs from the employer as a consequence of separation of
such official or employee from the service of the employer
6. Retirement Benefits, Pensions, Gratuities, etc. (Sec. because of death, sickness or other physical disability or
32 [B][6], NIRC) for any cause beyond the control of the said official or
employee shall be excluded from his gross income.
The following are the retirement benefits, pensions,
gratuities, etc. that are excluded from gross income:

a. Retirement benefits under R.A. 7641 Note: The phrase “for any cause beyond the control of the
said official or employee” means that the separation or
b. Social security benefits, retirement gratuities,
termination of the employee must be involuntary (e.g. an
pensions and other similar benefits received by
employee who is terminated for just and authorized
resident or non-resident citizens or resident alien
cause(s) under the Labor Code) or not initiated by him
from Foreign government agencies and other
(e.g. Voluntary resignation).
institutions, private or public

c. Retirement received by officials and employees

of private firms, whether individual or corporate, 6. Miscellaneous items:
in accordance with a Reasonable private benefit
plan maintained by the employer A. Income derived by foreign government – to be
exempt from tax, income derived by foreign government
d. Benefits from the US Veterans Administration must be:
e. GSIS benefits i. An income derived from investments in the Philippines;
f. SSS ii. Derived from bonds, loans or other domestic securities,
stocks or interests on deposits in banks; and
g. Separation pay
iii. The recipient of such income from investment in the
Retirement benefits received under RA 7641(The
Philippines must be a foreign government, financing
Retirement Pay Law) and those received by officials and
institutions owned, controlled or financed by foreign
employees of private firms under a reasonable private
government, regional or international financing institutions
benefit plan (RPBP) maintained by the employer under
established by foreign government (NIRC, Sec. 32 B [7]
RA 4917 (now Section 32(B)(6)(a) of NIRC) are excluded
[a]).
from gross income subject to income tax.
B. Income Derived by the Government or its Political
REQUISITES FOR EXEMPTION
Subdivisions. - Income derived from any public utility or
With RPBP (RA 4917) Without RPBP (RA from the exercise of any essential governmental function
7641) accruing to the Government of the Philippines or to any
political subdivision thereof.
Retiring official or Retiring employee must
employee must be at least be at least sixty (60) years C. Prizes and awards - Prizes and awards shall be
fifty (50) years old at the old but not more than 65 exempted from tax if:
time of retirement. years of age at the time of i. Primarily in recognition of Scientific, Civic, Artistic,
retirement. Religious, Educational, Literary, or Charitable
Retiring official or Retiring employee must achievement [SCAR-CEL];
employee must have been be in the service of same ii. The recipient was selected without any action on his
in the service of the same employer continuously part to enter the contest or proceeding; and
employer for at least ten for at least five (5) years.
(10) years. iii. He is not required to render substantial future services
as a condition to receiving the prize or award. (Sec. 32 B
[7]c,).
Note: the SCARCEL does not include Sports Competition.
Prizes and awards in sports competition are subject to
different requisites for exemption under Sec. 32 B [7]d of
the NIRC.
D. Prizes and awards in sports competitions – Prizes
and awards in sports competition are exempt from gross
income if the same are granted to athletes in local and
international sports tournaments and competitions which
must be sanctioned by their national sports associations
(NIRC, Sec. 32 B [7] [d]). National sports associations are
those duly accredited by the Philippine Olympic
Committee.
1996 BAR QUESTION
Q: Onyoc, an amateur boxer, won in a boxing competition
sponsored by the Gold Cup Boxing Council, a sports
association duly accredited by the Philippine Boxing
Association. Onyoc received the amount of P500, 000 as
his prize which was donated by Ayala Land Corporation.
The BIR tried to collect income tax on the amount
received by Onyoc and donor’s tax from Ayala Land
Corporation, which taxes, Onyoc and Ayala Land
Corporation refuse to pay. Decide.
A: The prize will not constitute a taxable income to
Onyoc; hence, the BIR is not correct in imposing the
income tax. R.A. No. 7549 explicitly provides that “All
prized and awards granted to athletes in local and
international sports tournaments and competitions held in
the Philippines or abroad and sanctioned by their
respective national sports associations shall be exempt
from income tax.” Neither is the BIR correct in collecting
the donor’s tax from Ayala Land Corporation. The law is
clear when it categorically stated that the donor of said
prizes and awards shall be exempt from the payment of the
donor’s tax.
E. 13th month pay and other Benefits - Gross benefits
received by officials and employees of public and private
entities may be excluded from gross income provided that
the total exclusion shall not exceed P90, 000, as increased
by TRAIN Law. Any excess therefrom is subject to
Normal Income Tax (schedular rate). (NIRC, Sec. 32 B [7]
e).
The P90,000 threshold shall only apply to the 13th month
pay and other benefits such as amount given in excess of
the de minimis benefits, and in no case apply to other
compensation received by an employee under an
employer-employee relationship such as basic salary.
De minimis benefits
The following are the de minimis benefits:
a. Monetized unused vacation leave credits of
private employees not exceeding 10 days during
the year;
b. Monetized unused vacation and sick leave credits
paid to government officials or employees
c. Medical cash allowance to dependents of
employees, not exceeding P1, 500 per employee
per semester or P250 per month;
d. Rice subsidy of P2, 000 or one 50-kg sack of rice
per month worth not more than P2, 000;
e. Uniforms and clothing allowance not exceeding
P6, 000 per annum;
f. Actual medical assistance not exceeding P10, 000
per annum;
g. Laundry allowance not exceeding P300 per
month;
h. Employees’ achievement awards, which must be
in the form of tangible personal property other
than cash or gift certificates, with an annual
monetary value not exceeding P10,000 received
by the employee under an established written plan
which does not discriminate in favor of highly
paid employees;
i. Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000
per employee per annum;
j. Daily meal allowance for overtime work and
night/graveyard shift not exceeding 25% of the
basic minimum wage; and
k. Benefits received by an employee by virtue of a
Collective Bargaining Agreement (CBA) and
productivity incentive schemes, provided the total
annual monetary value received from both CBA
