Basic Structural and Definitional Concepts
Structural and Definitional Concepts
Meaning of Income
Sec. 32(A), NIRC
SEC. 32. Gross Income. -
(A) General Definition. - 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.
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this Title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum or
otherwise, but if such amounts are held by the insurer under an agreement to
pay interest thereon, the interest payments shall be included in gross income.
(2) Amount Received by Insured as Return of Premium. - The amount received
by the insured, as a return of premiums paid by him under life insurance,
endowment, or annuity contracts, either during the term or at the maturity of
the term mentioned in the contract or upon surrender of the contract.
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift,
bequest, devise, or descent: Provided, however, That income from such
property, as well as gift, bequest, devise or descent of income from any
property, in cases of transfers of divided interest, shall be included in gross
income.
(4) Compensation for Injuries or Sickness. - amounts received, through
Accident or Health Insurance or under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus the amounts of any
damages received, whether by suit or agreement, on account of such injuries
or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required
by any treaty obligation binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 and
those received by officials and employees of private firms, whether
individual or corporate, in accordance with a reasonable private
benefit plan maintained by the employer: Provided, That the retiring
official or employee has been in the service of the same employer
for at least ten (10) years and is not less than fifty (50) years of age
at the time of his retirement: Provided, further, That the benefits
granted under this subparagraph shall be availed of by an official or
employee only once. For purposes of this Subsection, the term
'reasonable private benefit plan' means a pension, gratuity, stock
bonus or profit-sharing plan maintained by an employer for the
benefit of some or all of his officials or employees, wherein
contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials
and employees the earnings and principal of the fund thus
accumulated, and wherein its is provided in said plan that at no time
shall any part of the corpus or income of the fund be used for, or be
diverted to, any purpose other than for the exclusive benefit of the
said officials and employees.
(b) Any amount received by an official or employee or by his heirs
from the employer as a consequence of separation of such official
or employee from the service of the employer because of death
sickness or other physical disability or for any cause beyond the
control of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding,
social security benefits, retirement gratuities, pensions and other
similar benefits received by resident or nonresident citizens of the
Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other
institutions, private or public.
(d) Payments of benefits due or to become due to any person
residing in the Philippines under the laws of the United States
administered by the United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security
System in accordance with the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291,
including retirement gratuity received by government officials and
employees.
Basic Structural and Definitional Concepts
(7) Miscellaneous Items. –
(a) Income Derived by Foreign Government. - Income derived from
investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits in banks in the
Philippines by (i) foreign governments, (ii) financing institutions
owned, controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial institutions
established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. -
Income derived from any public utility or from the exercise of any
essential governmental function accruing to the Government of the
Philippines or to any political subdivision thereof.
(c) Prizes and Awards. - Prizes and awards made primarily in
recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part
to enter the contest or proceeding; and
(ii) The recipient is not required to render substantial future
services as a condition to receiving the prize or award.
(d) Prizes and Awards in sports Competition. - All prizes and awards
granted to athletes in local and international sports competitions
and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports associations.
(e) 13th Month Pay and Other Benefits. - Gross benefits received by
officials and employees of public and private entities: Provided,
however, That the total exclusion under this subparagraph shall not
exceed Ninety thousand pesos (P90,000) [41] which shall cover: [4]
(i) Benefits received by officials and employees of the
national and local government pursuant to Republic Act
No. 6686;
(ii) Benefits received by employees pursuant to
Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not
covered by Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and
Christmas bonus.
(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.
(i) Income Derived from the Sale of Gold Pursuant to Republic Act
No. 7076. – Income derived from the following transactions
pursuant to Republic Act No. 7076, otherwise known as the
“People’s Small-scale Mining Act of 1991”:
(1) The sale of gold to the Bangko Sentral ng Pilipinas by
registered small-scale miners, as defined under Republic
Act. No. 7076, and accredited traders; and
(2) The sale of gold by registered small-scale miners to
accredited traders for eventual sale to the Bangko Sentral
ng Pilipinas.
Meaning of Income
● All income derived from whatever source. Sec. 32
● No guidance on whether a particular item is, or is not, income.
● Sec. 36, Rev. Regs. No. 2
○ Per RR No. 2, “all wealth which flows into the taxpayer other than as
mere return of capital.”
○ Includes forms of income described as gains and profits, including
gains from sale or other disposition of capital assets.
○ “gain derived from capital, from labor, or from both combined.” Eisner
● Capital v Income – Madrigal
Capital Income
Fund Flow
Wealth Service of Wealth
● It is an amount of money coming to a person, whether as payment for services
(labor), or interest or profit from investment (capital) – Conwi
Basic Structural and Definitional Concepts
● The following are not income :
○ Country Club membership fees and other assessments of similar
nature are not income. (ANPC, FedGolf)
○ So are condominium dues. (First E-Bank)
● Ex. Suppose your parents purchase a Valle Verde land 20 years ago for 1M.
Does the guy have to recognize any income because his property which he
acquired for only 650k is suddenly worth 20M? No. There is no taxable income
because there is no realization yet– no realized income yet. There is
realization if the guy subsequently disposes of the property. The appreciation
in value of the property is not yet taxable.
● In order for income to be taxed, it must be realized first. An income could be
gained or derived from labor, capital, or from both combined as the court said
in Eisner v. Macomber
○ Ex. Gain derived from labor
■ Doctor renders services, and gets paid for service. The
payment is income because it’s a gain derived from labor.
■ Contractor renders services, then taxable for remuneration
of services.
○ Ex. Gain derived from capital
■ money put in the time deposit in the bank. The interest is
income.
■ Globe telecom shares
Q : If you get taxed from the appreciation, what are you going to do? sell the property?
A : Sir : well that’s unjust
CIR v Tours Specialist
● Yung patong lang yung machacharge sa travel agent, basically if the travel agent
PROFITS from the transaction and not merely accommodating third parties.
Q : what income will they be taxed ?
A : travel agent should not be charged for accommodation, hotel or plane fare , meal
expenses etc. Simply because these amounts that are set aside for third parties will not
constitute income ; these amounts will not go to the travel agent
Q : What about custom brokers?
A : Custom brokers pay the duties. These bills are billed to the “employer” or “client”.
These bills are not chargeable to the income of custom brokers.
Realization Income
● Increase in net worth due to appreciation in value of assets not taxable.
● Severance from capital necessary.
● Thus, profits of a corporation are not yet taxable to shareholders until there’s
distribution.
● This is the reason why stock dividends are not taxable yet.
● Myriad problems will arise if unrealized gain were to be taxed.
● See Sec. 38, Rev. Regs. No. 2
Imputed Income
● Theoretical receipt of income or economic gain, but no legal basis to impose a
tax, or doing so is administratively cumbersome.
○ E.g., interior designer renovating her own home, lawyer preparing his
own last will and testament, owner-occupied house, etc.
○ Ex deals, e.g., lawyer and doctor
● Difficult to bring to the realm of taxability.
● Income is only taxable if it is realized
● Constructive Income
○ Ex. Mr Pimentel and I bet in golf. I lost and owed him 1M. Atty’s fees
is owed to Sir 500k. My client pays Mr. Pimentel.
○ The facts are clear that that 500k is still taxable to me because of
the theory of constructive receipt.
● Constructive income is not the same as imputed income
● Impute income Analysis:
Q : Mr. Pimentel is a doctor and Sir is a lawyer. Agree na lang sila na sagot ni Sir si
Pimentel pag may kaso. Suppose nagkasakit si Sir, so he owes Mr. Pimentel 1M. Then
BIR investigated Mr. Pimentel, and Sir won the case. Under the circumstances, who has
taxable income? Mr. Pimentel? Me? Or both?
A : NEITHER. “Difficult to bring to the realm of taxability”
● When doctors want to evade tax liability , BIR requires “Doctor sworn
statement” → obligated to explain why “minimal charge”
● Note : pag yung patient sa clinic nag bayad + no receipt, as a rule, is also
taxable income, but subject to proof
Recovery of Capital Investment
● Taxpayer must be allowed to recover his cost in the investment.
● Doing so is consistent with the definition of “income”.
● May lawyers or doctors be allowed to deduct or amortize their cost of education
during their active years of practice?
● See Sec. 40(A), NIRC
Sec. 40(A), NIRC
SEC. 40. Determination of Amount and Recognition of Gain or Loss. -
(A) Computation of Gain or Loss. - The gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom over the basis or adjusted basis
for determining gain, and the loss shall be the excess of the basis or adjusted basis for
determining loss over the amount realized. The amount realized from the sale or other
disposition of property shall be the sum of money received plus the fair market value
Basic Structural and Definitional Concepts
of the property (other than money) received;
Q : You are engaging in a Jolibee franchise, which needs 75M to start. Is 75M taxable
income?
A : No. This is never taxable. There is no realization yet. There is realization only when
the corporation makes money and declares dividends as return on investment.
Q : 20 years later, ayaw mo nang magnegosyo ng Jollibee franchise and want to sell
your company. The 75M is the cost of your investment, and now this doubled in value
into 150M. How does the recovery of capital investment come into play?
A : You’re selling it for 150M. Magkano ba yung investment mo? 75M. So when you
receive the 150M purchase price for your shares of stock in your company, you will not
be taxed for the entire 150M, but only the excess of your capital. This is because the
75M is only your capital, and you are allowed to recover your capital, tax-free.
Q : Similarly, if your purchase a lot and put up a warehouse on that. Lot cost you 1M
and 5M for constructing the warehouse. If you sell it for 10M, and your capital is 6M,
how much will you be taxed for?
A : You will now be taxed only for 4M. Because you cannot be taxed on your capital.
Windfall Receipts
● Exemplary damages for fraud and the punitive portion of a treble-damage
antitrust recovery from a competitor. Glenshaw Glass
● Insider profits recovered from a director found guilty of insider trading. Gen.
American Investors
● Unclaimed customer deposits, uncashed checks, unused pre-paid cards, and the
like.
Q : Suppose you are a shareholder in a company and you found out that there is an
anomaly. So you reported it to the BIR. Sabi ng kumpanya, I’ll give you 5M para hindi
ka na magbigay ng ebidensya. Is there taxable income?
A : Yes. Even income from unlawful sources is taxable income. It’s a windfall receipt.
Q : Suppose you purchased an old piano for 5k. Years later, it turned out that the piano
is worth 500k because it used by owned by a national artist. Somebody offered to buy
the piano from you for 500k.
A : This is a windfall receipt.
Q : Spouses Meltio-Javier. They were expecting a wire-transfer of $1k, pero natanggap
nila ay $1M kasi nagkamali yung bangko ng credit. In bad faith, they immediately
withdrew the money and invested it everywhere (stock market, etc.). Is that taxable
income?
A : Yes. They derived a windfall receipt. They were expecting a 1k but received 1M. They
reduced this to their own benefit. It would have been different if they reported it to the
authorities.
Recovery of Deducted Items: Tax Benefit Principles
● Bad debt previously claimed as a deduction is subsequently recovered.
● Reimbursements of previously deducted losses.
● Recovery of excess employer contributions to an overfunded retirement plan.
● However, tax in year of recovery may be more or less than the tax benefit
previously enjoyed.
Q : Suppose you are a businessman and have a warehouse. Nasunog yung warehouse
mo. 100M yung inventory na nasunog. You filed a claim from the insurance company,
but they denied the claim on suspicion that this was arson. At this point, you cannot
claim a deduction in gross income yet because you have a pending case. Are you
allowed the loss? BIR might probably contest that because you have a pending claim,
and it’s not a complete transaction yet. But suppose that you claimed the loss of 100M,
so dineduct mo ‘to from gross income as loss.
A : If tax is 25%, then that is the amount of your tax benefit, to the extent of your
corporate income tax.
Q : Let’s say 5 years later naging final na yung kaso and nabayaran ka ng 100M. You
deducted 100M from your tax income as loss, so nagkaroon ka ng tax benefit from
claiming. Ngayon, bigla kang binayaran ng insurance company. What’s the
consequence now?
A : Under the tax benefit principle, you will be now required by law to report the 100M
you received by way of indemnification by the insurance company as income. Kasi di
puwede nagclaim ka ng tax deduction 5 years ago tapos ngayon biglang marerecover
mo 100M buo. Dahil diyan, kailangan mong ibalik sa gobyerno yung tax benefit na
nareceive mo kasi you did not suffer any loss kasi nabayaran ka na ng insurance
company for 100M. You will pay 25% tax on that too.
You can further illustrate this by discussing the principle of depreciation.
Q : Suppose you bought a brand new car for 100M. Yearly, you declare 200k as
depreciation. If every year nagcclaim ka ng depreciation by way of deduction from gross
income, at the end of 5 years, marerecover mo na yung 100M cost. Eh may naloko na
mabenta to for 500k. Will you still pay income tax?
A : Yes. You will pay the income tax for 500k because you’ve already recovered your
cost of 100M. At the end of 5 years, zero na yung cost mo.
Indirect Payments
● Payment by employer of employee’s taxes. Old Colony Trust
● Payment by tenant of landlord’s realty taxes.
● Payment by a third party of debtor’s indebtedness to a creditor.
● In a sale contract, payment by the buyer of the seller’s income tax or CGT liability.
● “Tax on tax” or “tax pyramiding”.
● How do you treat employer’s contributions to social security, PhilHealth or HDMF
for the benefit of employees?
● How about litigation expenses ordered by court to be paid by a corporation in a
derivative suit filed by a shareholder?
● Or payment by an insurance company to a victim of an automobile accident?
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Q : Suppose I promise to buy Bernette a brand new iPad at the end of the semester. But
Saulong bumped my car, so nagkautang siya sa akin na 500k. The parents of Saulong
offered to pay more. Sabi ko, bayad niyo na lang kay Bernette. Is this indirect payment?
A : Yes.
Q : In a US Case, the employer struck an arrangement with his employee, where the
employer would pay the income tax of the employee. Hindi nireport ng employee, and
as an excuse, hindi naman raw dumidirect sa kanya.
A : The Court said, that is an indirect payment.
Q : The buyer agreed to pay the income tax payable of the seller. Nung pumunta sila sa
BIR para kumuha ng tax clearance, sabi ng BIR, the said provision is considered as an
additional purchase price. Nung nirecompute, the capital gains tax increased.
A : This is because it’s an indirect payment of income.
Q : To continue, sabi ng seller, i-shoulder ng buyer yung assessment. The buyer was
therefore paid by the buyer. BIR learned about the arrangement again, so chinarge
nanaman ng bago si seller.
A : This is tax pyramiding, a tax on tax on tax. The BIR has the right to consider the
payment of the buyer.
Discharge of Indebtedness Income
● Borrowed funds not includible in gross income even if they increase one’s assets
because such increase is offset by the same amount that he is obligated to pay.
● But discharge of a debt for less than the amount received by the borrower is an
accession to income. (Kirby Lumber)
● How do you treat debt condonation and simultaneous conversion of such
condoned indebtedness into equity or additional paid-in capital (APIC)?
● How about a cancellation by a relative (e.g. parents or grandparents) of
indebtedness extended to fund a start-up or in recognition of a child’s
achievement?
Q : When is this taxable?
A : As a general rule, this is taxable.
Q : Suppose you are a businessman and you owe the supplier 10M. Naawa yung
supplier, bayaran na lang raw 5M.
A : The 5M condoned will be treated as taxable income. This is what you call as
discharge of indebtedness income. If your indebtedness is condoned in whole or in part,
this will become taxable. However, BIR ruled in the past, if you remain insolvent as you
were insolvent in the very beginning in the discharge of indebtedness income, you will
not be considered to have taxable income.
Q : When is this not taxable?
A : When the discharge of indebtedness income partakes the nature of a gift.
Q : Suppose that you owe your sister or parents 10M. Binilan ka nila ng condo sa
rockwell. Do you have taxable income?
A : No. It is of the nature of a gift. Because of the relationship between the debtor and
the creditor, the situation is transformed into something else. Instead of discharge of
indebtedness income, the amount forgiven is a gift. Under taxation, any property given
as a gift is excluded as income.
Income from Unlawful Activities
● Sec. 32 defines gross income as “all income derived from whatever source,”
without distinguishing between lawful and unlawful sources.
● US Treatment:
○ Original wording in the U.S. Revenue Act of 1913 taxed income from a
variety of sources, including “any lawful business carried on for gain or
profit.”
○ 3 years later, the U.S. Congress deleted the word “lawful” from the
statute.
○ Rationale: the fact that a business is unlawful should not exempt it
from paying taxes that, if lawful, it would have to pay. Sullivan
○ How do you treat embezzled funds that, like borrowed funds, are
subject to a duty to repay or return? (Wilcox)
○ The U.S. Supreme Court held in Wilcox that the embezzled funds are
not includible in gross income for the reason above-mentioned.
○ Wilcox ruling overturned many years later in James.
○ Ill-gotten wealth, including bribes, taxable. Republic ($658M), Marcos
Jr. ($3.3M),
Amounts Received Under Claim of Right
● One receives funds under circumstances permitting him to use them as his own
but is later required to repay part or all of the amount received because:
○ Amount was paid by mistake;
○ Erroneously computed; or
○ Controversy regarding the payment is eventually decided vs. the
taxpayer.
● Amounts of this type are ordinarily includible in gross income when received
under the “claim of right” doctrine- North American Oil Consolidated
● Erroneous bank remittance of $1M, instead of just $1,000 Javier
● To avoid taxability, promptly return the funds received in error, deposit to an
escrow, record it as a liability in the meantime, etc.
Reimbursement for Wrongful Death or Injury
● Amounts received through accident or health insurance or under Workmen’s
Compensation Acts as compensation for personal injuries or sickness are
excludable from gross income. Sec. 32(B)(4)
Basic Structural and Definitional Concepts
● So are damages received, whether by suit or agreement, on account of such
injuries or sickness. Ibid.
● How do you treat amounts received as compensation for non-physical injuries,
or damages received on account of such non-physical injuries?
● E.g. damages for defamation, breach of promise to marry,
Sec. 40(A), NIRC
SEC. 32. Gross Income. -
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this Title:
(4) Compensation for Injuries or Sickness. - amounts received, through Accident or
Health Insurance or under Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amounts of any damages received, whether by
suit or agreement, on account of such injuries or sickness.
Q : Supposed you are illegally dismissed. You went to the Department of Labor and went
up to the SC. The payment consists of two items. Damages for mental anguish and for
back wages. Which of those items would constitute taxable income?
A : Backwages. If he had not been illegally dismissed, then it would have been taxable.
Q : How about damages? What is the legal basis?
A : Not taxable income.
Q : What if you spent 1.5M in a suit; and won 1.5M. Is there tax?
A : No. No gain derived, just like capital investment.
Q : May nabangga ka. Insurance company paid 3M. Do you agree that you should
recognize income under the indirect payment principle?
A : Not taxable.
● But this is not health insurance, but a property insurance
Q : When the insurance pays, on whose obligation? Insurance company’s or yours?
A : It is the insurance company’s obligation to pay as per the insurance contract. It is
the insurance company’s obligation from the start to discharge the obligation to pay.
● Payment by the insurance company to the third party is a discharge of its own
contractual obligation as insurer rather than your indebtedness or liability
○ So hindi ito pareho sa may umuupa sa property mo tapos siya
nagbabayad ng real property tax
○ Iba rin to sa income tax liability incurred by the employer on behalf
of his employee
○ In this case, the insurer discharged its own obligation, so there is no
income
○ Another example is the payment of the SSS or PhilHealth
Definition of “Corporation”
● Regular Corporation under the RCC, including one-person corporation (“OPC”)
● Association
● Partnership, no matter how created or organized, except GPPs.
● Joint Ventures,
○ Except those formed for construction projects or for petroleum, coal,
geothermal and other energy operations under a SC with the
government. Sec. 22(B)
● Unregistered partnerships may be taxed like a corporation.
Sec. 22(B), (C), NIRC
(B) The term 'corporation' shall include one person corporations, partnerships, no
matter how created or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does not include general
professional partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium agreement under a service
contract with the Government.
'General professional partnerships’ are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is
derived from engaging in any trade or business.
(C) The term 'domestic’, when applied to a corporation, means created or organized in
the Philippines or under its laws.
● Jurisprudence :
○ Unregistered partnerships may be taxed like a corporation.
○ Pool of machinery insurers. (Afisco)
○ Siblings who bought 24 real properties and rented them out.
(Evangelista)
○ 2 bus companies who entered into a joint management agreement.
(Batangas Trans. Co.)
○ 15 persons who bought a winning sweepstakes ticket. (Gatchalian)
○ Co-heirs who rented out or sold the inherited properties and used the
proceeds to invest in more properties. (Ona)
○ Father and son who bought a lot and building and rented it out to
various tenants. (Reyes)
○ 4 siblings who sold 2 parcels of land given to them by their father and
divided the profit among themselves. (Obillos)
○ Petitioners bought 2 parcels of land in 1965. Did not sell or develop
them. In 1966, they bought 3 parcels. In 1968, they sold the 2 parcels
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bought in 1965. They sold the remaining 3 parcels in 1970. Isolated
and no habituality. (Pascual)
○ An unregistered partnership should not be confused, however, with a
mere co-ownership.
○ A mere co-ownership or co-possession does not of itself establish a
Definition of “Corporation”
partnership, whether the co-owners or co-possessors do or do not share
in the profits from the use of the property. Art. 1769(2) and (3), CC
○ This doctrine shifted JVA Corp:
■ JVs organized by landowner and developer previously held
non-taxable as a corporation.
■ In 2012, non-taxable JVs limited to construction project
formed by and among licensed local contractors accredited
by the PCAB, and by and between local contractors and
foreign contractors also accredited by PCAB for construction
project certified by the appropriate Tendering Agency and
foreign-financed or internationally funded. Rev. 10-2012
○ But see recent SC decision in Malayan Insurance where the SC held
that a JV for a construction project is not a taxable corporation, citing
Sec. 22(B).
○ Thus, the allocation to the JV partners of their respective share in the
developed lots or finished units in a condo project is not subject to
income tax or VAT. Ibid.
○ Subsequent sale by the JV partners of the units or lots allocated to them
is subject to income tax and VAT. Ibid.
Corporation
● registered with the SEC; articles of incorporation; partnerships; but does NOT
include GPP and joint ventures
Partnerships
● GR: For income tax purposes, partnerships are treated as a corporation (even
if not intended)
● EXC: General professional partnerships
○ Partners exercise a common profession
■ Not included in the definition of a corporation
■ Law firms, accounting firms
○ EXC: Joint ventures
1. Construction project
2. Petroleum or energy-related project or any venture with the
government
Ex. DMCI is a construction firm. It enters into a contract with Mitsubishi to build a
powerplant in Mindanao. They agreed to split the profit into 50-50. Unincorporated
