F. SPECIFIC ITEMS OF INCOME
(2011)
1. Final Tax Rates (RA 10963 – RA 11534)
a. Tax Tables
b. Sec. 4 RR No. 5-2021, April 8 2021
2. Royalties
ICONIC BEVERAGES VS. CIR - For royalties to be
subject to final tax, they must be in the nature of
passive income and not income generated in the
active pursuit and performance of the corporation’s
primary purpose. Hence, when royalties are derived
from its primary activities, they are subject to Regular
Corporate Income Tax (RCIT) under Section 32 (A)(6)
NIRC.
3. Interest
a. Compare with gains relative to bonds
i. Sec 32(B)(7)(g) NIRC
BDO VS. REPUBLIC OF THE PHILIPPINES (2015) –
Under the 1997 National Internal Revenue Code,
Congress specifically defined “public” to mean “twenty
(20) or more individual or corporate lenders at any
one time.”  Hence, the number of lenders is
determinative of whether a debt instrument should be
considered a deposit substitute and consequently
subject to the 20% final withholding tax - (20-lender
rule). from the point of view of the financial market,
the phrase “at any one time” for purposes of
determining the “20 or more lenders” would mean
every transaction executed in the primary or
secondary market in connection with the purchase or
sale of securities.
BDO VS. REPUBLIC OF THE PHILIPPINES (2016) -
The definition of deposit substitutes in Section 22(Y)
specifically defined “public” to mean “twenty (20) or
more individual or corporate lenders at any one time.”
The reckoning of the phrase “20 or more lenders”
should be at the time when the petitioner-intervenor
RCBC Capital sold the PEACe bonds to investors.
Should the number of investor to whom petitioner-
intervenor RCBC Capital distributes the PEACe
bonds, therefore, be found to be 20 or more, the
PEACe Bonds are considered deposit substitutes
subject to 20% final withholding tax. Petitioner-
intervenors RCBC/CODE-NGO and RCBC Capital, as
well as the final bondholders who have recourse to
government upon maturity are liable to pay the 20%
final withholding tax.
The Bureau of Internal Revenue is estopped from
imposing and/or collecting the 20% final withholding
tax from the face value of these Bonds. The Supreme
Court interpretation in its January 2015 decision of the
phrase “at any one time” to determine the phrase “20
or more lenders” to include both the primary and
secondary market cannot be applied to the PEACe
Bonds and should be applied prospectively.
CIR VS. FILINVEST DEVELOPMENT CORP.
- Despite the seemingly broad power of the CIR to
distribute, apportion and allocate gross income under
(now) Section 50 of the Tax Code, the same does not
include the power to impute theoretical interests even
with regard to controlled taxpayers’ transactions. This
is true even if the CIR is able to prove that interest
expense (on its own loans) was in fact claimed by the
lending entity. This is because under the Civil Code,
“no interest shall be due unless expressly stipulated in
writing”.
DOF VS. ASIA UNITED BANK - The CIR is
authorized to distribute, apportion, or allocate gross
income or deductions if they determine that such
distribution, apportionment, or allocation: (a) is
necessary in order to prevent evasion of taxes; or (b)
clearly to reflect the income of organizations, trades,
or businesses.
Section 50 authorizes the CIR to distribute, apportion
or allocate gross income or deductions between or
among two or more organizations, trades or
businesses owned or controlled directly or indirectly
by the same interests, if he determines that such
distribution, apportionment or allocation is necessary
in order to clearly reflect the income of such
organization, trade or business. Thus, the
Commissioner is authorized to make transfer pricing
adjustments. However, Section 50 is limited only to
allocating expense deductions between two or more
organizations, trades, or business. The subject
regulation provides for an allocation method for
different units or income streams within one bank or
financial institution. The FCDU/EFCDU and RBU are
part of a single bank or financial institution. It is hence
evident that Section 50 cannot be invoked as a
statutory basis for RR 4-2011 to require the allocation
of costs and expenses among different units or
income streams within a bank or single business unit
thereof. Consequently, RR 4-2011 is declared null
and void.
4. Dividends
a. Stock Dividends
i. Sec 73(B) NIRC
CIR VS. MANNING – The distinctions between a
stock dividend which does not and one which does
constitute taxable income to the shareholders is that a
stock dividend constitutes income if it gives the
shareholder an interest different from that which his
former stockholdings represented. On the other hand,
it does not constitute income if the new shares confer
no different rights or interests than did the old shares.