and productivity incentive schemes combined do
not exceed P10, 000 per employee per taxable
year.
All other benefits given by employers which are not
included in the above enumeration shall not be considered
as “de minimis” benefits. (Revenue Memorandum
Circular 50-2018)
Treatment of excess de minimis benefits
It shall be included as part of the “other benefits” as de
minimis benefits which is subject to the P 90,000 ceiling
under Section 32 (B)(7)(e)(iv) of the NIRC, as amended by
Train Law.
Any amount in excess of the P 90,000
If the recipient is a rank-and-file employee, the amount in
excess of P 90,000 – included in the gross compensation
income subject to normal income tax
If the recipient is managerial/supervisory employee, the
amount in excess of P 90,000 – subject to fringe benefit
tax (Revenue Regulations No. 5-2011; Revenue
Memorandum Circular No. 20-2-11)
F. GSIS, SSS, Medicare and Other Contributions. -
GSIS, SSS, Medicare and Pag-Ibig contributions, and
union dues of individuals.
G. Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness. - Gains realized from the
same or exchange or retirement of bonds, debentures or
other certificate of indebtedness with a maturity of more
than five (5) years.
H. Gains from Redemption of Shares in Mutual Fund. -
Gains realized by the investor upon redemption of shares
of stock in a mutual fund company as defined in Section
22 (BB) of this Code.
EXCLUSIONS UNDER THE CONSTITUTION
All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from
taxes and duties. (Section 4 (3)(4), XIV, 1987 Philippine
Constitution)
DEDUCTIONS FROM GROSS INCOME
Deductions for income tax purposes partake of the nature
of tax exemptions; hence, if tax exemptions are strictly
construed, then deductions must also be strictly construed
(Commissioner of Internal Revenue v. General Foods
(Phils.), Inc, G.R. 143672, April 24, 2003)
Deductions from gross income refer to the items or amount
allowed by Tax Code or special law to be subtracted from
the gross income in order to arrive at the taxable income
which is the tax base of the normal/net income tax or
regular corporate income tax.
General Rule
In order to be deductible, the following requisites must be
present:
1. The expense must be ordinary and necessary;
2. It must be paid or incurred within the taxable
year;
3. It must be paid or incurred in carrying on or
which are directly attributable to the
development, management, operation, and/or
conduct of the trade, business, or exercise of a
profession;
4. The amount must be reasonable;
5. It must be substantiated with sufficient evidence,
6. It is not contrary to law, public policy, or
morals; and
6. The tax required to be withheld on the amount
paid or payable must have been paid to the BIR
by the taxpayer, who is constituted as a
withholding agent of the government.
In general, there shall be allowed at the option of the
taxpayer, itemized deduction, or an Optional Standard
Deduction (OSD) at a rate of 40%.
Basis of 40% OSD:
Taxpayer Tax base
Individual taxpayer Gross sales/receipts
Corporation Gross income
However, no deductions shall be allowed to:
1. Individual taxpayers earning compensation income
arising from personal services rendered under an
employer-employee relationship; and
2. Those who opted to be taxed at 8% income tax rate on
their income from business/practice of profession. (Section
8, Revenue Regulations No. 8, 2018)
Concept of return of capital
The mere return of capital is allowed as deduction from
gross income in order to arrive at income subject to tax.
While general, the nomenclature of “cost of sales or cost
of goods sold” is applied, the return of capital has different
components depending upon the nature of the business
being taxed. (Domondon, 2013)
Income tax is levied by law only on income, hence, the
amount representing return of capital should be deducted
from proceeds of sales and should not be subject to income
tax.
Itemized Deductions
Except for taxpayers earning compensation income arising
from personal services rendered under an employer-
employee relationship where no deductions shall be
allowed under this Section, in computing taxable income
subject to income tax under Sections 24(A); 25(A); 26;
27(A), (B), and (C); and 28(A)(1), there shall be allowed
the following deductions from gross income: 
1. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion of oil and gas wells and mines
8. Charitable and other contributions
9. Research and development
10. Contributions to pension trusts
Classification of expenses:
1. Ordinary expenses refer to any expense that is normal
or usual in relation to the taxpayer’s business and the
surrounding circumstances.
2. Necessary expenses refer to the appropriate and helpful
expenses in the development of the taxpayer’s business
and those intended to minimize losses or to increase
profits.
3. Business expense refers to the expenditure related to the
business that is deductible in the year incurred, in the same
taxable year.
4. Capital expense refers to the expenditure that improves
or adds to the value of your property or equipment. It is
not immediately deductible. It is deductible over time,
such as in the form of depreciation.
Substantiation requirement (Sec. 34(A)(1)(b), NIRC)
No deduction from gross income shall be allowed unless
the taxpayer shall substantiate with sufficient evidence,
such as official receipts or other adequate records:
1. The amount of the expense being deducted; and exceeding 40% of gross
sales or receipts or gross
2. The direct connection or relation of the expense being income as the case may
deducted to the development, management, operation be.
and/or conduct of the trade, business or profession of the
taxpayer. It can be availed by all General Rule: It can be
taxpayers except those availed by all taxpayers
Additional requirements for deductibility
subject to tax on gross who are subject to tax
General Rule income (NRA-NETB or based on net income and
NRFC). not on gross income.
An income payment which is otherwise deductible under
the Code shall be allowed as a deduction from the payor's Exception: When the
gross income ONLY if it is shown that the income tax taxpayer is subject to tax
required to be withheld has been PAID to the Bureau in based on gross income; or
accordance with Secs. 57 and 58 of the Code. when under the law, the
taxpayer is mandated to
Exception use itemized deduction; or
when the taxpayer fails to
A deduction will also be allowed in the following cases
elect in his first quarter
where no withholding of tax was made:
income tax return, the
(A) The payee reported the income and pays the tax due option to avail OSD as his
thereon and the withholding agent pays the tax including mode of allowable
the interest incident to the failure to withhold the tax and deduction (irrevocable for
surcharges, if applicable, at the time of the the taxable year).
audit/investigation or reinvestigation/reconsideration.