because they did not file with the SEC.
● They will be taxed as soon as there has been a distribution of profits.
Realization of income principle.
● They will be taxed as dividends, payable at 10%
● They avoid the first layer of tax or corporate income tax
Baniqued : Definition in accordance with Revised Corporation Code
Filing of articles in the SEC
→ one person corporation ; or
→ more incorporators
→ includes non-stock (members) non-profit
→ partnerships registered or unregistered
GR : “corporation” includes partnerships
Exceptions :
1. GPPs
2. Joint Venture Agreement for Construction Projects
3. Joint Venture[Unincorporated, denominated as JVA or MOA or consortium
agreement]
4. Service Contracts Petroleum and Energy projects through JVAs [Corporate
Income Tax exempted ; ex. Malampaya]
Re : Entities not treated as corporation
● General Professional Partnerships or GPP (Architectural firms, Law Firms,
Accounting Firms)
● The term corporation DOES NOT include GPPs
● Cannot practice law as a corporation!
Note : For purposes of income tax, partnerships are considered as “corporations” in
NIRC.
Note : definition of corporation in NIRC includes “unintended partnerships” ; these
unregistered partnerships sa SEC.
Note : All tax consequences relating to corporations would also apply to all types of
partnerships. Distribution among partners would be treated as “dividends”
Example : DM Consunji to build power plant in Mindanao through Joint Venture
Agreement with Japan, Supposed DM Consunji and Mitsubishi, contributed money and
property and 50/50 ratio for profit , this is UNINCORPORATED. Under the general rule,
they are not corporations. For tax purposes it may be treated as soon as they start
distributing profits, at this point they have received “income” declare net income/profit
of JVA subject to corporate income tax→ dito pa lang papasok yung 1st layer.
Baniqued :
1st layer of tax → 20% or 35%
2nd layer of tax → distribution of profits , like distribution of dividends.
● 10% taxable if individual yung nag rereceive
● NOT SUBJECT TO TAX non-individuals like corporations
Basic Structural and Definitional Concepts
Definition of Gross Income
Definition of Gross Income
Compensation Income
● Compensation for services in whatever form paid including, but not limited to,
Statutory Definition fees, salaries, wages, commissions, and similar items. Sec. 32(A)(1)
Sec. 32(A), NIRC ● Any remuneration for services rendered by an employee under an employer-
employee relationship.
SEC. 32. Gross Income. - ○ It doesn’t matter by what name the remuneration is called.
● Thus, compensation income includes salaries, wages, emoluments, honoraria,
(A) General Definition. - Except when otherwise provided in this Title, gross income allowances, commissions, bonuses, and fringe benefits (except those provided
means all income derived from whatever source, including (but not limited to) the to managerial and supervisory employees that are subject to FBT).
following items: ○ It also does not matter how the remuneration is paid (e.g., piece-work,
weekly, monthly, annually) what matters is its from an employer-
(1) Compensation for services in whatever form paid, including, but not limited to employee relationship
fees, salaries, wages, commissions, and similar items; ● It also includes remuneration paid even after the employer-employee
(2) Gross income derived from the conduct of trade or business or the exercise of relationship has ceased to exist if the payment is made for services rendered
a profession; while the employee was still in the employ of the employer.
(3) Gains derived from dealings in property; ● Compensation income may be paid in whatever form, as mentioned earlier, e.g.,
(4) Interests; stocks, bonds, some other property, facilities, privileges, in which case the FMV
(5) Rents; thereof shall be included in compensation income.
(6) Royalties;
(7) Dividends;
(8) Annuities; Employee Employer
(9) Prizes and winnings;
(10) Pensions; and The term “employee” covers all The term “employer” embraces not only
(11) Partner's distributive share from the net income of the general professional employees, whether in the private or an individual and a business enterprise
partnership. public sector, whether as officer or rank (corporation, partnership) engaged in
and file. trade or business but also an organization
exempt from tax, such as charitable
Inclusions in Gross Income institutions, religious organizations, clubs,
1. Compensation income (i.e.) Salaries and Wages and the Government, including its
2. Income from Conduct of Trade or Business agencies, instrumentalities and political
3. Income from Exercise of Profession subdivisions.
4. Income from Dealings in Property
5. Passive Income (Interest, Dividend, Royalty, Capital Gain)
6. Other Income (Annuities, Prizes and Winnings, Pensions, Debt Discharge, Claim Other Similar Situations:
of Right, Windfall Receipt, Recovery of Deducted Item, Unlawful Sources etc.) ● An individual who sits in the board of directors or board of trustees of a
corporation may, at the same time, be an employee or officer of that corporation.
Compensation for Services Consequently, any amount received by him, such as director’s fees and bonuses,
shall be treated as compensation income because there is an employer-
employee relationship.
Sec. 32(A)(1), NIRC ● However, amounts received by an independent director, or by any other director
or trustee who is not an employee or officer of the corporation, shall not be
SEC. 32. Gross Income. - treated as compensation income. Rather, they shall be taxed as income from
exercise of a profession or from the conduct of trade or business (i.e., business
(A) General Definition. - Except when otherwise provided in this Title, gross income income). Are they subject to value-added tax, too?
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 Sec. 24 (A)(2)(a) or (A)(2)(b)
fees, salaries, wages, commissions, and similar items;
(a) Rates of Tax on Taxable Income of Individuals
Definition of Gross Income
(b) Rate of Tax on Income of Purely Self-employed Individuals and/or Professionals
Whose Gross Sales or Gross Receipts and Other Non-operating Income Does Not Exceed
the Value-added Tax(VAT) Threshold as Provided in Section 109(BB)
Mixed Income Earners
● GR: An individual who receives purely compensation income is not entitled to
claim deductions from gross income.
● EXE: However, if such individual receives income, other than salaries and wages
or items of income subject to final withholding tax,
○ He may claim deductions for ordinary and necessary business
expenses against such other income.
○ In addition, he becomes liable for payment of value-added tax.
1. Fringe Benefits
Definition and Treatment
● Commonly referred to as “tax shelter”.
● Not reported as part of compensation income, but employers claimed the FB as
a business expense, hence, a deduction from gross income.
● With the imposition of the FBT, tax burden is shifted to the employer who is made
to bear the FBT based on the grossed-up monetary value of the FB.
● FBT is treated as a final income tax on the employee, with the employer acting
as a withholding agent.
○ Thus, PAGCOR, which is exempt from all taxes and fees except the 5%
franchise tax, is not exempt from the obligation to withhold the FBT on
FBs granted to its employees (cars, country club memberships, etc.).
Pagcor
Computation
● FBT is 35% based on the grossed- up monetary value of the FB
○ FBT is arbitrarily fixed at 35%
● Grossed- up monetary value is the actual monetary value of of the FB divided by
65%
● To Illustrate:
○ FB: P100,000
○ Grossed up- MB: 153, 846. 15
○ FBT- 35% P53,856.15
“Managerial or Supervisory” Employees
● Only fringe benefits furnished to “managerial or supervisory” employees are
subject to FBT.
● Thus, fringe benefits, if any, granted to rank and file employees are not subject
to FBT.
○ However, such fringe benefits are includible in the compensation
income of the rank-and-file employees, subject to the withholding tax
on compensation.
● Refer to Labor Code definition of “managerial” or “supervisory” employees.
Sec. 33, NIRC
SEC. 33. Special Treatment of Fringe Benefit. -
(A) Imposition of Tax. – Effective January 1, 2018 and onwards, a final tax of thirty-five
percent (35%) [43] is hereby imposed on the grossed-up monetary value of fringe
benefit furnished or granted to the employee (except rank and file employees defined
herein) by the employer, whether an individual or a corporation (unless the fringe
benefit is required by the nature of, or necessary to the trade, business or profession of
the employer, or when the fringe benefit is for the convenience or advantage of the
employer). The tax herein imposed is payable by the employer which tax shall be paid
in the same manner as provided for under Section 57 (A) of this Code. The grossed-up
monetary value of the fringe benefit shall be determined by dividing the actual
monetary value of the fringe benefit by sixty-five percent (65%) effective January 1,
2018 and onwards: [44] Provided, however, That fringe benefit furnished to employees
and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the
applicable rates imposed thereat: Provided, further, That the grossed -up monetary
value of the fringe benefit shall be determined by dividing the actual monetary value of
the fringe benefit by the difference between one hundred percent (100%) and the
applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25.
(B) Fringe Benefit Defined. - For purposes of this Section, the term 'fringe benefit' means
any good, service or other benefit furnished or granted in cash or in kind by an employer
to an individual employee (except rank and file employees as defined herein) such as,
but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference
between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:
(1) Fringe benefits which are authorized and exempted from tax under special
laws;
(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated
by the Secretary of Finance, upon recommendation of the Commissioner.
Definition of Gross Income
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of
the Commissioner, such rules and regulations as are necessary to carry out efficiently
and fairly the provisions of this Section, taking into account the peculiar nature and
special need of the trade, business or profession of the employer.
Rev. Regs. No. 3-98
REVENUE REGULATIONS NO. 3-98 issued June 4, 1998 implements Section 33 of the
National Internal Revenue Code (NIRC), as amended by RA No. 8424, relative to the
special treatment of fringe benefits granted or paid by the employer to employees,
except rank and file employees, beginning January 1, 1998.
The definition of fringe benefits as well as the determination of the amount subject to
the fringe benefits tax are specified in the Regulations.
Housing Privilege
If ownership is transferred to the The value of the FB = the FMV of the property.
employee
If there is no transfer of ownership The monetary value of the FB = depreciation value
of the property.
Thus in the situations above, the annual monetary value of the FB is 5% of the FMV of
the property, multiplied by 50%. The 5% corresponds to the depreciation value of the
property.
If the employer merely leases the the rental paid by the employer is the value of the
property for the benefit of the FB, multiplied by 50%.
employee
In the situation above, only 50% of the value of the FB is subject to FBT on the
assumption that the employee uses the property both for personal and business use.
● Housing facility situated inside, or within 50 meters from the perimeter of, the
business premises of the employer are not subject to FBT.
○ Reason: “Convenience of the employer” test
○ This includes house staff and the like.
Expense Account
● Generally, expenses incurred by an employee but which are paid for or
reimbursed by the employer constitute FBs.
● However, if such expenses are duly supported by receipts or invoices in the name
of the employer and they do not partake the nature of personal expenses of the
employee, then they are not taxable FBs.
● Thus, a restaurant receipt in the name of the employer that is reimbursed to the
employee by the employer constitutes taxable FB if the expense is incurred not
in connection with the trade or business of the employer or has no relation to the
performance by the employee of his official duties or functions, but rather
partakes of a personal expense of the employee or that of his family.
● Representation and transportation allowances regularly received by employees
at payroll time and which are fixed in amounts are not treated as taxable FB.
● Instead, they are considered as taxable compensation income subject to
withholding tax on compensation or salaries and wages. BIR Rul. No. 512-2011,
Dec. 20, 2011
Q: If the employer gives a representation allowance for 10k, divided to 5k tuwing
payroll time. It’s a fixed amount and given alongside the salary every 15th and 30th of
the month.
A: Pag ganyan, it is to be treated as compensation income subject to withholding tax
on compensation, rather than a FBT.
Motor Vehicles
● If vehicle is purchased by the employer but placed in the name of the employee,
then the value of the FB is equal to the acquisition cost of the vehicle.
● If the employer purchased the vehicle on installment but in the name of the
employee, the taxable FB is to the extent of the acquisition cost (excluding
interest) divided by 5 years, which approximates the depreciation value of the
vehicle.
● In case of company fleet, the taxable FB is the acquisition cost of the vehicle
assigned to the employee, divided by 5 years and multiplied by 50%.
● However, company fleet, whether owned or leased by the employer, that are
normally used for sales, freight, delivery, service and other business use are not
subject to FBT.
Q: Giving motors to employees is taxable FBT. If vehicle is in the name of the
employee, the monetary of FBT is acquisition cost
Q: If employer purchased the vehicle on installments but in the name of employee
A: Taxable is acquisition cost divided by 5 years
Q: Why 5 years?
A: 5 year is the useful life of a motor vehicle.
Not really for personal use but rather these are service vehicles of the employee for
his duties and functions
Aircrafts and Yachts
● Aircrafts, including helicopters, owned and maintained by an employer, are not
subject to FBT. Reason? Presumed to be for use in trade or business?
○ Not necessarily presumed to be for use in trade or business
● Yachts, however, are treated differently. Reason? Presumed to be for personal,
rather than business, use?
○ Yachts are subject to FBT
Household Expenses
Definition of Gross Income
● Salaries of household help, driver, nannies, bodyguard, etc.
● Homeowners’ association dues, garbage fees, cable subscription fees,
broadband/internet connection, etc.
● Utilities, such as MERALCO, water, PLDT, etc.
● Subject to FBT if household expenses are given to managerial employees
Loan at Below Market Rate of Interest
● Internal revenue authorities earlier adopted a benchmark interest rate of 12%.
● Rate is subject to adjustment through a regulation issued from time to time.
● Whether below market rate of interest, or interest free, the foregone interest
constitutes taxable FB subject to FBT.
● Market rate now is 6%. If employee loan is below market rate of 6%, the
difference would be the forgone interest that would constitute FB subject to FBT
Membership in Sporting and Social Clubs
● Membership dues, fees, and other expenses in social, athletic or other similar
organizations that are paid for or reimbursed by the employer constitute taxable
FBs subject to the FBT.
● Under prior regulations, an employee was allowed a membership in 1 sporting
or social club without triggering taxable compensation or taxable FB.
○ Now: abolished
○ BUT for PAGCOR, the country club membership was proven to be for
the benefit of the employer, rather than the enjoyment of the employee
Foreign Travel
● Expenses paid for or reimbursed by employer for foreign travel of an employee
in connection with attendance in a business meeting, convention, seminar and
the like do not constitute taxable FB.
● Economy or business class ticket, inland travel expenses (e.g., food, beverages,
and local transportation) up to a maximum of $300 per day, hotel
accommodation, and other related or incidental expenses do not constitute
taxable FBs.
● If first class, 70% not taxable fringe benefit but the 30% will constitute the
taxable FB
● Traveling expenses of accompanying persons that are paid for or reimbursed by
employer are subject to FBT.
● First class ticket of the employee is subject to FBT, but only to the extent of 30%
of the cost of the first class ticket.
● It is required, however, that the expenses be duly substantiated by:
a. Documents proving the actual occurrence of the meeting, convention
or seminar;
b. Official communications from business associates abroad indicating
the purpose of the meetings;
c. Official invitations/communications from the host organization or
entity abroad in the case of conventions.
Holiday and Vacation Expenses
● FBT also applies to expenses incurred by an employee for a holiday and/or
vacation if the expenses are paid for or reimbursed by the employer.
● Some get around this by timing the holiday or vacation on the occasion of a
convention, seminar or business meeting.
Educational Assistance
● Cost of educational assistance extended to an employee constitutes taxable FB,
unless the assistance is:
a. In the nature of a scholarship grant;
b. Study is directly connected with the employer’s trade or business; and
c. Employee is under contractual obligation to remain in the employ of
the employer for a mutually agreed period of time.
● Educational assistance extended to dependents of employees also constitutes
taxable FB, unless the assistance is in the nature of a scholarship grant given
pursuant to a competitive program or scheme implemented by the employer.
Insurance Coverage
● Premiums paid by an employer for life or health insurance and other non-life
insurance coverage of an employee are treated as taxable FB, hence subject to
FBT, except the following:
a. SSS or GSIS contributions as required by law;
b. Similar contributions, such as PhilHealth, Pag-Ibig, etc
c. Premiums paid on employees’ group insurance.
When Compensation Income or Fringe Benefit May be Exempted from Income Tax or
Fringe Benefit Tax
1. Convenience of the Employer Doctrine
2. De Minimis Benefit
3. 13th Month Pay and other Benefits, including productivity incentives and
Christmas bonus, up to an aggregate amount of Php90,000/year.
4. Statutory Minimum Wage
5. Separation Benefit
6. Retirement Benefit
2. Convenience of the Employer Test
Definition
● Benefit or privilege is furnished by the employer primarily for the latter’s
convenience or benefit.
● E.g., in-premises meals and lodging, housing facility within 50 meters of
business premises, sales or service vehicles, taxi or transportation allowance for
employees working overtime late at night, reimbursement of travel expenses on
official business, educational assistance for studies in connection with
employer’s trade or business.
Cases
● See also Henderson, where the employer provided the employee luxurious
housing since the latter, being the President, was expected to entertain officials,
guests and customers of his employer in his home.
Definition of Gross Income
○ The SC held that only the amount of P4,800 annually, the reasonable
amount that the couple would have otherwise spent for house rental
and utilities, would constitute taxable compensation income.
● See also the PAGCOR cases, where the SC held that membership dues of its
employees in country clubs that the employer pays in order for its
employees/officers to entertain its customers are not subject to FBT since it is
the employer’s customers that benefit, not the employees.
○ However, the automobiles, absent any proof that they were ultimately
for the benefit of the business or convenience or advantage of the
employer, were held subject to FBT.
Sec. 2.78.1(A)(2) Rev. Regs
Rev. Regs. No. 2-98 (April 17, 1998)
Sec. 2, Rev. Audit Mem. Order No. 1-87 (April 23, 1987)
Other Cases
Collector v. Henderson, 1 SCRA 649 (1961)
CIR v. Secretary of Justice and PAGCOR, G.R. No. 177387, Nov. 9, 2016
Philippine Amusement and Gaming Corporation (PAGCOR) v. Commissioner of Internal
Revenue, G. R. Nos. 210689-90, Nov. 22, 2017, 846 SCRA 340, 364-366
Commissioner of Internal Revenue v. Philippine Amusement and Gaming Corporation
(PAGCOR), G. R. Nos. 210704 & 210725, Nov. 22, 2017, 846 SCRA 340, 364-366
3. De Minimis Benefits
Definition and Effect
● These are facilities or privileges furnished by the employer to its employees that
are of relatively small value and for the purpose of promoting the health,
goodwill, contentment, or efficiency of its employees.
● Not subject to either the withholding tax on compensation, if given to rank and
file, or even FBT, if furnished to managerial and supervisory employees. Courage
v. Commissioner, 870 SCRA 143 (2018)
Exclusive Enumeration of De Minimis Benefits
1. Monetized unused vacation leave credits of private employees. Max. 10
days/year.
2. Monetized value of vacation and sick leave credits paid to government
employees.
3. Medical cash allowance to dependents of employees. Max.
1,500/employee/semester, or P250/month.
4. Rice subsidy of P2,000, or 1 sack of 50 kg. rice/month.
5. Uniform and clothing allowance. Max. P6,000/year.
6. Actual medical assistance. Max. P10,000/year.
7. Laundry allowance. Max. P300/month.
8. Employees’ achievement awards, e.g. service loyalty, safety recognition,
which must be in the form of tangible personal property other than cash or GC
and granted under an established written plan that does not discriminate in
favor of highly paid employees. Max. P10,000/year.
9. Gifts during Christmas and major anniversary celebrations. Max.
P5,000/employee/year.
10. Daily meal allowance for OT work and night/graveyard shift not exceeding
25% of the basic minimum wage on a per region basis.
11. Benefits received pursuant to a CBA and productivity incentive (PI) schemes,
provided the total annual monetary value under both CBA and PI combined
does not exceed P10,000/employee/year.
Sec. 33(C)(4), NIRC
SEC. 33. Special Treatment of Fringe Benefit. -
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:
(1) Fringe benefits which are authorized and exempted from tax under special
laws;
(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated
by the Secretary of Finance, upon recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of
the Commissioner, such rules and regulations as are necessary to carry out efficiently
and fairly the provisions of this Section, taking into account the peculiar nature and
special need of the trade, business or profession of the employer.
Sec. 2.78.1(A)(3), Rev. Regs. No. 2-98 (April 17, 1998)
Rev. Regs. No. 5-2008, April 17, 2008
Rev. Regs. No. 5-2011, March 16, 2011
BIR Rul. No. DA (ECB-026) 778-2009, Dec. 15, 2009
13th Month Pay and Other Benefits
● This blanket exemption of maximum P90,000/year applies to all employees in
the private and public sector.
● Included in the said amount are the 13th month pay, and all other employee
benefits such as productivity incentives, Christmas bonus, loyalty award, and
other payments in cash or in kind.
○ NOTE: It does not cover basic salary and other allowances.
● De minimis benefits are not included in the computation of the said P90,000
ceiling. De minimis benefits are, by themselves, a separate exclusion from gross
income.
○ Hence, arguably, any amount in excess of the thresholds prescribed for
de minimis benefits may be included in the computation of the
P90,000 ceiling, provided such excess, along with the other employee
Definition of Gross Income
benefits (i.e.,13th month pay, Christmas bonus and other incentives),
does not exceed P90,000.
● Similarly, benefits paid or furnished to employees for the benefit or advantage (2) Rates of Tax on Taxable Income of Individuals – The tax should be computed in
of the employer are not included in the computation of the P90,000 cap. accordance with and at the rates established in the following schedule:
● Employee benefits furnished for the “convenience of the employer” likewise (a) Tax Schedule Effective January 1, 2018 until December 31, 2022
constitute a separate class of exclusion from gross income.
Not over P250,000 0%
4. Minimum Wage Earners
Over P250,000 but not over P400,000 20% of the excess over P250,000
Statutory Minimum Wage
● Presently, minimum wage in Metro Manila is P537/day. Over P400,000 but not over P800,000 P30,000 + 25% of the excess over
● Minimum wage earners (MWE) are likewise exempt from income tax on their P400,000
holiday pay, overtime pay, night shift differential pay, and hazard pay. Sec.
24(A)(2)(a) Over P800,000 but not over P130,000 + 30% of the excess over
● Note that if the employee’s basic pay is more than the SMW, his holiday pay, OT P2,000,000 P800,000
pay, night shift differential pay, and hazard pay, shall be subject to withholding
tax on compensation since he does not qualify as MWE. RMC No. 50-2018, May Over P2,000,000 but not over P490,000 + 32% of the excess over
11, 2018 P8,000,000 P2,000,000
● Nevertheless, such employee may still be exempt from income tax if his total net
income, including basic pay in excess of SMW and income from other sources
Over P8,000,000 P2,410,000 + 35% of the excess over
like from conduct of trade or business, during the year does not exceed the
P8,000,000
threshold of P250,000.
● Again, note that benefits received by a MWE for the “convenience of the
employer”, “de minimis benefits”, 13th month pay and other benefits not Tax Schedule Effective January 1, 2023 Onwards:
exceeding P90,000, remain exempt from income tax.
● Otherwise, other employee benefits received in excess of the de minimis or the
P90,000 ceiling shall be subject to withholding tax on compensation, unless the Not over P250,000 0%
aggregate amount does not exceed the threshold of P250,000.
Over P250,000 but not over P400,000 15% of the excess over P250,000
Separation and Retirement Benefits
● To be discussed further under Exclusions from Gross Income. Over P400,000 but not over P800,000 P22,500 + 20% of the excess over
● In order for separation benefits to be exempt from withholding tax on P400,000
compensation, separation from employment should be beyond the control of the
employee (e.g. death, sickness, physical disability, retrenchment, etc.) Over P800,000 but not over P102,500 + 25% of the excess over
● Retirements benefits, in order to be exempt, must be paid pursuant to the Labor P2,000,000 P800,000
Code or a retirement plan and the retiree must meet
1. The 50 years of age and Over P2,000,000 but not over P402,500 + 30% of the excess over
2. 10 years of service requirements at the time of retirement. P8,000,000 P2,000,000