Therefore, whenever the companies involved parted
with a portion of their earnings to buy the corporate
holdings of Reese, they were making a distribution of
such earnings to respondents. These amounts are
thus subject to income tax as a flow of cash benefits
to respondents. Hence, respondents are liable for
deficiency income taxes.

CIR VS. CA – The exchange of common with
preferred shares is not taxable because it produces
no realized income to the subscriber but only a
modification of the subscriber's rights and privileges
which is not a flow of wealth for tax purposes.
b. Cash and/or Property Dividends/Tax Sparing
Rule
TAX SPARING RULE - This tax-sparing credit
provision allows the reduction of the 30 percent tax
rate to 15 percent, on the condition that the country in
which the nonresident foreign corporation is domiciled
allows a credit against the tax due from the non-
resident foreign corporation taxes deemed to have
been paid in the Philippines equivalent to the
difference between the regular tax rate and the 15
percent tax on dividends. This tax-deemed paid
happens to be also at 15 percent (30 percent to 15
percent) based on current tax rate.
MARUBENI CORP. VS. CIR – The applicable
provision of the Tax Code is Section 24(b)(1)(iii) in
conjunction with the Philippine-Japan Tax Treaty of
1980. As a general rule, Marubeni is taxed 35% of its
gross income from all sources within the Philippines.
However, a discounted rate of 15% is given to
Marubeni Corporation on dividends received from
Atlantic Gulf and Pacific Co. on the condition that
Japan, its domicile state, extends in favor of Marubeni
Corporation a tax credit of not less than 20% of the
dividends received. This 15% tax rate imposed on the
dividends received under Section 24(b)(1)(iii) is easily
within the maximum ceiling of 25% of the gross
amount of the dividends as decreed in Article 10(2)(b)
of the Tax Treaty.
CIR VS. WANDER PHILIPPINES – the tax shall be
15% of the dividends received, subject to the
condition that the country in which the non-resident
foreign corporation is domiciled shall allow a credit
against the tax due from the non-resident foreign
corporation taxes deemed to have been paid in the
Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on
corporations and the tax (15%) on dividends.
While it may be true that claims for refund construed
strictly against the claimant, nevertheless, the fact that
Switzerland did not impose any tax on the dividends
received by Glaro from the Philippines should be
considered as a full satisfaction if the given condition.
CIR VS. PROCTER AND GAMBLE – The NIRC does
not require that the US tax law deem the parent
corporation to have paid the 20 percentage points of
dividend tax waived by the Philippines. It only requires
that the US “shall allow” P&G-USA a “deemed paid”
tax credit in an amount equivalent to the 20
percentage points waived by the Philippines. Section
24(b)(1) does not create a tax exemption nor does it
provide a tax credit; it is a provision which specifies
when a particular (reduced) tax rate is legally
applicable.
c. Liquidating Dividends
WISE AND CO VS. MEER – The distinction between
a distribution in liquidation and an ordinary dividend is
factual; the result in each case depending on the
particular circumstances of the case and the intent of
the parties. If the distribution is in the nature of a
recurring return on stock it is an ordinary
dividend. However, if the corporation is really winding
up its business or recapitalizing and narrowing its
activities, the distribution may properly be treated as
in complete or partial liquidation and as payment by
the corporation to the stockholder for his stock. The
corporation is, in the latter instances, wiping out all
parts of the stockholders' interest in the company.
Such liquidating dividends are taxable income.
Amounts distributed in the liquidation of a corporation
shall be treated as payments in exchange for the
stock or share, and any gain or profit realized thereby
shall be taxed to the distributee as other gains or
profits.
5. Sale of Shares of Stock
c. Net Capital Gain
JARDIN DAVIES VS. CIR
d. Listed Shares
IFC Capitalization vs. CIR
6. Sale of Real Property
SMI-ED TECHNOLOGY CORP VS. CIR - Capital
gains of individuals and corporations from the sale of
real properties are taxed differently. Individuals are
taxed on capital gains from sale of all real properties
located in the Philippines and classified as capital
assets.
REPUBILC VS. SPS. SALVADOR - RTC committed
a serious error when it directed the Republic to pay
respondents consequential damages equivalent to the
value of the capital gains tax and other taxes
necessary for the transfer of the subject property.
Since capital gains tax is a tax on passive income, it is
the seller, or respondents in this case, who are liable
to shoulder the tax.
REPUBLIC VS. SPS. BUNSAY