(B) The recipient/payee failed to report the income on the

What are the items that are not deductible in
due date thereof, but the withholding agent/taxpayer pays
computing net income?
the tax, including the interest incident to the failure to
withhold the tax, and surcharges, if applicable at the time In computing net income, no deduction shall be allowed
of audit/investigation or reinvestigation or reconsideration. with respect to:
(C) The withholding agent erroneously underwithheld the 1. Personal, living or family expenses;
tax but pays the difference between the correct amount and
the amount of tax withheld including the interest incident 2. Any amount paid out for new buildings or for
to such error and surcharges, if applicable, at the time of permanent improvements, or betterments made to increase
the audit investigation or reinvestigation/reconsideration. the value of any property or estate;
(Revenue Regulation No. 6-2018)
3. Any amount expended in restoring property or in
The Cohan Rule Principle making good the exhaustion thereof for which an
allowance is or has been made;
If there is showing that expenses have been incurred but
the exact amount thereof cannot be ascertained due to the 4. Premiums paid on any life insurance policy covering the
absence of documentary evidence, it is the duty of the BIR life of any officer or employee, or of any person
to make an estimate of deduction that may be allowed in financially interested in any trade or business carried on by
computing the taxpayer’s taxable income bearing heavily the taxpayer, individual or corporate, when the taxpayer is
against the taxpayers whose inexactitude is of his own directly or indirectly a beneficiary under such policy;
making. A disallowance of 50% of the taxpayer’s claimed
5. Losses from sales or exchanges of property between
deduction is valid. (RMC 23-2000)
related parties;
Distinguish itemized deductions and Optional Standard
6. Losses from wash sales of stock or securities unless the
Deduction (OSD)
claim is made by a dealer in stock or securities and with
Itemized deductions OSD respect to a transaction made in the ordinary course of the
business of such dealer;
Refer to the allowable Refers to the standard
deductions as enumerated deduction in an amount 7. Non-deductible taxes
under Section 34 of the not exceeding 40% of the 8. Non-deductible losses
NIRC. gross income of
individuals, other than 9. Non-deductible interest
nonresident aliens, or
corporations, in lieu of the (Section 36, NIRC)
deductions enumerated Marcelo Doctrine
under Subsections A-J of
Section 34 of the NIRC. A loss in one line of business is not permitted as a
deduction from gain in another line of business (Marcelo
It must be substantiated It requires no proof of Steel Corporation v. CIR, G.R. No. No. L-12401, October
by receipts. expenses incurred because 31, 1960)
the allowable deduction is
a fixed percentage not Withholding Tax
Concept

It is a method of collecting income tax in advance from the 2. Yes. We hold that the obligation of the payor/employer
taxable income of the recipient of income. to deduct and withhold the related withholding tax arises at
the time the income was paid or accrued or recorded as an
In the operation of the withholding tax system, the payee is expense in the payor's/employer's books, whichever comes
the taxpayer, the person on whom the tax is imposed, first. Petitioner ING Bank accrued or recorded the bonuses
while the payor, a separate entity, acts no more than an as deductible expense in its books. Therefore, its
agent of the government for the collection of the tax in obligation to withhold the related withholding tax due
order to ensure its payment. (Bank of America v. from the deductions for accrued bonuses arose at the time
Commissioner, [234 SCRA 320]) of such accrual and not at the time of actual payment.
Time of Withholding Distinguish Creditable Withholding tax with Final
The obligation of the payor/employer to deduct and Withholding tax.
withhold the related withholding tax arises at the time the Final Creditable
income was paid or accrued or recorded as an expense in Withholding Withholding tax
the payor's/employer's books, whichever comes first (ING Tax
Bank N.V. vs. Commissioner of Internal Revenue, G.R. No.
167679, July 22, 2015). As to the The amount of Taxes withheld
amount of tax income tax on certain income
ING Bank N.V. vs. Commissioner of Internal Revenue,
withheld withheld by the payments are
G.R. No. 167679, July 22, 2015
withholding intended to equal
FACTS: ING Bank, the Philippine branch of agent is or at least
Internationale Nederlanden Bank N.V., a foreign banking constituted as a approximate the
corporation incorporated in the Netherlands. full and final tax due of the
payment of the payee on said
Petitioner ING Bank asserts that it is "qualified to avail of income tax due income.
the tax amnesty under Section 5 [of Republic Act No. from the payee
9480] and not disqualified under Section 8 [of the same on the said
law]." income.
Furthermore, Petitioner ING Bank claims that it is not
liable for withholding taxes on bonuses accruing to its
officers and employees during taxable years 1996 and As to the The liability for The liability rests
1997. It maintains its position that the liability of the obligation to payment or primarily on the
employer to withhold the tax does not arise until such withhold taxes withholding of taxpayer.
bonus is actually distributed. Petitioner ING Bank further the tax rests
argues that the Court of Tax Appeals' discussion on primarily on the
Section 29(j) of the 1993 National Internal Revenue Code payor as a
and Section 3 of Revenue Regulations No. 8-90 is not withholding
applicable to the issue in this case. agent.

In petitioner's case, bonuses were determined during the

year (1996 and 1997) but were distributed in the
succeeding year. No withholding of income tax was As to the need The payee is The income
effected but the bonuses were claimed as an expense for to file an not required to recipient is still
the year. Since the bonuses were not subjected to income tax file an income required to file an
withholding tax during the year they were claimed as an return tax return for income tax return,
expense, the same should be disallowed. the particular as prescribed in
income. Sec. 51 and Sec.
ISSUES: 52 of the NIRC,
as amended.
1. Whether petitioner ING Bank may validly avail itself of
the tax amnesty granted by Republic Act No. 9480;