Over P8,000,000 P2,202,500 + 35% of the excess over

Sec. 2.78.1(B)(13), Rev. Regs. No. 02-98, as amended P8,000,000

For married individuals, the husband and wife, subject to the provision of Section 51
Sec. 24(A)(2), NIRC (D) hereof, shall compute separately their individual income tax based on their
respective total taxable income: Provided, That if any income cannot be definitely
SEC. 24. Income Tax Rates. - attributed to or identified as income exclusively earned or realized by either of the
spouses, the same shall be divided equally between the spouses for the purpose of
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the determining their respective taxable income.
Philippines.-
Definition of Gross Income
Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall
be exempt from the payment of income tax on their taxable income: Provided, further,
That the holiday pay, overtime pay, night shift differential pay and hazard pay received
by such minimum wage earners shall likewise be exempt from income tax.
(b) Rate of Tax on Income of Purely Self-employed Individuals and/or
Professionals Whose Gross Sales or Gross Receipts and Other Non-operating
Income Does Not Exceed the Value-added Tax(VAT) Threshold as Provided in
Section 109(BB). – Self-employed individuals and/or professionals shall have
the option to avail of an eight percent (8%) tax on gross sales or gross receipts
and other non-operating income in excess of Two hundred fifty thousand
pesos (P250,000) in lieu of the graduated income tax rates under Subsection
(A)(2)(a) of this Section and the percentage tax under Section 116 of this Code
(c) Rate of Tax for Mixed Income Earners. – Taxpayers earning both
compensation income and income from business or practice of profession
shall be subject to the following taxes:
(1) All Income from Compensation – The rate prescribed under Subsection
(A)(2)(a) of this Section.
(2) All Income from Business or Practice of Profession –
(a) If Total Gross Sales and/or Gross Receipts and Other Non-Operating
Income Do Not Exceed the VAT Threshold as Provided in Section
109(BB) of this Code. – The rates prescribed under Subsection
(A)(2)(a) of this Section on taxable income, or eight percent (8%)
income tax based on gross sales or gross receipts and other non-
operating income in lieu of the graduated income tax rates under
Subsection (A)(2)(a) of this Section and the percentage tax under
Section 116 of this Code.
(b) If Total Gross Sales and/or Gross Receipts and Other Non-operating
Income Exceeds the VAT Thresholds Provided in Section 109(BB) of
this Code. – The rates prescribed under Subsection (A)(2)(a) of this
Section. [13]
Sec. 22(HH)
(HH) The term “minimum wage earner” shall refer to a worker in the private sector paid
the statutory minimum wage or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in the non-agricultural sector
where he/she is assigned.
Rev. Regs. No. 10-2008, July 8, 2008
5. 13th Month Pay and Other Benefits
Sec. 32(B)(7)(e), NIRC
SEC. 32. Gross Income. -
(B) Exclusions from Gross Income
(7) Miscellaneous Items. –
(a) Income Derived by Foreign Government. - Income derived from investments
in the Philippines in loans, stocks, bonds or other domestic securities, or from
interest on deposits in banks in the Philippines by (i) foreign governments, (ii)
financing institutions owned, controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial institutions
established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. - Income
derived from any public utility or from the exercise of any essential
governmental function accruing to the Government of the Philippines or to
any political subdivision thereof.
(c) Prizes and Awards. - Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational, artistic, literary, or civic
achievement but only if:
(i) The recipient was selected without any action on his part to enter
the contest or proceeding; and
(ii) The recipient is not required to render substantial future services as
a condition to receiving the prize or award.
(d) Prizes and Awards in sports Competition. - All prizes and awards granted to
athletes in local and international sports competitions and tournaments
whether held in the Philippines or abroad and sanctioned by their national
sports associations.
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and
employees of public and private entities: Provided, however, That the total
exclusion under this subparagraph shall not exceed Ninety thousand pesos
(P90,000) [41] which shall cover:
(i) Benefits received by officials and employees of the national and
local government pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No.
851, as amended by Memorandum Order No. 28, dated August 13,
1986;
(iii) Benefits received by officials and employees not covered by
Presidential Decree No. 851, as amended by Memorandum Order
No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-
Ibig contributions, and union dues of individuals.
Definition of Gross Income
(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.