2. Whether petitioner ING Bank is liable for deficiency As to coverage All income Those
withholding tax on accrued bonuses for the taxable years subject to final income
1996 and 1997. taxes (i.e. payments
passive income, covered by
HELD:
gross income of Expanded
1. Yes. Qualified taxpayers with pending tax cases may NRA-NETB); Withholding
still avail themselves of the tax amnesty program. Thus, tax [Revenue
Fringe benefit Regulations
the provision in BIR Revenue Memorandum Circular No.
tax 11-2018];
19-2008 excepting "issues and cases which were ruled by
any court (even without finality) in favor of the BIR prior and
to amnesty availment of the taxpayer" from the benefits of
Income
the law is illegal, invalid, and null and void. The duty to
payments
withhold the tax on compensation arises upon its accrual.
covered by
 compensation
income
Who is a withholding agent?
A withholding agent is any person or entity who is in
control of the payment subject to withholding tax and
therefore is required to deduct and remit taxes withheld to
the government. (BIR Website)
He is merely a tax collector, not a taxpayer. If a
withholding agent was assessed for deficiency withholding
tax under the Code, as such, it is being held liable in its
capacity as a withholding agent and not its personality as a
taxpayer. (CIR v. CA, G.R. No. 104151 March 10, 1995)
What are the obligations of a withholding agent?
1. To collect taxes as well as the payment thereof on
behalf of the government (Collection and/or Withholding
of taxes and filing of the necessary tax returns);
2. To claim a refund of erroneously or illegally withheld
taxes and the responsibility to return the same to the
principal taxpayer (Commissioner of Internal Revenue vs.
Smart Communication, Inc., G.R. Nos. 179045-46, 25
August 2010)
2007 BAR QUESTION
Q: Weber Realty Company which owns a three-hectare
land in Antipolo entered into a Joint Venture Agreement
(JVA) with Prime Development Company for the
development of said parcel of land. Weber Realty as
owner of the land contributed the land to the Joint Venture
and Prime Development agreed to develop the same into a
residential subdivision and construct residential houses
thereon. They agreed that they would divide the lots
between them.
Does the JVA entered into by and between Weber and
Prime create a separate taxable entity? Explain briefly.
A: The JVA entered into between Weber and Prime does
not create a separate taxable entity. The joint venture is
formed for the purpose of undertaking construction
projects; hence, is not considered as a corporation for
income tax purposes. (Section 22 (B), NIRC).
Q: Are the allocation and distribution of the saleable lots
to Weber and Prime subject to income tax and to expanded
withholding tax? Explain briefly.
A: No. The allocation and distribution of the saleable lots
to Weber and Prime is a mere return of their capital
contribution. The income tax and the expanded
withholding tax is not due on a capital transaction because
no income is realized from it. (BIR Ruling No. DA-192-
2001, October 17, 2011).
Q: Is the sale by Weber or Prime of their respective shares
in the saleable lots to third parties subject to income tax
and to expanded withholding tax? Explain briefly.
A: Yes. The sale by Weber and Prime of their respective
shares to third parties is a closed and completed
transaction resulting in the realization of income, subject
to income tax and to the expanded withholding tax.
FILING OF RETURNS AND PAYMENTS
Individual Returns
The following INDIVIDUALS are REQUIRED to file
an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines,
on his income from sources within the Philippines;
(c) Every alien residing in the Philippines, on income
derived from sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or
in the exercise of profession in the Philippines. (Section 51
(A) (1), NIRC)
(e) A citizen of the Philippines and any alien individual
engaged in business or practice of profession within the
Philippine shall file an income tax return, regardless of the
amount of gross income (Section 51 (A) (2), NIRC)
(f) An employee is required to file an Annual Income Tax
Return for compensation earned within the same taxable
year from multiple employers, whether successive or
concurrent, regardless of the of the amount compensation
(Q:51:A:51, RMC-50-2018)
Example: 1. A works as accountant in ABC Corporation
and at the same time, during the taxable year, he also
works as a part time professor at San Sebastian College
(Multiple employers).
2. A works in ABC Corporation as an Administrative Staff
for 3 months, later within the same taxable year, he
resigned from the company and was hired by XYZ
Corporation as an accounting clerk for the remaining
taxable year. (Successive employers)
The following INDIVIDUALS shall NOT be
REQUIRED to file an income tax return:
(a) An individual whose taxable income does not exceed
Two hundred fifty thousand pesos (P250,000) under
Section 24(A)(2)(a): Provided, That a citizen of the
Philippines and any alien individual engaged in business or
practice of profession within the Philippine shall file an
income tax return, regardless of the amount of gross
income;
(b) An individual with respect to pure compensation
income, as defined in Section 32 (A)(1), derived from
sources within the Philippines, the income tax on which
has been correctly withheld under the provisions of
Section 79 of this Code: Provided, That an individual
deriving compensation concurrently from two or more
employers at any time during the taxable year shall file an
income tax return.
(c) An individual whose sole income has been subjected to
final withholding tax pursuant to Section 57(A) of this
Code; and
(d) A minimum wage earner as defined in section 22 (HH)
of this Code or an individual who is exempt from income
tax pursuant to the provisions of this Code and other laws,
general or special. (Section 51 (A) (2), NIRC)
NOTE: The foregoing notwithstanding, any individual not
required to file an income tax return may nevertheless be
required to file an information return pursuant to rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. (Section 51 (A) (3),
NIRC)
SUBSTITUTED FILING
Substituted filing applies only if all of the following
requirements are present:
1. The employee received purely compensation
income, regardless of amount during the taxable
year.
2. That the compensation was received from only
one employer in the Philippines for the calendar
year.
3. The income tax of which has been withheld
correctly by the said employer (tax due equals tax
withheld).
4. The employer files the annual information return
(BIR Form No. 1604-C).
In lieu of BIR Form No. 1700, the Certified List of