(i) Income Derived from the Sale of Gold Pursuant to Republic Act No. 7076. –
Income derived from the following transactions pursuant to Republic Act No.
7076, otherwise known as the “People’s Small-scale Mining Act of 1991”:
(1) The sale of gold to the Bangko Sentral ng Pilipinas by registered small-scale
miners, as defined under Republic Act. No. 7076, and accredited traders; and
(2) The sale of gold by registered small-scale miners to accredited traders for
eventual sale to the Bangko Sentral ng Pilipinas. [42]

Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 11-2018

Rev. Regs. No. 3-2015, March 13, 2015

6. Treatment of Directors’ Fees, Allowances and Bonuses

Rev. Mem. Cir. No. 34-2008, April 15, 2008.
Income from Business or Exercise of Profession
Income from Business or Exercise of Profession
Manufacturer Trader

Sec. 32(A)(2), NIRC

Gross Sales Gross Sales
SEC. 32. Gross Income. - Less: Cost of Goods Less: Cost of Goods
Less: Sales Returns, Discounts and Less: Sales Returns, Discounts and
(A) General Definition. - Except when otherwise provided in this Title, gross income Allowances Allowances
means all income derived from whatever source, including (but not limited to) the Gross Profit/Gross Income Gross Profit/Gross Income
following items: Less: Deductions Less: Deductions
Net Profit/Net Income Net Profit/Net Income
(2) Gross income derived from the conduct of trade or business or the exercise of a Multiplied by: Income Tax Rate Multiplied by: Income Tax Rate
profession; Tax Due Tax Due
Less: Tax Credits/Withheld Taxes Less: Tax Credits/Withheld Taxes
Tax Payable Tax Payable
1. Partner’s Distributive Share in Net Income of a GPP

Sec. 32(A)(11), NIRC Service Provider Cost of Goods

SEC. 32. Gross Income. -

Gross Receipts/Revenues Raw Materials
(A) General Definition. - Except when otherwise provided in this Title, gross income Less: Cost of Services Direct Labor and Manufacturing
means all income derived from whatever source, including (but not limited to) the Less: Sales Returns, Discounts and Overhead
following items: Allowances Freight Cost
Gross Profit/Gross Income Insurance Premiums
(11) Partner's distributive share from the net income of the general professional Less: Deductions Transportation Costs in Bringing Raw
partnership. Net Profit/Net Income Materials to Factory or Goods to Venue of
Multiplied by: Income Tax Rate Sale
Tax Due Salaries and Employee Benefits of
2. Directors’ Fees, Allowances and Bonuses, supra Less: Tax Credits/Withheld Taxes Personnel, Consultants & Specialists
Tax Payable Cost of Facilities Used in Providing
Inclusions in Gross Income: Service
1. Compensation Income or Salaries and Wages
2. Income from Conduct of Trade or Business
Income from Business or Exercise of Profession
3. Income from Exercise of Profession
● Income derived from conduct of trade or business by self-employed individuals
4. Income from Dealings in Property
or businessmen
5. Passive Income (Interest, Dividend, Royalty, Capital Gain)
● Income derived from conduct of trade or business by juridical persons, such as
6. Other Income (Annuities, Prizes and Winnings, Pensions, Debt Discharge, Claim
corporations, partnerships, associations, etc.
of Right, Windfall Receipt, Recovery of Deducted Item, Unlawful Sources etc.)
● The trade or business may be manufacture and/or sale of goods or sale of
services.
● Income derived from exercise of profession.
● Unlike salaried individuals, self-employed and professionals may claim ordinary
and necessary business expenses as deductions from their gross income derived
from conduct of trade or business or exercise of profession.
● “Self-employed” may refer to a sole proprietor, an independent contractor, or a
professional who earns income from self-employment.
Computation of Income and Tax Payable by Businesses and Professionals
● A “professional” refers to a person formally certified by a professional body to a
specific profession by virtue of having completed a required examination or
Income from Business or Exercise of Profession
course of study and/or practice. It may also refer to a person who engages in
some art or sport for money, as a means of livelihood. E.g., lawyers, doctors,
CPAs, professional athletes, artists, consultants, etc.
Sec 24A - individuals
Sec. 38 - corporations
Partners’ Distributive Share in Net Income of a General Professional Partnership (GPP)
General Professional Partnership (GPP)
● Not a taxable entity.
● Not treated as a “corporation”.
● Nerely a “pass-through” entity.
● The individual partners comprising the GPP who are subject to income tax on
their distributive share, actually or constructively received, in the net income of
the GPP.
● Although not a taxable entity, the GPP nevertheless files a tax return (as an
exempt entity) that sets forth its items of gross income, deductions claimed,
names of the partners, and the distributive share of each partner.
● For purposes of computing the distributive share of the partners, the net income
of the GPP is computed in the same manner as a corporation.
● Thus, the GPP may deduct its cost of services that includes all direct costs and
expenses incurred to provide the services required by its clients, such as salaries
and employee benefits of personnel directly rendering the services and cost of
facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies.
● GPP files an income tax return kasi it is exempt. But the individuals as
partners are would report their distributive share in the net income of the
GPP in their annual tax return and pay tax for that.
● While GPP is not a taxable entity for income tax purposes, it is subject to VAT
when it receives professional fees from clients.
● Pero yung share ng partners sa net income ng GPP will no longer subject to
VAT because it’s already subject to VAT on the level of the GPP.
● Gross Receipts ng law firm = gross professional fees paid by clients
● Cost of services = wages of the lawyers, auditors directly performing the
services, depreciation of laptops, allocable rental of spaces
GPP vs Ordinary Partnership
General Professional Partnership (GPP) Ordinary Partnership
Not a taxable entity. Taxable like a corporation, hence, pays
20%-25% income tax.
Partners are taxed on their distributive Partners are taxed on their distributive
share of the net income of the GPP, share in the net income (after corporate
actually or constructively received, at the income tax) of the partnership, whether
graduated income rates. In practice, actually distributed or not, in the nature of
though, partners report their distributive dividends, hence, 10% withholding tax.
share whether actually distributed or not.
Not subject to MCIT. Subject to MCIT?
GPPs Exempt from Withholding Tax
● Professional fees paid to GPPs are not subject to the creditable withholding tax
on the theory that GPPs are not taxable entities.
● There are merely “pass-through” entities since it is the individual partners who
are taxable in their separate and individual capacities.
● Clients should not withhold tax on professional fees if the firm is a GPP
Deductions Available to GPP
● Can claim either itemized deductions or OSD in computing its net income for
distribution to partners.
● However, once the GPP has claimed itemized deductions or OSD, the individual
partners could no longer claim any itemized deduction or OSD against their
distributive share
● since the latter is already net of direct cost and operating expenses. Rev. Regs.
No. 08-2018
● However, if the individual partners derive other income from business or other
sources (such as consultancy, director’s fees, etc.), they could still claim itemized
deductions or OSD against such other income. Ibid.
8% Income Tax Rate Not Applicable to Distributive Share
● Neither could the partners avail of the 8% income tax on gross sales or gross
receipts not exceeding P3 Million under Section 24(A)(b) or (c) of the NIRC
○ Since their distributive share in the net income of the GPP is already
net of cost and other operating expenses. Ibid.
● But with respect to other business income, 8% can be applied
Distributive Share Not Subject to VAT
● The gross sales or receipts of the GPP are already subjected to value-added tax
upon receipt by the GPP, with the latter filing monthly and quarterly VAT returns.
Income from Business or Exercise of Profession
● Thus, the partners’ distributive share is no longer subjected to VAT since the basis
of the distributive share is exactly the same sales or receipts that had already
been subjected to VAT in the hands of the GPP.
Items of Passive Income
Items of Passive Income (c) make public performance of the program,
1. Royalties (d) publicly display the program, or
(e) any other rights of the copyright owner, the exercise of which by
2. Interest another without his authority will constitute infringement, constitutes
3. Dividend royalty. BIR Rul. No. DA-ITAD-17-07, Feb. 9, 2007
4. Rent
5. Pension Note: If it is done in active business → Active Income therefore business income
6. Annuities Versus as passive income

1. Royalties
● Distinguish between royalty that partakes the nature of passive income and
royalty that constitutes business income or business profit.
● GR: Passive royalty income is subject to final withholding tax, generally at 20%,
○ Except royalty on books, literary and musical compositions that are
subject to 10%.
● Royalty received by a non-resident alien not engaged in trade or business in the
Phils. is subject to 25% final withholding tax, unless reduced by an applicable
tax treaty.
● Royalty income from active pursuit of business (not passive income) is subject
to the regular graduated income tax rates for individuals and 20%-25% income
tax for corporations. May be subject to creditable withholding tax at applicable
rates.
See → Sec 24(B)(1)
Ex. REX Bookstore royalties subject to withholding tax. No need to declare this as
income as it is already subject to final withholding tax.
EX. Cats, Hamilton in the Philippines pays royalties otherwise this constitutes
infringement
2. Interest
● GR: As a passive income, interest is likewise subject to a final withholding tax at
20%.
● Distinguish interest income derived as a passive income from interest income
derived from the active conduct of trade or business:
○ Ex. lending by financial institutions, pawnshops, etc., which is subject
to the regular income tax rate.
● Interest income from bank deposits and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements is subject to
a 20% FWT.
● Interest income received by an individual (except a non-resident individual) from
foreign currency deposits is subject to 15% FWT.
● Interest derived from long-term deposit or investment in savings, common or
individual trust funds, deposit substitutes, IMA and other investments evidenced
by BSP-prescribed certificates is exempt from income tax, subject to the holding
period prescribed in Sec. 24(B) of the NIRC.

● Royalties derived by franchisors in the conduct of their business to operate are

not passive income, but rather ordinary business income. BIR Rul. No. DA (C-
101) 311-2008, Oct. 17, 2008
● Same with royalties collected by a cinematographic film owner from television
companies and cable TV operators to whom it had licensed the distribution and
exhibition of his motion pictures and television programs. BIR Rul. No. DA-364-
2008, June 13, 2008
● Same with royalties received by recording companies. BIR Rul. No. DA-684-
2007, Dec. 27, 2007
Check SEC 24(b)(1) Rate of Tax on Certain Passive Income
Distinguished with passive income v active interest
Note :
The interest we pay to the bank → this income by the bank , is received as active
income
Whereas the interest we receive from the bank → in our POV is a passive income

Ex. Jollibee nagpa-franchise ng business. Franchisees pay 5% of gross sales. (Not

passive income)
● Payment for the use of software in a transaction that constitutes a sale or
exchange is not royalty, but rather a business profit or ordinary income. E.g.,
purchase of MS Office, Adobe, etc.
○ Consideration of Purchase and not passive income
● On the other hand, payment for a transfer of software in a transaction whereby
the user or transferee of the software acquires one or more of the following
rights:
(a) make copies for distribution to the public by sale or otherwise,
(b) prepare derivative programs,
3. Dividend
● Defined as “any distribution made by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders, whether in money or in other
property.”
● Conditioned on existence of unrestricted retained earnings. See Distribution
Management, Inc. and Goodyear Philippines, Inc.
● Dividend distribution is on the basis of proportionate interest of shareholders in
the corporation (i.e., pro rata)
● As a passive income, dividend is subject to FWT of 10% if paid to individuals
(citizens and resident aliens), 25% if paid to non-resident aliens not engaged in
Items of Passive Income
trade or business in the Phils.; exempt if paid to another domestic corporation
or resident foreign corporation.
● If paid to a non-resident foreign corporation, the FWT is 15% pursuant to the “tax
●
sparing” provision in Section 28(B)(5)(b).
Dividends received by a domestic corporation from a foreign corporation are
exempt provided
○ (a) they are reinvested in the Phils., to fund the domestic corp’s working
capital requirements, dividend payment, infrastructure, capex, or
investment in another domestic corp,
○ (b) the domestic corporation owns at least 20% of the capital stock of
the foreign corp, and
○ (c) has held such shareholding in the foreign corp for at least 2 years
at the time of the dividend distribution. As amended by CREATE [ see
example below ]
NOTE: Not taxable income
● Only cash dividend or property dividend is taxable to an individual
● Dividend cannot be paid out to shareholders unless there is unrestricted
dividend to its shareholders ;
● Distribution is considered under retained earnings as you cannot pay out of
capital income (?)
Recipient of the dividend:
● By a PH Corp to Individual? FWT 10%
● By a PH Corp to alien non-residents? FWT 25%
● Exemption of inter-company dividend tax
○ Sec. 27 D(4) Intercorporate Dividends. - Dividends received by a
domestic corporation from another domestic corporation shall not
Example:
be subject to tax.
Suppose B has shares of stock in Globe, everytime they pay B dividend, they make
caltas 10% Withholding tax. If corporation yng shareholder, walang tax – ph corp to ph
corp !!!
In the past :
● In the past, dividends paid to a domestic corporation, the exemption was
limited to domestic coRporation to another domestic corporation.
● Example: Corporation received dividends from foreign corp. Suppose Jollibee
put up a corporation in Delaware to own Jollibee store in US. The shareholder
Delaware. Every time jollibee Ph received dividends from Jollibee USA, those
dividends would be subject to regular income tax rate
Current CREATE Law insertion in NIRC :
1. Dividends received from Jollibee USA are reinvested in the PH to fund
Jollibee Ph infrastructure, capital expenditure etc. or if Jolly Ph invest in
another corporation.
2. Jollibee PH should own 20% of the capital stock of Jollibee US
3. Jollibee PH should have held shares in Jollibee USA for at least 2 years at the
time of dividend distribution
4. Rent (supposedly)
● No question that amount paid for the use, occupation or enjoyment of one’s
property, whether real or personal, constitutes rental income subject to income
tax.
● Although generally considered a passive income, it is not subject however to a
final withholding tax unlike royalty, interest and dividend.
● Instead, it is subject to the
(1) regular graduated income tax rates or
(2) 8% tax on gross sales or receipts of not more than P3M
annually for individuals, or
(3) the 20%-25% income tax on net income for corporations.
● Rental of personal or real property is subject to 5% creditable withholding tax at
source.
Rent Income
● “Supposedly” if you had rental income, you do not exert any effort.
Technically passive income.
● However it is not subject to FWT of 20% that ordinarily applies to royalties or
interests or 10% of Dividends.
● BUT what applies is Rental income subject to 24(2)(a) yung 8%
● Although the said FWT does not apply, creditable withholding tax applies
○ Rental income subject to 5% creditable withholding tax withheld by
the lessee will still have to be included by the lessor in the
computation of his gross income his annual income tax return; and
this is subject to graduated income tax rate or corp tax rate of 20-
25%
○ BUT the 5% withholding tax will be credited against the income tax
due from the lessor (that’s why the use of the word “creditable”)
○ Ex. Lawyer gets paid professional fees. Every time clients pay him,
they withhold 10% of professional fees. Lawyer reports 100%
(including the fees as income) AND claim the 10% withheld by his
clients.
○ Ex. Royalties. Subject to FWT. No longer counted as part of the tax.
Sec. 27:
● If the corporation’s net income does not exceed 25M a year, and its gross
Items of Passive Income
assets don’t exceed 100M, then it’s subject to the reduced rate
● If the net income exceeds; but its gross assets exceed 100M, then it’s
subject to 25% income tax rate for corp
● How do you treat permanent improvements introduced by the lessee to the
leased property? Do they constitute taxable income on the part of the lessor after
the lessee vacates the property upon the expiration of the lease without a
corresponding obligation on the part of the lessor to reimburse the lessee the
cost of the improvements?
● Under the Income Tax Regulations, a building erected or improvements made by
the lessee on the leased premises are taxable only if:
1. the same are made pursuant to an agreement with the lessor
and
2.
the same are not subject to removal by the lessee.
● The lessor has an option:
1. to report as income, at the time when such buildings or
improvements are completed, the fair market value of the
same, subject to the lease, or
2.
to spread over the life of the lease the estimated depreciated
value of such buildings or improvements at the termination
of the lease and to report as income for each year of the lease
an aliquot part thereof.
● Absent any agreement between the lessor and the lessee, or where there is no
explicit provision in the agreement that the lessee may not remove the building
and improvements at the end of the lease, the lessor may not be deemed to
have realized any taxable income therefrom. Sec. 49, Rev. Regs. No. 2; BIR Rul.
No. 484-04, Sept. 10, 2004.
Ex. Lawyer leases office space. Nagpa-renovate yung lawyer (new rooms, glass
partitions). At the end of the lease, do these permanent improvements constitute
taxable income on the part of the lessor? Lessor has two options:
1. Lessor reports the fair market value at the time the improvements were
introduced OR
2. Lessor spread out the life of the lease, check the allocable value of the
improvements each year is reported
● It may be difficult at times to determine the tax consequences of certain
transactions that may not be readily characterized as a lease, sale, or some other
agreement. (finance lease for example)
● For example, an agreement that is documented as a lease of property may in
substance be a conditional sale, resulting in different tax treatment of the
income payment, namely, whether the lessor/taxpayer would book it as rent or
income from sale of property, or whether the lessee/customer would claim a
business deduction for rental expense or capitalize the payment and thereafter
claim a depreciation allowance.
for example contract of lease , but if you check it it’s actually a conditional sale. This
will result to a different tax income.
● kung conditional sale, capitalized payment + may depreciation value
● if true lease, the lessor would report the rental income as a rental income ;
lessee will claim it as business expense for example
Require to look into the essence of the contract to determine the nature of the sale/
lease
Operating Lease
Sec. 2.02(1), Rev. Regs. No. 19-86
Defined as “a contract under which the asset is not wholly amortized during the primary
period of the lease, and where the lessor does not rely solely on the rentals during the
primary period for his profits but looks for the recovery of the balance of his costs and
for the rest of his profits from the sale or re-lease of the returned asset upon the
expiration of the primary lease period.”
“Finance Lease” or “Full Pay-Out Lease”
(Really a Conditional Sale depending on circumstances)
Sec. 2.02(2), Rev. Regs. No. 19-86
Defined as “a contract involving payment over an obligatory period (also called primary
or basic period) of specified rental amounts for the use of a lessor’s property sufficient
in total to amortize the capital outlay of the lessor and to provide for the lessor’s
borrowing costs and profits.” The obligatory period refers to the primary or basic non-
cancellable period of the lease which in no case shall be less than 730 days, or two
years.
The term of the finance lease may be extended upon the expiration of the primary or
basic period by non-cancellable secondary or subsequent periods with the rentals
significantly reduced. The residual value of the leased asset must however not be less
than 5% of the lessor’s acquisition cost.
Baniqued: Hindi naman daw tunay na lease. especially pag treat rental payment as
amortization of purchase price
Items of Passive Income
“Conditional Sale”
Sec. 2.02(3), Rev. Regs. No. 19-86
Defined as a contract or agreement that purports to be a lease but is treated as a
conditional sales contract because one or more of the following compelling persuasive
factors is present, namely,
(1) there is an option to purchase the asset at any time,
(2) the lessee acquires automatic ownership of the asset upon payment of the
rentals under the contract,
(3) portions of the periodic rental payments are credited to the purchase price,
and
(4) the receipts of payments indicate that partial payments of the assets were
made.
Even absent any of the above-mentioned compelling persuasive factors, the lease
agreement may still be treated as a conditional sale if one or more of the following
conditions is present, namely,
(1) portions of the periodic payments are made specifically applicable to an
equity to be acquired by the lessee,
(2) the property may be acquired under a purchase option at a price which is
nominal in relation to the value of the property at the time when the option
may be exercised, as determined at the time of entering into the original
agreement, or which is relatively small amount when compared with the total
payments which are required to be made.
Prizes and Winnings
Sec. 32(A)(9), NIRC
SEC. 32. Gross Income. -
(A) General Definition. - Except when otherwise provided in this Title, gross income
means all income derived from whatever source, including (but not limited to) the
following items:
(9) Prizes and winnings
Sec. 32(B)(7)(c), NIRC
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this Title:
Sec. 32(B)(7)(d), NIRC
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this Title:
(7) Miscellaneous Items. –
(d) Prizes and Awards in sports Competition. - All prizes and awards granted to athletes
in local and international sports competitions and tournaments whether held in the
Philippines or abroad and sanctioned by their national sports associations.
BIR Rul. No. 026-00, June 13, 2000
● GR: Prizes are subject to a final withholding tax of 20%.
○ XPN: Prizes amounting to P10,000 or less are subject to the regular
graduated income tax rates in Section 24(A).
→ Note : within taxing jurisdiction of the Philippines
● GR: Winnings are subject to a final withholding tax of 20%.
○ XPN: Winnings amounting to P10,000 or less from Philippine Charity
Sweepstakes and Lotto are exempt.
● The term “other winnings” applies to persons or entities who can be individually
and easily identified such as golfers, tennis players and other professional
sportsmen participating in tournaments offering money prizes for winners as
well as participants in raffles and product promotions.
● However, winnings from horse racing, which are the results of risking money at
great odds, are not covered by “other winnings”, hence, not subject to the 20%
FWT. BIR Rul. Nol. 249-87, Aug. 31, 1987
How come it’s a passive income?
A : people who gamble
Ex. Golf club won’t release the car, unless the winner pays 20% withholding tax.
Note: Only applies to persons within the taxing jurisdiction of the Philippines
● This does not mean you are not taxable on the income except that the
sponsor or host abroad is not subject to withholding tax
● The winner is expected to report it as part of taxable income
● Unless it falls within the exclusions of gross income
○ Ex. Prizes in sports competitions
5. Pension
Sec. 32(A)(10), NIRC
Gross Income Except when otherwise provided in this Title, gross income means all
income derived from whatever source, including (but not limited to) the following
items: xxx (10) Pensions
(7) Miscellaneous Items. –
(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the contest or
proceeding; and
Items of Passive Income
(ii) The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
Sec. 32(B)(6)(a), NIRC
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this Title:
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 and those received by
officials and employees of private firms, whether individual or corporate, in accordance
with a reasonable private benefit plan maintained by the employer: Provided, That the
retiring official or employee has been in the service of the same employer for at least
ten (10) years and is not less than fifty (50) years of age at the time of his retirement:
Provided, further, That the benefits granted under this subparagraph shall be availed of
by an official or employee only once. For purposes of this Subsection, the term
'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-
sharing plan maintained by an employer for the benefit of some or all of his officials or
employees, wherein contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and employees the
earnings and principal of the fund thus accumulated, and wherein its is provided in said
plan that at no time shall any part of the corpus or income of the fund be used for, or
be diverted to, any purpose other than for the exclusive benefit of the said officials and
employees.
Sec. 32(B)(6)(c), NIRC
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this Title:
Xxx
(c) The provisions of any existing law to the contrary notwithstanding, social security
benefits, retirement gratuities, pensions and other similar benefits received by resident
or nonresident citizens of the Philippines or aliens who come to reside permanently in
the Philippines from foreign government agencies and other institutions, private or
public.
● Pension or retirement benefits are exempt from income tax, provided the retiree
meets the minimum 10-year service and 50-years of age requirements.
● Pension and other similar benefits received by resident or non-resident Filipino
citizens or aliens who come to reside permanently in the Philippines from foreign
government agencies and other institutions, private or public, are likewise
exempt from income tax.
● SSS and GSIS benefits are likewise exempt.
6. Annuities
● Amounts received by the insured by way of a return of premiums paid by him
under an annuity contract, either during the term or at the maturity of the term
mentioned in the annuity contract or upon surrender of the contract, are exempt
from income tax. Sec. 32(B)(2) ;
● note : amount as in invest in that annuity contract , only up to that amount of
investment
● The exemption covers only the amount representing return of premiums, i.e., the
taxpayer’s investment in the annuity contract. Hence, the interest component of
annuity payments will constitute taxable income to the annuitant. The following
exclusion ratio formula may be used to determine the portion representing
return of premiums (investment): premiums or other consideration paid divided
by the expected return or aggregate amount to be received computed under the
actuarial tables prescribed multiplied by the annuity payments received during
the taxable year.
● The “investment” is the aggregate amount of the premiums or other
consideration paid, less premium refunds, dividends, and any excludable
amounts received under the contract before the annuity starting date. Prof.
Bittker
Example :
● A 56-year old taxpayer paid $5,000 to an insurance company, either in lump
sum or installments, for an annuity contract under which he was to be paid
$1,000 a year, starting at age 65 and continuing for the rest of his life, with no
refund if he should die prematurely (i.e., either before reaching 65, or thereafter
but before receiving as much as the $5,000 investment). If he lives exactly as
long as the average person reflected by the mortality tables used by the company
in fixing the amount to be paid (14 years), he will receive a total of $14,000. If
the annuitant’s life is longer or shorter than the average, however, he will benefit
from a “mortality gain” or suffer a “mortality loss”. Prof. Bittker
Gains from Dealings in Property
Gains from Dealings in Property
Requirement of Realization
● Increases and decreases in the value of property are not taken into account for
tax purpose when they accrue, but only when they are realized by a taxable event
● That is why the NIRC is worded in such a way that only “gains derived from
dealings in property” shall be included in gross income. Sec. 32(A)(3), NIRC
● The term “derived” is so broad that it may encompass other transactions such
as lease or license of the property
● But leases or licenses of property give rise to other items of income that are
treated separately in Sec. 32, such as rents and royalties.
● Thus, the term “gains derived from dealings in property” properly pertains only
to transactions involving sale or disposition of property
● What constitutes a “sale” or “disposition” subject to income tax
● Exchange of property without monetary consideration to correct error in
technical description in the title. BIR Rul. 95-2001
● Adjudication to spouses of properties following judicial dissolution of CPG. BIR
Rul. DA-(I-033) 584-2009
● Reconveyance of property to rightful owners pursuant to a court decision. BIR
Rul. DA-021-2008
● Conveyance of shares from the trustee or nominee to the beneficial owner.
[Subject to potential abuse]
● In correcting an error, there’s no sale
● Foreclosure sale, whether judicial or extrajudicial, is however a taxable sale.
● So is expropriation. It was therefore erroneous for the RTC to make the DPWH
liable for the CGT in the nature of consequential damages to the owner of the
property. Salvador
● A “realizable event” must occur with respect to the taxpayer’s property before
gain becomes taxable or loss deductible, i.e., mere unrealized appreciation in
the value of property does not constitute a presently taxable transaction.
● Expropriation is still a taxable sale. So pay CGT
Computation of Gain or Loss from Sale of Property
● When a taxable disposition of property occurs, the amount of gain or loss arising
therefrom is determined using the following formula:
Amount Realized
Less: Basis or Adjusted bases
—--------------------------------------------------------------
Gain (Loss)
● To determine the gain or loss, follow this formula in case of sale
○ Except for real property classified as capital asset or like those
listed stock in PSE
Meaning of Amount Realized
● The amount realized from the sale or other disposition of property shall be the
sum of money received plus the FMV of the property (other than money) received.
Sec. 40 (A), NIRC
● Cash, Cash + FMV of Property, or FMV of Property Received (in case of an
exchange)
● FMV of unlisted shares cannot be lower than BV per most recent audited FS
● FMV of real property cannot be lower than prescribed zonal value.
Suppose selling a piece of land not a capital asset, but used in trade or business, selling
it for 10M in cash and a BMW to go with it.
Q: What is the amount realized?
A 10M , 7.5M worth BMW note where the amount is unlisted shares of stock →
shares of stock cannot be valued xxxx DI KO NARINIG . ; real property cannot be below
zonal value
Meaning of Book Value
● In determining the book value per share, you divide the stockholders’ equity by
the total number of shares issued and outstanding (i.e., subscribed, whether fully
paid or not). BIR Rul. No. 203-89, Sept. 21, 1989; BIR Rul. No. 174-99, Nov. 17,
1999
● In case there are both common and preferred shares, the book value per
common share is computed by deducting the liquidation value of the preferred
shares from the total equity of the corporation and dividing the result by the
number of outstanding common shares as of balance sheet date nearest to the
transaction date. Rev. Regs. No. 6-2008, as amended by Rev. Regs. No. 20-
2020, Aug. 3, 2020
● For preferred shares of stock, the liquidation value, which is equal to the
redemption price of the preferred shares as of balance sheet date nearest to the
transaction date, including any premium and cumulative preferred dividends in
arrears, shall be considered as fair market value. Rev. Regs. No. 06-2008, as
amended by Rev. Regs. No. 20-2020, Aug. 3, 2020
● In determining the FMV of shares not traded but listed in the stock exchange, the
highest closing price on the day the shares were sold, transferred or exchanged
shall be the FMV. When no sale is made in the exchange, the highest selling
price on the day nearest to the day of sale, transfer or exchange shall be the
FMV. Rev. Regs. No. 6-2008, as amended
● The FMV of shares not listed in the stock exchange shall be the book value based
on the audited FS prior to the date of sale, but in no case earlier than the
immediately preceding taxable year. Rev. Regs. No. 6-2008, as amended by Rev.
Regs. No. 20-2020
Use of Zonal Valuation
Gains from Dealings in Property
● Section 6(E) of the NIRC empowers the CIR to determine the FMV of real Illustration of Basis of Donated Property
properties located in each zone or area in the Phils. in consultation with
competent appraisers both from the private and public sectors. Thus, for tax Acquired ‘97 P10,000 P25,000
purposes, the value of a property shall be the higher of the FMV as determined Donated ‘03 P25,000 FMV P15,000 FMV
by the CIR (generally the “zonal value”) or the FMV as determined by the Sold ‘04 P25,000 FMV P10,000 FMV
assessor.
If sold:
Exceptions to Use of Zonal Valuation
Amt. Realized P25,000 P10,000
● Where property transferred is a private road lot and not a marketable piece of
property on account of restrictions on its alienability annotated on the title. BIR Basis P10,000 P15,000
Rul. No. 150-98, Oct. 19, 1998 Gain (Loss) P15,000 (P5,000)
● Sale through public bidding (e.g. judicial sale, extrajudicial foreclosure sale). Tax
is based on highest bid price. BIR Rul. No. 101-89, 118-91, BIR Rul. No. 016-97, ● Basis is the same as the hands of the donor First Column So if the donor had the
Feb. 5, 1997, BIR Rul. No. 036-00, Sept. 11, 2000, BIR Rul. No. DA-207-02, Nov. basis of 10k at the time he acquired it, then this will be your basis at the time of
12, 2002, and BIR Rul. No. DA-332-2003, Oct. 1, 2003. the disposition of the property
● Negotiated purchase and/or sale by a government agency or GOCC. BIR Rul. No. ● This formula applies only when the property is an ordinary asset If capital asset
105-91, 001-91 → tax is based on the gross selling price
● Expropriation. Tax is based on “just compensation”. Rev. Mem. Order No. 41-91, ● Ex. shares of stock If ordinary asset → tax is based on the gain Second Column
cited in BIR Rul. No. 150-98, Oct. 19, 1998; BIR Rul. No. DA-212-2007, April 4, If the basis is greater than the FMV of the gift, then the basis is FMV If he used
2007. the basis 25k, then the loss would be much higher (15k).
● Sale of residential lots by Pag-Ibig and NHA pursuant to social housing program. ● The law will not allow you to realize a bigger loss because the donee might profit
Rev. Rul. Nos. 001-91 and 232-90, respectively. from the existence of a bigger loss Suppose the property here is shares of stock.
● The tax base for computing capital gains tax in an installment sale of real ● The donee, now the seller, if realizer a bigger capital loss, he might deduct capital
property should be the zonal value at the time of the execution of the deed of gains in the year, and this would reduce his capital gain.
conditional sale and not the zonal value at the time of the execution of the deed
of absolute sale. BIR Rul. No. DA-098-2007, Feb. 15, 2007 Rationale for basis of donated property
● To prevent the shifting of potential tax losses by gifts of loss property to taxpayers
Meaning of Basis who may be better able to use the losses.
● If acquired by purchase ● On the other hand, the rule blithely permits shifting of potential tax gains by gifts
○ Purchase price plus cost of improvements, minus depreciation claimed of gain property to lower bracket taxpayers.
in prior years. In case of stock dividends, basis of original shares shall ● If acquired for less than an adequate consideration in money or
be allocated to total number of shares after stock dividend declaration. money’s worth - the amount paid by the transferee
APIC to be added to original basis of the shares. ● If acquired pursuant to a tax-free exchange, statutory merger or
● If acquired by inheritance consolidation, or de facto merger – generally “carry-over basis,” “historical
○ FMV at the time it was inherited. cost” or “substituted basis”. Section 40(B),NIRC; see also Rev. Regs. No. 18-
● If acquired by gift 2001, Nov. 13, 2001 and Rev. Mem. Rul. No. 2-2002, June 10, 2002
○ Same as in the hands of the donor or the last preceding owner by whom
it was not acquired by gift, except that if such basis is greater than the
FMV of the property at the time of the gift, then for purpose of ● Memorize the rule for determining basis: SEC. 40
determining loss, the basis shall be such FMV. ● Suppose the father is the donor and the donee is the son. They don’t expect
stock transactions. The son anticipates that he would sell shares that would
result in capital gains, and gets capital losses. The bigger the loss, the bigger
● Sec 40B → memorize the tax benefit to the son. To prevent that, the law does not allow this (...)
● From the amount realized, you deduct basis. Basis is the cost from the
property to determine your gain or loss
● Ex. Basis is 1k per sqm; now selling for 10k per sqm; your taxable gain is 9k ● The tax base for computing capital gains tax in an installment sale of real
per sqm. If acquired by inheritance If someone dies, and you inherit, that property should be the zonal value at the time of the execution of the deed of
property will be subject to estate tax of 6% If acquired by gift Example in the conditional sale and not the zonal value at the time of the execution of the deed
next slide of absolute sale. BIR Rul. No. DA-098-2007, Feb. 15, 2007