Employees Qualified for Substituted Filing of ITR with
information regarding the name of compensation earner,
TIN, compensation paid, tax due and tax withheld, filed by
the employer with the concerned BIR office and stamped
“Received” by the latter shall be tantamount to the
substituted filing of ITRs by concerned employees (BIR
Form No. 2316)
Income Tax on Corporations
A corporation for income tax purposes shall:
1) Include:
a. Partnerships;
b. Joint stock companies;
c. Joint accounts (cuentas en participacion);
d. Associations; and
e. Insurance companies.
2) Not include:
a. General Professional Partnerships (GPP)
NOTE: The distributive share of each partner in a general
professional partnership shall form part of partner’s gross
income in its individual tax returns subject to graduated
income tax rates.
b. A joint venture or consortium formed for purposes of
undertaking construction projects
c. A joint venture or consortium formed for the purpose of
engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under a service contract with the government
(Sec. 22 (B), NIRC)
Normal corporate income tax (NCIT)
An income tax of thirty percent (30%) shall be imposed
upon the taxable income derived during the taxable year
from all sources within and without the Philippines for
DC.
Minimum corporate income tax (MCIT)
The MCIT is equal to 2% of the gross income of the
corporation at the end of the taxable quarter, except
income exempt from income tax and income subject to
final withholding tax.
A corporation should pay the MCIT whenever its normal
corporate income tax (NCIT) is lower than the MCIT, or
when the firm reports a net loss in its tax return.
Conversely, the NCIT is paid when it is higher than the
MCIT. (Dimaamapo, 2015)
Therefore, the taxable due for the taxable year will be
NCIT (30% of taxable income) or MCIT (2% of gross
income), whichever is HIGHER.
The MCIT covers domestic and resident foreign
corporations which are subject to the 30% normal
corporate income tax; hence, corporations which are
subject to special corporate taxes do not fall within the
coverage of the MCIT.
The MCIT is imposed beginning on the fourth taxable year
immediately following the year in which the corporation
commenced its business operations.
Carry-forward of the excess of MCIT
1. The excess of MCIT over the NCIT shall be carried
forward on an annual or quarterly basis.
2. The excess shall be credited against the NCIT due for
the three (3) immediately succeeding taxable years.
3. Any excess not credited in the next three years shall be
forfeited.
4. Carry forward (annually or quarterly) is possible only if
MCIT is greater than NCIT.
5. The maximum amount that can be credited is only up to
the amount of the NCIT, there can be no negative NCIT.
Improperly Accumulated Earnings Tax
Domestic corporations as defined under the Tax Code and
which are classified as closely-held corporations are
subject to 10% improperly accumulated earnings tax on
their improperly accumulated earnings. (Sec. 29(A),
NIRC)
Closely-held Corporations
These are corporations, at least 50% in value of the
outstanding capital stock of which or at least 50% of the
total combined voting power of all classes of stock entitled
to vote is owned directly or indirectly by or not more than
20 individuals. (Sec. 4, RR No. 2-2001)
Rationale: IAET is imposed in the nature of a penalty to
the corporation for the improper accumulation of its
earnings and as a form of deterrent to the avoidance of tax
upon shareholders who are supposed to pay dividends tax
on the earning distributed to them by the corporation. If
the earnings and profits were distributed, the shareholders
would be liable for tax on dividends. (Commissioner v.
Ayala Securities Corp., 101 SCRA 231)
Section 29 (D) of the NIRC provides that the term
'improperly accumulated taxable income' means taxable
income adjusted by: a. Income exempt from tax; b.
Income excluded from gross income; c. Income subject to
final tax; and d. The amount of net operating loss carry-
over deducted;
And reduced by the sum of: a. Dividends actually or
constructively paid; and b. Income tax paid for the taxable
year.
Prima facie instances of accumulation of profits beyond
the reasonable needs of a business
1. Investment of substantial earnings and profits of the
corporation in unrelated business or in stock or securities
in unrelated business.
2. Investment in bonds and other long-term securities. 3.
Accumulation of earnings in excess of 100% of paid-up
capital, not otherwise intended for the reasonable needs of
the business .(Sec. 7, RR No. 2-2001)
DONOR’S TAX
It is a tax imposed on the exercise of the donor’s right
during lifetime to transfer property to others in the form of
gift. Hence, donor’s tax is not a property tax, but is an
excise tax on the transfer of property by way of gift inter
vivos. (RR 12-2018)
Gift in Relation to Donor’s Tax
It covers not only “direct gifts” but also “indirect gifts.”
Examples of indirect gifts are: condonation of
indebtedness due to mere liberality of the creditor; transfer
of property without consideration; sales, exchanges and
other dispositions of property for a consideration to the
extent that the value of the property transferred exceeds
the value in money or money’s worth of the consideration
received therefor; and renunciation of an inheritance in
favor of another co-heir.
Transfers and transactions constituting donation
Yes. The BIR is correct that there is a taxable gift as to the
renunciation by Mrs. Barbera, the surviving spouse, of her
share in the conjugal partnership. This is a transfer of
property without any consideration which takes effect
during the lifetime of the wife and thus should be qualified
as a taxable gift. (RR No. 2-2003).
However, The BIR is incorrect with regard to Mrs.
Barbera’s renunciation of her share in the inheritance
during the settlement of the estate as this is a general
renunciation not subject to donor’s tax.
5. Transfer of Property for insufficient consideration
General Rule: When the property is transferred for less
than an adequate and full consideration, the amount by
which the fair market value of the property exceeded the
value of consideration shall be deemed a gift and shall be
included in computing the amount of gifts made during the
calendar year.
Exceptions:
▪ Where property transferred is real property located in the
Philippines considered as capital asset;
Reason: The transfer is not subject to donor’s tax but to a
capital gains tax.
▪ Where the sale, exchange or other transfer of property
made in the ordinary course of business which is
(1) bona fide, (2) at arm’s length, and (3) free from any
donative intent
Reason: This shall be considered as made for an adequate
and full consideration.