Practical Applications
Gains from Dealings in Property
● Transfer of Stock for Cash
○ e.g., SMC sold its 10,354,166 common shares of Nestle Phils., Inc. to
Nestle S.A. for US$591,535,264.30 and paid 5% - 10% [now 15%]
capital gains tax. BIR Rul. No. 146-98, Oct. 14, 1998.
○ It also paid DST on sale of shares.
● Transfer of Stock of Stock
○ e.g., in BIR Rul.No. 075-98, May 27, 1998, a taxpayer who owned
shares of stock with an acquisition cost of P23.1M transferred such
shares to a listed company in exchange for shares of stock of the
latter with a par value of P40.2M, and paid capital gains tax of 5%-
10% [now 15%].
● Sale of Real Property
○ a corporation that shut down its plant later sold the land and building
where it used to conduct manufacturing operations. The gain derived
from the sale was subjected to the 30% [now 20%-25%] regular
corporate income tax. The sale was also subjected to 12% VAT based
on the selling price, or zonal value, whichever is higher. DST on sale of
real property also paid, plus local transfer tax and registration fee.
Capital Asset vs. Ordinary Asset
● Capital asset
○ Defined as “property held by the taxpayer (whether or not connected
with his trade or business), but does not include ……..
● Ordinary asset
○ That which is excluded in the definition of capital asset, namely:
■ Stock in trade of the taxpayer
■ 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
■ Property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business.
■ Property used in the trade or business (e.g. buildings and/or
improvements) of a character which is subject to the
allowance for depreciation provided in Subsection (F) of
Section 34
■ Real property used in trade or business of the taxpayer.
■ A vast property (7 hectares) that a taxpayer inherited,
developed, subdivided into small lots, and then subsequently
sold through an attorney-in-fact or broker is an ordinary asset.
Tuason v. Lingad, 58 SCRA 170, 178 (1974); see also
Calasanz v. CIR, 144 SCRA 664 (1986)
NOTE: while he inherited it, capital asset yan. kaso inimprove niya with an end in view of
selling it. then it’s an ordinary asset because the intention is to use it as an inventory, or
property to be held for sale in the ordinary course of business
○ A 5-door apartment was held to be an ordinary asset, the sale of which
would be subject to the creditable withholding tax on sale of real
property. BIR Rul. No. 061-96, May 22, 1996.
○ Real properties acquired by banks through foreclosure sales are
ordinary assets. However, banks shall not be considered as habitually
engaged in the real estate business for withholding tax purposes, thus
6% EWT applies. Rev. Regs. No. 7-2003, Dec. 27, 2002
○ In the case of subsequent non-operation by taxpayers originally
registered as engaged in real estate business, all real properties
originally acquired by them shall continue to be treated as ordinary
assets. Id.
○ Similarly, real property formerly forming part of stock in trade of a real
estate dealer, or formerly used in trade or business, which was later
abandoned or which became idle shall continue to be treated as
ordinary asset. Id.
NOTE: There’s this rule issue by the BIR wherein a real estate dealer may have
properties primarily held for sale to customers (or inventory property)
Covers real estate dealer has properties, inventory property.
Q: Suppose buy and sell ako. B bought a lot of properties in Bulacan like A LOT, IN
SHORT nag-land banking siya. When B unloaded to SM and AYala land. Was he a real
estate dealer?
A : Yes. Those assets were ordinary asset
Q: Suppose nag bago isip ni B after selling only some land. OK na kumita na ako eh
pero meron pang substantial na natira. When B stopped engaging in real estate
business, those properties acquired primarily become capital assets?
A: BIR says no not capital asset
Q: Suppose later these properties became idle. They do not revert to investment asset
Q: Suppose Atty. Baniqued has condominium unit for investment, Baniqued wants to
sell it when the right time comes, pag nag triple yung value. So Baniqued made pa
lease.
A: The BIR is of the view that once you rent out this property it becomes ordinary asset.
Baniqued’s rental income 1-2% of his whole gross income.
● Examples: Inventory Real properties of Ayala Land, SM residences, DMC
Homes, Megaworld, Vista Land You hold an office space; building used in
trade or business; machineries and equipment; land Real properties for rent
used in trade or business
● Problem: Suppose I have a condo na nag-iisa. When I acquired this, my
intention was to hold this for investment. Wait for it to appreciate over time.
Suppose I want to release it after 10 years. But in the meantime, I will rent it
out as Airbnb. So basta I don’t intend it to be for trade or business, just
investment.
● “The realization of appreciation..” Sir’s condo example The distinction:
Business property → ordinary asset Investment → capital asset
Gains from Dealings in Property
NOTE: WE MUST KNOW DIS BY HEART. Capital asset anything that isn’t an ordinary
asset. This is a pingpong definition look to next slides
● Sec. 39(A) seeks to distinguish between “profits and losses arising from the
everyday operation of the business”, on one hand, and “the realization of
appreciation in value accrued over a substantial period of time”, on the other.
Read Corn Products
● Distinction is essentially one of “investment” vs. “business” property.
● Dealings in property
● Person disposes property—real or personal.
● We now confine our discussion as to sale or disposition (not income)
● IN CONTRAST: However, a property formerly used in trade or business by a
taxpayer, other than a real estate dealer, real estate developer, or a real estate
lessor, is automatically converted into capital asset upon showing of proof that
the same has not been used in business for more than 2 years prior to the
transaction (e.g., sale) involving such property. Id.
Q: Suppose I am a practicing atty and bought a condo, planning to sell the condo
when the value multiplies. I rented it out.
● BIR: Once you rent out a property, it is an ordinary asset because it is used
for the business.
● Sir: But this is only a small percentage of my income. It’s not my business.
Q: Suppose I changed my mind. The lessor of Baniqued, nako had a dog basically
nanira yung dog. Ayaw niya na ipaupa so stopped leasing activity. If the property not
rented for 2 years, does it reverted to capital asset ?
A: Yes automatically reverted to capital asset if shown not used for business for more
Capital Asset
than 2 years. This is in contrast to persons engaged in the real estate business. In
such a case, hindi nagrerevert yung kanila (? or hindi automatic raw)
● Will an office condominium unit purchased by a practicing lawyer for investment
but used by him as his office in the meantime (while waiting for its value to
appreciate) be treated as an ordinary asset?
○ Argue that it does not become an ordinary asset
○ You could argue that it does not become an ordinary asset kasi di mo
ginamit sa negosyo. As an owner, you have the right to use that as an
office.
○ You don’t derive income from the condo too. (BUT BIR might make
palusot na pang-office mo pa rin raw)
● To resolve that, take into account the following factors:
○ purpose of acquisition, number and regularity of sales, subdividing and
improvements, sales effort, relation of activity to one’s primary
occupation, and purpose at time of sale.
Purpose of acquisition
● If you just wanna sell it later then ordinary asset
Number and regularity of sales
● If madami umuupa, then capital asset
● If ikaw lang, ordinary asset
Subdividing or improving a property to sell
● ordinary asset
● if you engage brokers, then ordinary asset
Relation of activity to one’s primary occupation
● I’m a lawyer. my rental income is 1% of my gross income. Then this is an
isolated transaction
● Shares of stock held by a dealer in securities or by a person engaged in the
purchase and sale of, or an active trader (for his own account) in, securities are
ordinary assets. China Banking Corporation v. CA, et. al., 336 SCRA 178 (2000)
● If held, however, by another person by way of investment, they are capital assets.
Ibid.
● If I hold shares as investment, they are capital assets.
● If I keep buying shares, then I merely acquired these securities by way of
investment, and not for sale
● Property merely held for investment and which remains vacant and idle, BIR Rul.
No. DA-349-2008, June 11, 2008, and which is not used in business by the owner
who is neither a real estate developer nor a real estate dealer, BIR Rul. No. DA-
395-2007, July 19, 2007
● An option to buy, in the hands of a taxpayer who does not deal in options, is a
capital asset and the sale thereof gives rise to a capital gain. BIR Ruling No. 31-
83, March 1, 1983, cited in BIR Ruling No. 98-97, August 28, 1997.
● Similarly, condo units, parking slots, and agricultural lands, acquired purely for
investment and which were classified in the company’s financial statements as
capital assets and never subjected to depreciation, are indeed capital assets.
BIR Rul. No. DA-692-2006, Dec. 7, 2006
● If may-ari ng lupa yung company, sa tingin ng BIR ordinary asset
○ But the mere fact that this corporation owns such land not
automatically an ordinary asset
● Suppose realty holding company
○ BIR assets are ordinary assets
Gains from Dealings in Property
● However, only the sale of the buildings is subject to the 6% CGT, while the sale
● Ex. Client Corp owned a building. NEVER rented out. BIR still saw as an ordinary of the machineries and equipment is subject to the regular corporate income tax
asset. rate. Reason: Sec. 27(D)(5) applies only to sale of “lands and/or buildings”. SMI-
○ Before train law → BIR charged corp 30% Ed Phils.
○ if capital asset → 6% CPG tax on sale of real property (Correct)

● If these properties, namely the building, machineries were used precisely for
● Warning: If may-ari ng lupa ay company. Default utak nila is ordinary asset trade and business, then they should be ordinary assets
yan. Because a corp is entitled to 6% of real property. So some lands should
actually be classified as capital assets. ● Real estate dealer ka. Namili ng lots, machineries, and equipment to be sold
● The mere fact that the corporation owns a property, not automatically an in the ordinary course of business. Does the law intend na kapag di ka
ordinary asset natuloy sa negosyo, these properties become capital assets?
● But if you’re a realty holding company, BIR says that lahat ng assets mo ay ○ SC: YES FOR LAND. Oince the corporation is a registered enterprise
ordinary assets na. Kahit sabihin man na they have to hold it for 10 years failed to commence operation, then they were never used in trade
before selling, still classified as ordinary asset and business, even if they were acquired for this purpose. Dahil di
nagamit sa negosyo yung land, edi capital assets. Yung mga di
● Lots that have been vacant, idle, unproductive and unimproved since acquisition. nagamit, subject to 6% capital gains tax.
BIR Rul. No. DA-420-2005, Oct. 10, 2005; BIR Rul. No. DA-542- 2006, Sept. 11, ○ SC: NO FOR MACHINERIES AND EQUIPMENT. Because 6% capital
2006 gains tax ay for land and building. Hindi kasama machineries and
● Real properties received by a corporation as additional capital contribution from equipment. Even if we agree that they should be considered as
a stockholder and which were never used and were left idle and did not generate capital assets, they should be subject to corporate assets.
any income. BIR Rul. No. DA-160-2006, March 27, 2006
● Lots sold by Roxas y Cia. to hundreds of vendees in deference to the request of
the Government to allocate lands to the landless were held capital assets. The
fact that there were hundreds of vendees would not make the vendor a real
estate dealer, the sales being an isolated transaction. Roxas v. CTA, 23 SCRA
276, 281-282 (1968)
○ Note: pag benta niya rito isolated case, company was just lending
support to the government
● An equity investment of China Banking Corporation (in a Hongkong subsidiary)
that has become worthless is a loss from sale or exchange of capital assets and,
as such, is deductible only to the extent of capital gains, i.e., gains derived from
sale or exchange of capital assets, and not from any other income of the
taxpayer. China Banking Corp., supra.
● In Gaw, Jr., the BIR accused the taxpayer of tax evasion when he misrepresented
as “capital assets” 10 parcels of land acquired with BDO loans and which were
subsequently sold only 8 months later to a single buyer, with taxpayer paying
only the 6% CGT, instead of the 32% [now max. 35%] regular income tax.
● The BIR also assessed the taxpayer Php6.5B.
● Case later compromised judicially at roughly 10% of the total deficiency
assessment. SC Resolution dated Jan. 8, 2020 Ordinary Asset
1. Low basis
● It appears from the facts that this guy really acquired the properties to sell
them within a short period of time. But ang laki ng hiniram sa BDO a. there will be a high tax because your gain is high.
● Should have been liable for 35% 2. High basis
● The SC held that buildings and machineries and equipment sold by a PEZA- a. there will be a lower tax because your gain is lower
registered enterprise that failed to commence operation are capital assets
because they were not used in trade or business.
Gains from Dealings in Property
● In Corn Products Refining Co v. Commissioner, 350 US 46 (1955), the taxpayer,
a manufacturer of products made from grain corn such as starch, syrup, sugar,
and their by-products, feeds and oil, argued that its purchases and sales of corn
futures were capital-asset transactions, entitled to the preferential capital gains
tax treatment.
○ The Supreme Court held that the taxpayer’s futures activity was vitally
important to taxpayer’s business as a form of insurance against
increases in the price of raw corn.
○ It was an integral part of taxpayer’s business designed to protect its
manufacturing operations against a price increase in its principal raw
material and to assure a ready supply for future manufacturing
requirements.
○ Taxpayer was not a “legitimate capitalist” that engaged in “speculating
and buying and selling corn futures” that was separate and distinct
from its manufacturing operations but rather its activity was an integral
part of its manufacturing operations and intended to protect a part of
its manufacturing costs.
● This taxpayer bought corn futures to protect its business against increases
from the price of corn. So prior to entering into the transaction, nilalakihan
niya yung presyo ng corn. Para kapag tumaas yung presyo, nakapako na
yung lower price. That’s why you invest in these futures.
● Kaso, the company subsequently sold these corn futures and considered as
capital assets and therefore considered as capital gains.
● SC: Yung buy and sell mo ng corn futures forms part of your business to
protect your price increases in your principal raw materials (corn). So when
you bought those corn futures, you did not buy them for investment, rather
you bought them as an integral part of your manufacturing operations, for
your business. Therefore, it is a business property. Denied capital gains tax
treatment.
● The Corn Products decision simply reiterates the congressional intent “that
profits and losses arising from the everyday operation of a business be
considered as ordinary income or loss rather than capital gain or loss.”
● Similarly, a newspaper publisher that entered into a long-term contract for the
purchase of newsprint at a favorable price was held to have realized ordinary
income, rather than capital gain, on assignment of its rights under the long-term
contract to other publishers for an amount equal to the difference between the
contract price and the higher current price for paper. Mansfield Journal Co. v.
CIR, 274 F.2d 284 (6th Cir. 1960)
CGT on Sale of Shares of Stock Applies Only to the “Net Capital Gain”
● ”Net capital gain” means “the excess of the gains from sales or exchanges of
capital assets over the losses from such sales or exchanges.”
● Conversely, ”net capital loss” means “the excess of the losses from sales or
exchanges of capital assets over the gains from such sales or exchanges.”
● this statute → Capital losses sustained during the taxable year from sales or
exchanges of shares of stock classified as capital assets may be deducted
currently (as opposed to year-end) from capital gains derived during the same
taxable year from sales or exchanges of shares of stock classified as capital
assets. Jardine Davies, Inc. v. CIR, CTA Case No. 5738, August 1, 2000; see also
BIR Rul. No. 037-98, April 13, 1998
Sec 24(C), NIRC
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The
provisions of Section 39(B) notwithstanding, a final tax at the rate of fifteen percent
(15%) is hereby imposed upon the 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.
● Suppose I bought a condo in Makati 30 years ago for 20M. Now, a unit costs
100M. I rented it out to derive rental income overtime. Suppose I am in need
and want to unload this property now and sell it for 100M. BIR will collect
35% from me bec I am in the max tax bracket (Sec. 24A2A). I have a gain of
80M. This will be taxed at 30% under the current BIR rules and I have been
leasing it out.
● Suppose bago ko siya ibenta, hindi ko na siya ipapaupa for 2 years, as of
December 31, 2021. I will wait for two years, and on January 2024, I will sell
it. Assuming that the market value remains the same at 100M, what tax will
I pay now, or at that point in time that I sell it?
○ CAPITAL ASSET. 6% capital gains tax on the 100M, regardless of
the gain
● Suppose I bought this property three years ago for 95M, now it’s worth
100M. Pinapaupa ko siya up to and until the time of sale. What will I pay?
○ ORDINARY ASSET. 0% or 35% based on the excess of selling price
over basis. Tax on 5M.
● If mababa ang basis mo, better to pay 6% CGT.
● If mataas basis mo, ok lang to pay 30 to 35%
Sec 24(C)
● Suppose u sold shares at a gain of P5K. This sale u realized 5K, you also
report prior transaction where u had a loss of 1K. How much is ur net capital
gain at the time of the 2nd sale?
○ A : your gain in the second is 5K but u suffered 1K in the prior →
obviously net capital gain is 4K. ANg babayaran mo na tax should
only be 15% base on P4K that is your net capital gain, after
deducting the loss. [follow this train of thought]
○ HOWEVER THE BIR SAID, NO PAY FIRST 15% from 5K that you
gained ; set aside the loss of 1K , report that at the end of the year
na raw basically BIR insisting per transaction, consolidation at the
end of the year.
Gains from Dealings in Property
○ SIR’S POV : Suppose in march may bagong loss na incurred 3K. so
wala ka na babayaran dun sa 4K gain mo nung February. Suppose
kumita ka ng 10K sa April → 5K Feb, 10 APril = 15K - 1K loss jan -
3K in march =11K net
Treatment of Liquidating Dividend
Tax Consequences to the Corporation
● Transfer by the liquidating corporation of its remaining assets to its stockholders
is not considered as a sale of assets. Thus, the liquidating corporation does not
realize gain or loss in partial or complete liquidation. See, however, BIR Rul. No.
479-2011, Dec. 5, 2011 that ruled to the contrary without offering any legal
basis.
● Conversely, neither is the corporation subject to tax on its receipt of the shares
surrendered by its shareholders pursuant to the liquidation. BIR Rul. Nos. 171-
92, May 28, 1992, 039-02, Nov. 11, 2002, DA-033-2005, Jan. 27, 2005, and
DA-318-2005, July 15, 2005.
● When a corp has retained earnings or profits, may be distributed to the
shareholders as cash dividends, stock dividends (additional given to
shareholders); or property dividends
● BIR: Distribution or liquidating dividend is a sale of the corporation, and
therefore taxable (without statutory basis)
● BIR: Pag magsasara na yung corporation tapos kukunin ng corporation yung
stocks ng shareholders, walang tax
Tax Consequences to Shareholders
● There used to be a debate on whether money or property distributed by a
corporation to its shareholders in complete liquidation or partial liquidation
should be taxed as ordinary income or as capital gain subject to the preferential
CGT rate of 5% - 10% [now 15%].
Suppose you have investment in the corporation for 1M. So you subscribe to shares of
stock and pay 1M. A few years later, the corporation wants to liquidate.
● There were as many BIR rulings that said they are subject to regular income tax
as there were that said they are subject to the preferential capital gains tax (5%-
10%) [now 15%].
● Inconsistent rulings - source of confusion.
● Tax advisors could not make definitive tax planning for corporate and individual
clients.
Ordinary Income
● Some BIR rulings imposing ordinary income tax. BIR Ruling Nos. 119-84, 190-
84, 322-87, 21-89, BIR Rul. No. DA-316-2007, May 29, 2007.
Capital Gain
● Some BIR rulings imposing preferential capital gains tax. BIR Ruling Nos. 19-80,
15-82, DA-367-6-24-99, DA-556-9-28-99, DA-529-99, DA-597-10-7-99.
Current Position of the BIR
● Liquidating dividends are capital gains [hence, the holding period in Section
39(B) applies], but the same shall be subject to the regular income tax rates
imposed under Section 24(A).
● Redeemable preferred shares that are redeemed into treasury in order to be
retired and, therefore, no longer available for subsequent reissuance shall not
give rise to any income tax consequence on the part of the redeeming
corporation. However, the shareholder whose redeemable preferred shares are
redeemed at a time when the corporation that issued the shares is still an
ongoing concern and is not contemplating dissolving or liquidating its assets and
liabilities shall realize capital gain or loss consisting of the difference between
his adjusted basis in the shares and the redemption price or fair market value of
property received in the redemption. Such capital gain shall be subject,
however, to the regular income tax rates imposed on individuals or corporations,
and not the preferential capital gains tax rates of 5%-10% [now 15%].
Redeemed shares are defined as “shares bought back by the issuing corporation
for the purpose of retirement or cancellation.”
● Revenue Regulations No. 6-2008, however, also provides that where a
corporation buys back its own shares that thereupon become treasury shares,
the buy-back shall be subject to the ½ of 1% stock transaction tax if the shares
are listed and sold through the trading system of the local stock exchange, or
the 5%-10% [now 15%] capital gains tax if the shares are not listed or sold
through the facilities of the stock exchange. Treasury shares are defined as
“shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption which is not for
cancellation, donation or through some other lawful means.” The corporation
may again reissue such reacquired shares for such price as the board of directors
may fix.
● The difference in the tax treatment of shares of stock redeemed in order to be
retired or cancelled (which are taxed at regular income tax rates) and those
redeemed into treasury and available for reissuance (which are taxed at the
preferential capital gains tax rates) lacks statutory basis. In either case, the
stockholder gives up his shares of stock in a transaction that clearly constitutes
a sale, exchange, barter or some other disposition in exchange for cash and/or
property. If such shares of stock are capital assets in the hands of the
shareholder, the gain or loss resulting from the surrender of the same to the
issuing corporation should be considered as capital gain or capital loss, as the
case may be, subject to the preferential tax treatment provided in the Code.
Look at Sec. 24C
● “The provisions of 39B notwithstanding”
● Look at 39B.
● Even if you held the real property classified as capital asset for more than 12
Gains from Dealings in Property
mos, you still subject to the tax of __%
● BIR: Liquidating dividend shall be treated as capital gains and subject to
income tax 24A but the holding period shall apply
● GR: In sale of shares, sabog na q
● Shouldn’t the determination of whether liquidating dividends should be taxed as
ordinary income or as capital gain depend on whether the shares of stock
surrendered partake the nature of ordinary asset or capital asset?
● Liquidation is treated as a sale or exchange of the stock. Wise & Co. v. Meer, 78
Phil. 667 (1947)
● See also Section 256 of the Income Tax Regulations (Rev. Regs. No. 2)
● If shares surrendered are capital asset, then capital gain. If shares are ordinary
asset, then ordinary income. Loss to be characterized in like manner.
● Shares held by a dealer in securities are classified as ordinary asset. Hence,
liquidating dividend received upon the surrender of his shares in the dissolved
corporation should be taxed as ordinary income.
● Shares held by a passive investor are capital asset. Hence, liquidating dividend
received constitutes capital gain.
Conversion of Redeemable Preferred Shares into Common Shares
● Partakes the nature of recapitalization, hence, no gain or loss should be
recognized.
● Besides, there’s no “realization” of income yet. The investment remains
unliquidated. BIR Ruls. DA-166-2008, DA-163-2008
● But see ITAD Rul. No. 001-2012, Jan. 10, 2012, where the CIR ruled, without
citing any legal basis, that the conversion of preferred shares with a par value of
P1.049B into common shares with a higher par value of P1.603B gave rise to a
gain of P553.5M, subject to the 5%-10% CGT [now 15%]. This is now considered
as a “recapitalization” under CREATE, hence, a non-recognition transaction.
● Earlier, we discussed the realization of gain. To be taxable, the gain should
be a severance on the principal. There’s also a recovery of investment.
You’re taxed on the fruit of the capital, not the capital
● Issue: Third point
○ BIR: Taxable raw
○ Sir: Gain, to be taxable, should be realized first. Here, the
investment of the stockholder remains in the corp. No realization,
no liquidation, no sale. Cinonvert lang yung one class of shares into
another class of shares. But the par value is just higher. Thus, the
gain of 553.3M is just a paper profit until subsequent disposition of
shares.
○ SC: in favor of BIR
○ NOW WITH CREATE LAW: now called recapitalization. Therefore no
gain or loss is recognized on the exchange of preferred shares into
common shares
Sale of Principal Residence
● 6% CGT is deferred if the entire sale proceeds are used to acquire or construct a
new principal residence within 18 months from date of sale. If not all the
proceeds are so used, then such % of the selling price as the unutilized amount
of the proceeds bears to the gross selling price shall be subject to CGT.
● 6% CGT supposedly payable is placed in escrow with an Authorized Agent Bank
(Landbank). ; 18 MONTHS period , yung escrow parang u placed money in the
bank , joint signature of BIR + private person
Q: how often can you avail of this deferral ?
A: May be availed of only once every 10 years.
● Suppose your parents want to sell your house because your moving. Your
parents are entitled to a referral of a tax
○ BEFORE: 6% CPG bec of sale of real prop as capital asset)
○ NOW WITH Sec. 24D2: no need to pay 6% CGT because they’ll be
reinvesting their proceeds to the acquire/construct a new house,
■ PROVIDED that this must be done within 18mos from the
sale of residence.
■ PROVIDED that this is availed only once every 10 years
● ESCROW
○ naglagay ka ng pera sa bangko tapos joint sign ng bIR and
authorized officer and kayo
○ pag na-approve na nagcomply ka, tapos nagamit yung pera sa new
house, ibabalik ng BIR yung 6% na nilagay sa ESCROW
Non-Recognition Transactions
● The underlying assumption of the tax-free exchange provisions is that the new
property is substantially a continuation of the old investment still unliquidated;
and, in the case of the reorganizations, that the new enterprise, the new
corporate structure and the new property are substantially continuations of the
old still unliquidated. Delpher Trades Corp. v. IAC, 157 SCRA 349
● Whatever a tax payer receives , pursuant to this kind of transaction is just a
continuation. Suppose title is in Baniqued’s name, in exchange Baniqued will
be under corporation ; not equivalent to non-disposition of the investment, just
a continuation of your investment and remains unliquidated , wala pang cash
equivalent
Gains from Dealings in Property
Non-Recognition Transactions
● As a rule, f there is a gain from this transaction, the gain shall not be
recognized
● If there is a loss, the loss shall not be deductible for income tax purposes
Requirements of a Tax Free Exchange of Asset for Shares of Stock (Memorize)
1. One or more persons, not exceeding a total of 5, must transfer property (other
than cash) to a corporation;
2. The transfer must be “solely in exchange for stock or unit of participation in such
a corporation”; and
3. The transferor or transferors must be “in control” of the corporation after the
exchange.
● “property” → only bawal is cash
● max of 5 transferors lang daw
Sec. 40C, NIRC
(C) Exchange of Property. -
(1) General Rule. - Except as herein provided, upon the sale or exchange or property,
the entire amount of the gain or loss, as the case may be, shall be recognized.
(2) Exception. - No gain or loss shall be recognized on a corporation or on its stock or
securities if such corporation is a party to a reorganization and exchanges property in
pursuance of a plan of reorganization solely for stock or securities in another
corporation that is a party to the reorganization. A reorganization is defined as:
(a) 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; or
(b) The acquisition by one corporation, in exchange solely for all or a part of its voting
stock, or in exchange solely for all or part of the voting stock of a corporation which is
in control of the acquiring corporation, of stock of another corporation if, immediately
after the acquisition, the acquiring corporation has control of such other corporation
whether or not such acquiring corporation had control immediately before the
acquisition; or
(c) The acquisition by one corporation, in exchange solely for all or a part of its voting
stock or in exchange solely for all or part of the voting stock of a corporation which is in
control of the acquiring corporation, of substantially all of the properties of another
corporation. In determining whether the exchange is solely for stock, the assumption
by the acquiring corporation of a liability of the others shall be disregarded; or
(d) A recapitalization, which shall mean an arrangement whereby the stock and bonds
of a corporation are readjusted as to amount, income, or priority or an agreement of all
stockholders and creditors to change and increase or decrease the capitalization or
debts of the corporation or both; or
(e) A reincorporation, which shall mean the formation of the same corporate business
with the same assets and the same stockholders surviving under a new charter.
No gain or loss shall also be recognized if property is transferred to a corporation by a
person, alone or together with others, not exceeding four (4) persons, in exchange for
stock or unit of participation in such a corporation of which as a result of such exchange
the transferor or transferors, collectively, gains or maintains control of said corporation:
Provided, That stocks issued for services shall not be considered as issued in return for
property.
Sale or exchanges of property used for business for shares of stock covered under this
Subsection shall not be subject to value-added tax.
In all of the foregoing instances of exchange of property, prior Bureau of Internal
Revenue confirmation or tax ruling shall not be required for purposes of availing the tax
exemption.
(3) Exchange Not Solely in Kind. -
(a) If, in connection with an exchange described in the above exceptions, an individual,
a shareholder, a security holder or a corporation receives not only stock or securities
permitted to be received without the recognition of gain or loss, but also money and/or
property, the gain, if any, but not the loss, shall be recognized but in an amount not in
excess of the sum of the money and fair market value of such other property received:
Provided, That as to the shareholder, if the money and/or other property received has
the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the
shareholder an amount of the gain recognized not in excess of his proportionate share
of the undistributed earnings and profits of the corporation; the remainder, if any, of
the gain recognized shall be treated as a capital gain.
(b) If, in connection with the exchange described in the above exceptions, the transferor
corporation receives not only stock permitted to be received without the recognition of
gain or loss but also money and/or other property, then (i) if the corporation receiving
such money and/or other property distributes it in pursuance of the plan of merger or
consolidation, no gain to the corporation shall be recognized from the exchange, but (ii)
if the corporation receiving such other property and/or money does not distribute it in
pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to
the corporation shall be recognized but in an amount not in excess of the sum of such
money and the fair market value of such other property so received, which is not
distributed.
(4) Assumption of Liability. -
(a) If the taxpayer, in connection with the exchanges described in the foregoing
Gains from Dealings in Property
exceptions, receives stock or securities which would be permitted to be received without
the recognition of the gain if it were the sole consideration, and as part of the
consideration, another party to the exchange assumes a liability of the taxpayer, or
acquires from the taxpayer property, subject to a liability, then such assumption or
acquisition shall not be treated as money and/or other property, and shall not prevent
the exchange from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the liabilities to which
the property is subject exceed the total of the adjusted basis of the property transferred
pursuant to such exchange, then such excess shall be considered as a gain from the
sale or exchange of a capital asset or of property which is not a capital asset, as the
case may be.
(5) Basis -
(a) The basis of the stock or securities received by the transferor upon the exchange
specified in the above exception shall be the same as the basis of the property, stock
or securities exchanged, decreased by (1) the money received, and (2) the fair market
value of the other property received, and increased by (a) the amount treated as
dividend of the shareholder and (b) the amount of any gain that was recognized on the
exchange: Provided, That the property received as 'boot' shall have as basis its fair
market value: Provided, further, That if as part of the consideration to the transferor,
the transferee of property assumes a liability of the transferor or acquires form the
latter property subject to a liability, such assumption or acquisition (in the amount of
the liability) shall, for purposes of this paragraph, be treated as money received by the
transferor on the exchange: Provided, finally, That if the transferor receives several
kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis
among the several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the transferee shall be the same
as it would be in the hands of the transferor increased by the amount of the gain
recognized to the transferor on the transfer.
(6) Definitions. -
(a) The term “securities” means bonds and debentures but not 'notes" of whatever class
or duration.
(b) The term “merger” or “consolidation”, when used in this Section, shall be understood
to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition by one
corporation of all or substantially all the properties of another corporation solely for
stock: Provided, That for a transaction to be regarded as a merger or consolidation
within the purview of this Section, it must be undertaken for a bona fide business
purpose and not solely for the purpose of escaping the burden of taxation: Provided,
further, That in determining whether a bona fide business purpose exists, each and
every step of the transaction shall be considered and the whole transaction or series of
transaction shall be treated as a single unit: Provided, finally, That in determining
whether the property transferred constitutes a substantial portion of the property of the
transferor, the term “property” shall be taken to include the cash assets of the
transferor.
(c) The term “control”, when used in this Section, shall mean ownership of stocks in a
corporation after the transfer of property possessing at least fifty-one percent (51%) of
the total voting power of all classes of stocks entitled to vote: Provided, That the
collective and not the individual ownership of all classes of stocks entitled to vote of
the transferor or transferors under this Section shall be used in determining the
presence of control.
(d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby
authorized to issue rules and regulations for the purpose “substantially all” and for the
proper implementation of this Section.
What are these non-recognition transactions?
1. Sec. 40C → MEMORIZE THIS PROVISION
“No gain or loss shall also be recognized if property is transferred to a
corporation by a person in exchange for stock or unit of participation in such
a corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four (4) persons, gains control of said
corporation: Provided, That stocks issued for services shall not be considered
as issued in return for property.”
a. Suppose your parents have a 2k sqm land which they are leasing to
a food distributor or construction company to be used as the site of
their business. If your parents sell this property used in trade and
business, how much will your parents pay? How would the gain be
recognized?
i. Ordinary assets formula: FMV - Basis = Gain
ii. So let’s say their gain is 8k, this will be taxed on Sec.
24A2A (35%). On top of that, they will have to pay VAT.
b. If your parents transfer this property to a corporation in exchange
for stock and that stock represents 100% of the outstanding stock
of the corp, will the transfer be subject to income tax?
i. No. Sec. 40C says that the transfer of the property in
exchange of stock shall not be subject to tax. There shall
be no gain or loss shall be recognized.
c. Let’s assume na na-transfer na sa corporation. 2 years later, your
parents decide to sell the property. What will they most likely do to
minimize tax? Will they cost the stocks be sold? Or will they sell the
corp to the buyer?
i. Latter. Through a tax-free exchange scheme, this can
minimize tax legally.
d. Requirements
i. Transferor transfers property (real estate, intangible
personal properties, personal properties, shares of stock;
Gains from Dealings in Property
BAWAL CASH)
ii. Person may be an individual, corporation, or a partnership
iii. Transferors cannot exceed a total of 5
iv. Transfer of the property must be solely in exchange of
stock of the corporation. If partnership, it must be in
exchange for unit of participation.
1. UNLESS: General Professional Partnership (hindi
treated as a corporation)
v. The transferor must be in control after the exchange

Q: Suppose A and B have a parcel of land, leasing 2K sqm sa construction/food

dsistributor, to be used as the site of their business. – classified to ordinary asset,
used in trade or business. If A nd B sell this property how much would A and B pay?
how would the gain be calculated?
A: Compute gain first. Assuming 8M yung gain. The rate applicable will be: 35% (Sec
24 (A)(2)(a)). On top of that, impose the value added tax of 12%.