In the Philippines

1. Campaign Contributions- Only those donations Real Personal Properties Outside

contributions that have been spent during the campaign Propertie the
Deceden Tangibl Intangibl Philippine
period as set by the COMELEC are exempt from donor’s s
t e e s
tax. Donations utilized before or after the campaign period
are subject to donor’s tax and not deductible as political RC / / / /
contribution on the part of the donor.
NRC / / / /

RA / / / /
2. Cancellation of Indebtedness- If a creditor merely
desires to benefit a debtor and without any consideration NRA w/ / / x
cancels the debt, the amount of the debt is a gift to the reciproci
debtor and the creditor shall be liable to pay donor’s tax. ty X

3. Renunciation of Inheritance NRA / / / x

w/o
General renunciation by an heir of his/her share in the
reciproci
inheritance is not subject to donor’s tax. Special
ty
Renunciation is subject to donor’s tax.
DC / / / /
4. Renunciation of the Surviving Spouse of the share on
the Conjugal Partnership or Absolute Community RFC / / / /
2013 Bar Exam Question NRFC / / / x
In the settlement of the estate of Mr. Barbera who died
intestate, his wife renounced her inheritance and her share
of the conjugal property in favor of their children. The BIR Reciprocity Rule
determined that there was a taxable gift and thus assessed
Mrs. Barbera as a donor. It applies only to a NRA donor and only on his intangible
personal properties located in the Philippines. For the
Was the BIR correct? reciprocity rule to apply, a donor must be a citizen and
resident of a foreign country that does not impose donor’s
tax or grants exemption thereto.
Exclusions in Gross Gift and Exempt Donations
1. Gifts to the National Government or any entity created
by its agencies which is not conducted for profit, or to any
political subdivision;
2. Gifts to an educational and/or charitable, religious,
cultural or social welfare institution, accredited NGO,
trust, philanthropic or research organization; provided that
not more than 30% shall be used by the donee for
administration purposes.
3. Encumbrances on the property donated if assumed by
the donee in the deed of donation;
4. Donations made to entities exempted under special
laws.
Donation to Non-Stock, Non-Profit Private
Educational Institutions
The following conditions must occur in order that all
grants, donations and contributions to non-stock, non-
profit private educational institutions may be exempt from
the donor's tax under Section 101 (a) of the NIRC:
● Not more than thirty percent (30%) of said gifts
shall be used by such donee for administration
purposes;
● The educational institution is incorporated as a
non-stock entity, paying no dividends;
● Governed by trustees who receive no
compensation, and
● Devotes all its income, whether students' fees or
gifts, donations, subsidies or other forms of
philanthropy, to the accomplishment and
promotion of the purposes enumerated in its
Articles of Incorporation.
2002 Bar Exam Question
On December 6, 2001, LVN Corporation donated a piece
of vacant lot situated in Mandaluyong City to an
accredited and duly registered non-stock, non-profit
educational institution to be used by the latter in building a
sports complex for students.
A. May the donor claim in full as deduction from its gross
income for the taxable year 2001 the amount of the
donated lot equivalent to its fair market value/zonal value
at the time of the donation? Explain your answer.
No. The donor is not entitled to claim as full deduction the
fair market value/ zonal value of the lot donated. The
amount of any charitable contribution of property other
than money shall be based on the acquisition cost of said
property. (Sec. 34 (H) NIRC)
B. In order that donations to non-stock, non-profit
educational institution may be exempt from the donor’s
gift tax, what conditions must be met by the donee? (3%)
In order that donations to non-stock, non-profit educational
institution may be exempt from the donor’s gift tax, it is
required that not more than thirty percent (30%) of said
gifts shall be used by such donee for administration
purposes. (Sec. 101(A)(3), NIRC)
VALUE-ADDED TAX
Nature and Characteristic of Value Added Tax
Tax on Value Added
The tax is so called because it is imposed on the value not
previously subjected to VAT, i.e., on the value added to
the goods or services at each stage of the distribution
chain. (De Leon, 2011)
Tax on Consumption
VAT is a tax on consumption levied on the sale, barter,
exchange or lease of goods or properties and services in
the Philippines and on the importation of goods into the
Philippines. (RR 16-05)
VAT as Indirect Tax
VAT is an indirect tax and the amount of tax may be
shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services. (Section 105, NIRC)
The liability for the payment of the indirect taxes lies only
with the seller of the goods or services, not in the buyer
thereof. Thus, one cannot invoke one’s exemption
privilege to avoid the passing on or the shifting of the
VAT to him by the manufacturers/suppliers of the goods
purchased. Hence, it is important to determine if the tax
exemption granted to a taxpayer specifically includes the
indirect tax which is shifted to him as part of the purchase
price, otherwise it is presumed that the tax exemption
embraces only those taxes for which the buyer is directly
liable. (CIR vs. PLDT, GR No. 140230, 2005)
2016 Bar Question
Pursuant to Sec. 11 of the "Host Agreement" between the
United Nations and the Philippine government, it was
provided that the World Health Organization (WHO), "its
assets, income and other properties shall be : a) exempt
from all direct and indirect taxes." Precision Construction
Corporation (PCC) was hired to construct the WHO
Medical Center in Manila. Upon completion of the
building, the BIR assessed a 12% VAT on the gross
receipts of PCC derived from the construction of the WHO
building. The BIR contends that the 12% VAT is not a
direct nor an indirect tax on the WHO but a tax that is
primarily due from the contractor and is therefore not
covered by the Host Agreement. The WHO argues that the
VAT is deemed an indirect tax as PCC can shift the tax
burden to it. Is the BIR correct? Explain.
No. The BIR is incorrect.
While it is true that VAT is an indirect tax, the Host
Agreement, in specifically exempting the WHO from
"indirect taxes," contemplates taxes which, although not
imposed upon or paid by the Organization directly, form
part of the price paid or to be paid by it. The 12% VAT is
an indirect tax whose burden was shifted by PCC to WHO,
thus, it is evident that BIR is incorrect. (CIR, vs. John
Gotamco & Sons, Inc. and the Court of Tax Appeals, G.R.
No. L-31092 February 27, 1987)
The Destination Principle; Cross Border Doctrine
Under the Destination Principle, the goods and services are
taxed only in the country where these are consumed and in
connection with the said principle, the Cross-Border
Doctrine mandates that no VAT shall be imposed to form
part of the cost of the goods destined for consumption
outside the territorial border of the taxing authority. (Atlas
Consolidated Mining v CIR, G.R. Nos. 141104& 148763,
June 8, 2007)
Elements of VAT Taxable Transaction
1. It must be done in the ordinary course of trade or
business;
2. There must be a Sale, barter exchange, lease of
properties, or rendering of services; and
3. It is not VAT-exempt or VAT zero-rated. (Ingles, 2015)
Persons Liable to Pay Value-Added Tax
1. Any person, who in the course of his trade or
business, sells, barters, exchanges, or leases
goods or properties, or renders services; and
2. Any person who imports goods (Sec. 105, NIRC),
whether it is done in the course of trade/business
or not.
The phrase “in the course of trade or business” means the
regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental
thereto.
Exceptions to the Rule of Regularity
As stated, the transaction must be done in the course of
trade or business to be subject to VAT. The transaction
must be characterized as a regular or habitual conduct.
However, the following are exceptions to this rule:
1. Importation
In general, VAT is imposed on goods brought into the
Philippines, whether for business or not.
The VAT on importation is paid by the importer prior to
the release of such goods from customs custody. (Section
4.107-1(b) Revenue Regulation N0.16-2005)
2. Transactions incidental to the Course of Trade or
Business
3. Services performed in the Philippines by Non-
Resident Person
4. Transaction Deemed Sale
2014 Bar Question
Masarap Kumain, Inc. (MKI) is a Value-Added Tax
(VAT)-registered company which has been engaged in the
catering business for the past 10 years. It has invested a
substantial portion of its capital on flat wares, table linens,
plates, chairs, catering equipment, and delivery vans. MKI
sold its first delivery van, already 10 years old and idle, to
Magpapala Gravel and Sand Corp. (MGSC), a corporation
engaged in the business of buying and selling gravel and
sand. The selling price of the delivery van was way below
its acquisition cost. Is the sale of the delivery van by MKI
to MGSC subject to VAT? 
Yes. The sale of the delivery van is subject to VAT being a
transaction incidental to the catering business which is a
VAT-registered activity of MKI. The phrase “in the course
of trade or business” means the regular conduct or pursuit
of a commercial or an economic activity, including
transactions incidental thereto, by any person. (Sec. 105,
NIRC) The sale of the fully-depreciated vehicle that has
been used in business is subject to VAT as an incidental
transaction, although such sale may be considered isolated.
(Mindanao II Geothermal Partnership vs CIR)
On Sale of Goods or Properties
Tax Base: Gross Selling Price
The total amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the goods
or properties, excluding the value-added tax. The excise
tax, if any, on such goods or properties shall form part of
the gross selling price. (Sec. 106 (A)(1), NIRC)
Allowable Deductions from the Gross Selling Price
A. Sales Returns and Allowances may be deducted on
the quarter in which the refund was made or a
credit memorandum or refund was issued.
B. Sales Discounts granted and indicated in the
invoice at the time of sale and the grant of which
does not depend upon the happening of a future
event may be excluded within the same quarter it
was given. (Sec. 106 (D), NIRC)
Transactions Deemed Sale
There is no actual sale of goods but such transactions are
subject to VAT.
The following transactions shall be deemed sale:
(1) Transfer, use or consumption not in the course of
business of goods or properties originally intended for sale
or for use in the course of business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the
VAT-registered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within
sixty (60) days following the date such goods were
consigned; and
(4) Retirement from or cessation of business, with respect
to inventories of taxable goods existing as of such
retirement or cessation. (Sec. 106 (B), NIRC)
The following circumstances shall, among others, give rise
to transactions "deemed sale";
 Change of ownership of the business. There is a
change in the ownership of the business when a
single proprietorship incorporated; or the
proprietor of a single proprietorship sells his
entire business.
 Dissolution of a partnership and creation of a new
partnership which takes over the business.
Changes in or Cessation of Status of a VAT-registered
Person.
VAT shall apply to goods or properties originally intended
for sale or use in business, and capital goods which are
existing as of the occurrence of the following:
(1) Change of business activity from VAT taxable taxable
status to VAT-exempt status.
(2)Approval of a request for cancellation of registration
due to revertion to exempt status.
(3) Approval of a request for cancellation of registration
due to a desire to revert to exempt status after the lapse of
three (3) consecutive years from the time of registration by
a person who voluntarily registered despite being exempt
under Section 109 of the Tax Code.
(4) Approval of a request for cancellation of registration of
one who commenced business with the expectation of
gross sales or receipts exceeding P3,000,000.00 but who
failed to exceed this amount during the first twelve months
of operation. (RMC 39-2018)
The following change in or cessation of status of VAT
registered person are not subject to Output VAT:
(i) Change of control of a corporation
(ii) Change in the trade or corporate name
(iii) Merger or consolidation of corporations
On Importation of Goods
Transfer of goods by Tax exempt persons (Technical
Importation)
In the case of tax-free importation of goods into the
Philippines by persons. Entities or agencies exempt from
tax where such goods are subsequently sold, transferred or
exchanged in the Philippines to non- exempt persons or
entities, the purchasers, transferees or recipients thereof
shall be considered as the importer and held liable for
payment of VAT and other internal revenue tax for such
importation. (Section 107(b), NIRC)
Zero-Rated Sale
 A zero-rated sale of goods or properties is a sale, barter or
exchange of goods or properties of a VAT- registered
person subject to zero percent (0%) VAT.
1. Export Sales
a. Sale and actual shipment of goods from the Philippines
to a foreign country, paid for in acceptable currency, and
accounted for in accordance with the rules and regulations
of the BSP
b. Sale of raw materials or packaging materials to a non-
resident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing,
processing, packing, or repacking in the Philippines of the
said buyer’s goods, paid for in acceptable currency, and
accounted for in accordance with the rules and regulations
of the BSP
c. Sale of raw materials or packaging materials to an
export-oriented enterprise whose export sales exceed 70%
of total annual production
d. Transactions considered constructively exported under
Art. 23 of EO 226
e. Sale of goods, supplies, equipment, and fuel to persons
engaged in international shipping or air transport
operations: Provided that the goods, supplies, equipment
and fuel shall be used exclusively for international
shipping or air transport operations.
2. Effectively Zero-Rated Sales
Services rendered to persons or entities whose exemption
under special laws or international agreements to which
the Philippines is a signatory effectively subjects the
supply of such services to zero percent (0%) rate.
Under the TRAIN LAW foreign currency denominated sale
is now a sale subject to twelve percent (12%) VAT.
Value-Added Tax Exempt Transactions
New items that are VAT Exempt under the TRAIN Law
(Section 109, NIRC)
a. Sale of lease of goods and services to senior
citizens and persons with disabilities
b. Transfer of property in merger or
consolidation pursuant to Section 40 (C)(2)
c. Association dues, membership fees and other
assessments and charges by home owners
association and condominium corporations
d. Sale of gold to the BSP
e. Sale of drugs and medicines for diabetes, high
cholesterol and hypertension beginning 01
January 2019
f. Sale or lease of goods or properties or the
performance of services other than
transactions in the preceding paragraph, the
gross annual sales and/or receipts do not
exceed the amount of P3, 000, 000 (Sec. 34,
RA 10963)
Difference between Zero-Rated Entities and VAT-
Exempt Entities
Zero-rated:
(1) It is a taxable transaction but does not result in an
output tax.
(2) The input VAT on the purchases of a VAT- registered
person with zero-rated sales may be allowed as tax credits
or refunded.
(3) Persons engaged in transactions which are zero-rated,
being subject to VAT, are required to register.
VAT-exempt:
(1) Not subject to output tax.
(2) The seller in an exempt transaction is not entitled to
any input tax on his purchases despite the issuance of a
VAT invoice or receipt.
(3) Registration is optional for VAT- exempt persons.
Input and Output Tax
Input Tax means the value added tax due from or paid by a
VAT-registered person in the course of his trade or
business on importation of goods or local purchase of
goods or services, including lease or use of property from
a VAT-registered person. (Section 110, NIRC)
Output Tax means the value-added tax due on the sale or
lease of taxable goods or properties or services by any
person registered or required to register under Section 236.
(Section 110, NIRC)
Tax Credit Method
The Tax Credit Method relies on invoices wherein an
entity can credit against or subtract from the VAT charged
on its sales or outputs the VAT paid on its purchases,
inputs and imports.  Any person who, in the course of trade or business, sells,
If at the end of a taxable quarter the output taxes charged
by a seller are equal to the input taxes passed on by the
suppliers, no payment is required. It is when the output
taxes exceed the input taxes that the excess has to be paid.
If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or
effectively zero-rated transactions or from the acquisition
of capital goods, any excess over the output taxes shall
instead be refunded to the taxpayer or credited against
other internal revenue taxes. (CIR v. Seagate Technology,
G.R. NO. 153866, 2005)
Refund or Tax Credit of Excess Input Tax; Procedure
Requisites for Claim of Refund of Input Tax
1. The taxpayer claimant must be VAT-Registered;
2. There must be zero-rated or effectively zero-rated
sales;
3. Input taxes are incurred or paid;
4. Such input taxes are attributable to zero-rated or
effectively zero-rated sales;
5. The input taxes are not applied against other
output VAT liability; and
6. The claim for refund must be filed within the
prescriptive period.
Prescriptive Period to File Administrative Claim for
Refund of Input Tax- 2 years after the close of the taxable
quarter when the sales were made.
Enhanced VAT Refund System
The Commissioner is given 90 days from the date of
submission of official receipts or invoices and other
documents in support of the application for refund.
Should the Commissioner find the refund not proper, he
must state in writing the legal and factual basis of his
denial.
In case of partial or full denial of refund, the taxpayer is
given 30 days from receipt of denial to appeal with the
CTA.
Failure on the part of any official, agent, or employee of
the BIR to act on the application within 90 days, a
corresponding penalty shall be imposed. (Sec. 4.112-1, RR
26-2018)
Note: Under the TRAIN Law, the provision on inaction
has been removed. The law is currently silent on what the
remedy is if there is no decision within the 90-day period
of the BIR.
Nonetheless, prior to the amendment, the rule is that the
120-day period (now 90-day) is mandatory and
jurisdictional. Failure to comply with the period violates
the doctrine of exhaustion of administrative remedies and
renders the petition premature and without cause of action,
with the effect that the CTA does not acquire jurisdiction
over the petition. (CIR v San Roque Power Corporation,
G.R. No. 187485, February 12, 2013)
Mandatory VAT Registration
barters or exchanges goods or properties or engages in the
sale or exchange of services shall be liable to register if:
a. His gross sales or receipts for the past twelve (12)
months, other than those that are exempt under
Section 109 (A) to (U), have exceeded Three
Million Pesos (P3,000,000.00): or
b. There are reasonable grounds to believe that his
gross sales or receipts for the next twelve (12)
months, other than those that are exempt
under Section 109 (A) to (U), will exceed Three
Million Pesos (P3, 000,000.00).
VAT registration is optional for any person who is VAT-
exempt under Sec. 109 of the NIRC or those whose gross
annual sales or receipts did not exceed P3, 000,000.
Any person who elects to register under optional
registration shall not be allowed to cancel his registration
for the next three (3) years.
Invoicing Requirement
A VAT registered person shall issue:
a. A VAT invoice for every sale, barter or exchange
of goods or properties; and
b. A VAT official receipt for every lease of goods or
properties and for every sale, barter or exchange
of services.
A VAT-registered person may issue a single invoice/
receipt involving VAT and Non-VAT transactions
provided that the invoice or receipt shall clearly indicate
the break-down of the sales price between its taxable,
exempt and zero-rated components and the calculation of
the Value-Added Tax on each portion of the sale shall be
shown on the invoice or receipt.
Withholding of Final VAT on Sales to Government
The government or any of its political subdivisions,
instrumentalities or agencies, including government-
owned or controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods
and/or services taxed at twelve percent (12%) VAT
pursuant to Sections 106 and 108 of the Tax Code, deduct
and withhold a Final VAT due at the rate of five percent
(5%) of the gross payment.
The five percent (5%) final VAT withholding rate shall
represent the net VAT payable of the seller while the
remaining seven percent (7%) effectively accounts for the
standard input VAT for sales of goods or services.
The government or any of its political subdivisions,
instrumentalities or agencies including GOCCs, as well as
private corporation, individuals, estates and trusts, whether
large or non-large taxpayers, shall withhold twelve percent
(12%) VAT with respect to the following payments:
1) Lease or use of properties or property rights
owned by non-residents; and
2) Other services rendered in the Philippines by non-
residents.
Filing of Returns and Payment
Every person liable to pay VAT shall file a quarterly
return
of the amount of his gross sales or receipts within 25 days
following the close of the taxable quarter: Provided,
however, That VAT-registered persons shall pay VAT on
a monthly basis. (Section 114(A), NIRC)
Administrative and Penal Sanctions
The Commissioner or his authorized representative is
hereby empowered to suspend the business operations and
temporarily close the business establishment of any person
for any of the following violations:
(A) In the case of a VAT-registered Person. –
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return as required
under Section 114; or
(3) Understatement of taxable sales or receipts by thirty
percent (30%) or more of his correct taxable sales or
receipts for the taxable quarter.
(B) Failure of any Person to Register as Required under
Section 236.
The temporary closure of the establishment shall be for the
duration of not less than five (5) days and shall be lifted
only upon compliance with whatever requirements
prescribed by the Commissioner in the closure order.
(Section 115 of the NIRC)
JUDICIAL REMEDIES
Remedies against Assessment Notices
Administrative Protest
The taxpayer or its authorized representative or tax agent
may protest administratively against the FLD/FAN within
thirty (30) days from date of receipt by filing a request for
reconsideration or reinvestigation with the BIR.
REQUEST FOR
RECONSIDERATION REQUEST FOR
REINVESTIGATION
A claim for reevaluation of A claim for reevaluation
the assessment based on of the assessment based
existing records without on newly discovered or
need of additional additional evidence.
evidence.
It may involve a question It may also involve a
of fact or law or both. question of fact or law or
both.
It does not toll the statute It tolls the statute of
of limitations. limitations.
For requests for reinvestigation, the taxpayer shall submit
all relevant supporting documents in support of his protest
within sixty (60) days from date of filing of his letter of
protest; otherwise, the assessment shall become final.
Remedies of the taxpayer in case of denial or inaction of
the Commissioner
A. By the CIR’s duly authorized representative
1. If the protest is denied, in whole or in part, the taxpayer
may either:
a. appeal to the CTA within 30 days from date of receipt of
the said decision; or
b. elevate his protest through request for reconsideration to
the CIR within 30 days from date of receipt of the said
decision. No request for reinvestigation shall be allowed in
administrative appeal and only issues raised in the decision
of the CIR’s duly authorized representative shall be
entertained by the CIR.
These options are mutually exclusive.
2. If the protest is not acted upon, the taxpayer may either:
a. appeal to the CTA within 30 days after the expiration of
the 180-day period; or
b. await the final decision of the CIR’s duly authorized
representative on the disputed assessment.
These options are mutually exclusive.
B. By the CIR
1. If the protest or administrative appeal, as the case may
be, is denied, in whole or in part, the taxpayer may appeal
to the CTA within 30 days from date of receipt of the said
decision. Otherwise, the assessment shall become final,
executory and demandable.
A motion for reconsideration of the CIR’s denial of the
protest or administrative appeal, as the case may be, shall
not toll the 30-day period to appeal to the CTA.
2. If the protest or administrative appeal is not acted upon,
the taxpayer may either:
a. Appeal to the CTA within 30 days from after the
expiration of the 180- day period; or
b. Await the final decision of the CIR on the disputed
assessment and appeal such final decision to the CTA
within 30 days after the receipt of a copy of such decision.
These options are mutually exclusive.
Assessments are deemed final when:
1. The taxpayer failed to file a protest 30 days from receipt
of the assessment.
2. After the 180-day period and the CIR has not yet acted
on the protest, the taxpayer fails to appeal it.
3. After 30 days from the receipt of the decision of the CIR
the taxpayer fails to appeal.
Prescriptive Periods
General Rule:
The right to assess must be done within 3 years from the
date of:
1. Actual filing of the return, or
2. From the last date prescribed by law for the filing of
such return, whichever is later.

The prescriptive period to collect taxes due is five years

from the date of assessment.

Exceptions:
1. False or fraudulent return with intent to evade the
tax: within 10 years from discovery without need of
assessment
2. Failure or omission to file return: within 10 years
from discovery without need of assessment
3. Where a waiver of statute of limitations in writing
executed before the expiration of the period of
assessment of taxes, or for collection, before the
five-year period for expires: period agreed upon.

NOTE: The period agreed upon may be extended by

subsequent written agreements made before the period
previously agreed upon.