Q: Suppose they transfer this property in exchange for outstanding capital stock, will
this transfer be subject to income tax?
A: Sec 40 C , this transfer shall not be taxed, no gain shall be recognized.
note : property 20M worth.

Q: Suppose two years later, what would they most likely do to minimize tax, stocks be
sold or sells the corporation to the buyer directly?
A: Sell the the stocks instead. 15% tax Sec 24 [Capital Gains from Sale of Shares of
Stock not Traded in the Stock Exchange]
Q: Will they be subject to VAT ?
A: No.
● Baniqued: by doing tax exchange, you’re not committing any violation.
● Atlas owned power plant assets. Ginawa ng Atlas, tinransfer niya yung power
plant to Toleda Power. Toledo, prior to the exchange, may-ari ay sila DP and
BA.
● Prior to exchange, Atlas now owns almost 100% of Toledo Power.
● Were the requirements of the tax exchange fulfilled?
○ YES.

● The tax-free exchange provision also applies to a transfer of assets to a
partnership in exchange for partnership interest in such partnership, as a result
of which exchange the transferor, alone or together with others not exceeding 4,
gains control of such partnership. BIR Rul. No. 105-A-94, May 20, 1994.
Instead of shares of stock being given to the transfer in exchange for the property, the
transferor will transfer units of participation
Incorporation of a Sole Proprietorship
● Converting proprietorship to a corporation
● For example, a businessman who owns and operates a trading business as a
sole proprietorship may organize a corporation and transfer all of the operating
assets of the business to that corporation in payment for his stock subscription.

● In said BIR Rul. No. 105-A-94, Atlas Mining (ATLAS) spun off its power plant
assets to Toledo Power Co. (TOLEDO), a general partnership, in exchange for
99.99% of its partnership interest. The CIR ruled the transfer to be a tax-free
exchange since the term “corporation” as defined in Sec. 22(B) of the NIRC
includes, among others, partnerships, no matter how created or organized.
● NOTE : EXCEPT general professional partnerships
Gains from Dealings in Property
(c) The acquisition by one corporation, in exchange solely for all or a part of its voting
stock or in exchange solely for all or part of the voting stock of a corporation which is in
control of the acquiring corporation, of substantially all of the properties of another
corporation. In determining whether the exchange is solely for stock, the assumption
by the acquiring corporation of a liability of the others shall be disregarded; or

xxx

No gain or loss shall also be recognized if property is transferred to a corporation by a

person, alone or together with others, not exceeding four (4) persons, in exchange for
stock or unit of participation in such a corporation of which as a result of such exchange
the transferor or transferors, collectively, gains or maintains control of said corporation:
Provided, That stocks issued for services shall not be considered as issued in return for
property.

xxx

SEC. 24. Income Tax Rates. -

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the
Philippines.-

(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in
accordance with and at the rates established in the following schedule:

(a) Tax Schedule Effective January 1, 2018 until December 31, 2022:

● He has inventory of goods. Proprietor transfers these assets to newly Not over P250,000……………………………………………… 0%
organized corp. The new corp owns assets and this properitor becomes stock
holder. Over P250,000 but not over P400,000……………………….. 20% of the excess over
○ Purely tax free exchange, Sec 40. P250,000
■ NOTE: Sir failed to note the specific part, the provision
cited below is a guess Over P400,000 but not over P800,000……………………….. P30,000 + 25% of the excess
○ This is an example of non-recognition, no tax. over P400,000
○ 24(a)(2)(a) if hindi ginawa yung Sec 40
Over P800,000 but not over P2,000,000…………………….. P130,000 + 30% of the excess
over P800,000
Sec 40, NIRC
Over P2,000,000 but not over P8,000,000…………………... P490,000 + 32% of the
SEC. 40 excess over P2,000,000
(C) Exchange of Property. -
Over P8,000,000 ……………………………………………….. P2,410,000 + 35% of the excess
(1) General Rule. - Except as herein provided, upon the sale or exchange or property, over P8,000,000
the entire amount of the gain or loss, as the case may be, shall be recognized.
Tax Schedule Effective January 1, 2023 and onwards:
(2) Exception. - No gain or loss shall be recognized on a corporation or on its stock or
securities if such corporation is a party to a reorganization and exchanges property in Not over P250,000………………………………………………. 0%
pursuance of a plan of reorganization solely for stock or securities in another
corporation that is a party to the reorganization. A reorganization is defined as: Over P250,000 but not over P400,000……………………….. 15% of the excess over
P250,000
Gains from Dealings in Property
Over P400,000 but not over P800,000……………………….. P22,500 + 20% of the excess
over P400,000
Over P800,000 but not over P2,000,000…………………….. P102,500 + 25% of the excess
over P800,000
Over P2,000,000 but not over P8,000,000…………………... P402,500 + 30% of the
excess over P2,000,000
Over P8,000,000 ……………………………………………….. P2,202,500 + 35% of the excess
over P8,000,000
For married individuals, the husband and wife, subject to the provision of Section 51
(D) hereof, shall compute separately their individual income tax based on their
respective total taxable income: Provided, That if any income cannot be definitely
attributed to or identified as income exclusively earned or realized by either of the
spouses, the same shall be divided equally between the spouses for the purpose of
determining their respective taxable income.
Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall
be exempt from the payment of income tax on their taxable income: Provided, further,
That the holiday pay, overtime pay, night shift differential pay and hazard pay received
by such minimum wage earners shall likewise be exempt from income tax.
● Another example of a tax-free exchange
Transfer of Intangibles for Stock
● SMC, for instance, transferred various trademarks, trade names and other
related properties to separate corporations in exchange for stock.
○ In BIR Ruling No. DA-238-2001, Nov. 15, 2001, SMC transferred the
tradenames and brandnames, Royal Tru-Orange and its variant, Royal
Lem-O-Lime, to Royal Beverage Corporation (RBC) in exchange for
stock of the latter with a par value of P186,720,000, as a result of
which SMC gained further control of RBC, i.e., 99.99%.
● See also BIR Rul. No. DA-266-2001, where La Tondeña Distillers, Inc. (LTDI)
transferred various trademarks, tradenames, and other like properties related to
its non-alcoholic beverage business (e.g., Viva, Funchum, Zip, Wilkins, Eight-
O’Clock, Yipee, Ponkana, First, Ice Cold-Mix) to Beverage Far East, Inc. (BFEI) as
a result of which La Tondeña gained further control of the latter, i.e. 99.99%.
Spin-Off a Division to a New Company
● Phimco Industries, Inc. (Phimco) spun-off its Lighter Division into a new entity,
Swedish Match Philippines, Inc. (SMPI), by transferring to the latter all of the
operating assets of the Lighter Division consisting mainly of property and
equipment, inventories and account receivables in exchange for 100% of the
capital stock of SMPI. BIR Rul. No. 106-91, June 17, 1991
● See example below:

Transfer of Stock for Stock

● In the Amari case, the 5 investors in Amari Coastal Bay Dev. Corp. transferred all
of their shares in the latter to Guoco Land Phils. in exchange for stock of Guoco
Land Phils. representing an aggregate 66.7% for all 5 of them. BIR Rul. No. S-
34-297-96, July 12, 1996.

● Another example of a tax-free exchange

Transfer of Real Property for Stock

● RFM Corp. transferred its 28,052 sq.m. lot and all buildings and other
improvements thereon in Bo. Santolan, Pasig to Selecta Dairy Products, Inc. in
full payment of its subscription to the latter’s capital stock, constituting 97%. BIR
Rul. No. 322-93, July 16, 1993.
● In BIR Rul. No. DA-270-2001, Dec. 12, 2001, La Tondeña Distillers, Inc. (LTDI)
transferred several parcels of land to Philbev Realty Inc. (PRI) in exchange for
stock of the latter as a result of which LTDI gained further control of PRI, i.e.
99.99% of the voting stock of the latter.
● Former Pres. Joseph Estrada and members of his family transferred some of
their properties in San Juan, Manila, Horseshoe Village, and Tanay to Jelp Real
Estate Development Corp. in exchange for 100% of the capital stock of the latter.
BIR Rul. No. 454-93, Nov. 19, 1993.
Gains from Dealings in Property
● Similarly, in BIR Ruling No. 163-90, August 27, 1990, the taxpayer spun-off its
packaging division to a new company by transferring newly appraised
machineries and equipment to the latter in exchange for shares of stock.
by both FDC and FAI of 70.99% of the total outstanding capital stock of FLI, the
transferee corporation. This more than sufficiently meets the minimum 51%
requirement of the statute.

Transfer of Working Interests in a Petroleum Service Contract
● Transfer by Oriental Petroleum and Minerals Corp. of its working interest in
blocks A & B and C of SC 14 to Linapacan Oil Gas and Power Corp. in exchange
for 80.1% of the latter’s authorized capital stock. BIR Rul. No. 136-93, April 22,
1993.
What happens if there are more than 5?
● Only the first 5 transferors are entitled to the tax-free treatment, while the
6th to the last transferor will be subject to the applicable tax (e.g. capital
gains tax, ordinary income tax, or stock transaction tax). BIR Rul. No. 030-
2000, Aug. 10, 2000, and BIR Rul. No. 109-94, May 31, 1994.

Transfer of Working Interests in a Geophysical Survey & Exploration Contract (GSEC) BIR Rul. Nos. 030-2000 and 109-94 have raised more questions than they have
● Four foreign corporations and 1 domestic corporation transferred their working answered.
interests in GSECs 64, 69 and 72 to Cophil Exploration Corporation in exchange ● How do you determine the first 5 who are exempt? Chronological? Based on
for 54% interest in the latter. BIR Rul. No. 132-95, Aug. 29, 1995 value of property transferred? Or transferors are left to choose who among
themselves will avail of the tax-free treatment?
Transfer by a Non-Stock, Non-Profit Educational Institution of its Real Properties ● Because of the unanswered questions, It’s prudent to limit the transferors to
● Transfer by FEU of its parcels of land in Manila and improvements thereon in 5 to avail of the tax-free exchange
exchange for shares of stock of FERN Realty, Inc. with a par value equivalent to
the zonal value of the parcels of land and FMV of the improvements. BIR Rul. No. Concept of “Boot”
008-90, Jan. 29, 1990 ● If the transferor in a tax-free exchange or reorganization receives not only stock
but also money and/or property (termed as “boot”), the gain, if any, but not the
Requirement of Control loss, shall be recognized (meaning, taxed) to the extent of the boot. Section
● Control means at least 51% of the voting stock. 40(C)(3), NIRC
● Only those persons who transferred property for stock in the same transaction ● Thus, if a taxpayer transfers property with an adjusted basis of P1,000,000 and
may be counted up to a maximum of 5. a FMV of P5,000,000 to a controlled corporation in exchange for stock worth
● Thus, where the transferor of real property acquired only 6% of the transferee, P3,000,000, cash of P1,000,000, and an automobile with a FMV of P1,000,000,
the control requirement was not met notwithstanding that transferor’s parent his gain is P4,000,000, but only P2,000,000 of it is to be recognized under
company owned 54% of the transferee. BIR Ruling No. 019-91, Feb. 14, 1991 Section 40(C)(3), computed as follows:
● While the statute requires that the transferor/s “gain control” of the transferee,
it is alright if transferor/s “remains in control” or gains “further control” after the
exchange. Rev. Mem. Ruling No. 1-2001, Nov. 29, 2001 Amount Realized:
● Thus, spouses who, prior to the exchange, owned 98.8% of the transferee, ended Shares of Stock P3,000,000
up with 100% after transferring their real estate, met the control requirement. Cash (“Boot”) 1,000,000
BIR Rul. No. 003-94, Jan. 6, 1994. Automobile (“Boot”) 1,000,000
Total P5,000,000
Jurisprudence Less: Adjusted Basis 1,000,000
● On the other hand, the Supreme Court held in Filinvest Development Corporation Gain Realized P4,000,000
that the dilution or reduction of the proportionate interest of the transferor after Gain Recognized P2,000,000
the exchange is immaterial for as long as the transferor, either alone or together
with other transferors not exceeding five, continues to own at least 51% of the
outstanding capital stock of the transferee corporation. ● Gain, if any, is recognized.
● Thus, the transfer by Filinvest Development Corporation (FDC) of parcels of land ● In this case, 2M will have to be taxable
in exchange for shares of stock of Filinvest Land Incorporated (FLI) remains a
non-recognition transaction notwithstanding that FDC that used to own 67.42%
● If the adjusted basis in the example above was P4,500,000 instead of
of FLI ends up being diluted in that, after the exchange, its percentage of
P1,000,000, the gain would be only P500,000, and only this amount would be
ownership decreased to 61.03% because its affiliate, Filinvest Alabang,
recognized under Section 40(C)(2).
Incorporated (FAI), 80% of whose outstanding capital stock is also owned by
○ If the adjusted basis was more than P5,000,000, there would be a
FDC, likewise transferred parcels of land in the same transaction in exchange for
realized loss, but, because of Section 40(C)(3), the loss could not be
shares of stock of FLI representing 9.96%, thus resulting in a combined control
Gains from Dealings in Property
recognized (meaning, could not be deducted) even though boot was ● However, if the liability assumed by the transferee exceeds the transferor’s
received. adjusted basis in the property transferred, then such excess shall be treated as
a gain from the sale or exchange of a capital asset or ordinary asset, as the case
may be, and taxed accordingly. Section 40(C)(4)(b), NIRC
Amount Realized:
Shares of Stock P3,000,000 Step Transaction Doctrine
Cash (“Boot”) 1,000,000 ● Steps taken by a taxpayer may be collapsed by revenue authorities as being
Automobile (“Boot”) 1,000,000 indicative of a preconceived plan to avoid or minimize tax through means that
Total P5,000,000
have no genuine business purpose other than tax avoidance.
Less: Adjusted Basis 4,500,000 ● Powerful weapon for revenue authorities to attack sham transactions.
Gain Realized P 500,000 ● In BIR Rul. No. 185-91, Sept. 11, 1991, the taxpayer, 6 months after spinning-
Gain Recognized P 500,000 off its Lighter Division to SMPI in a tax-free exchange, turned around and sold
the shares received in the exchange at a profit. It paid the then 10%-20% CGT
[now 15%] on stock transactions but the RDO insisted that the tax be the regular
● Buong 500k will be taxable corporate income tax of 35% [now 20%-25%]. The CIR upheld the taxpayer.
● In BIR Rul. No. 222-91, Oct. 31, 1991, SMC boldly asked the CIR for written
Effect of Assumption of Liability confirmation that its sale of the shares of FJV to which it earlier transferred via a
● Liability assumed by the transferee pursuant to the exchange, whether that of tax-free exchange all the operating assets of its Magnolia Division shall be
the transferor or attached to the property transferred, generally shall not be subject to the 10%-20% CGT [now 15%]. SMC’s subsequent sale of the FJV
treated as “boot” and shall not jeopardize the tax-free character of the exchange shares to new investors was at a 40% premium. CIR obliged.
or reorganization. Section 40(C)(4)(a), NIRC ● Relevant provision, See Sec 40 (c) (2)
○ A taxpayer who owned a highly appreciated land transferred it to a
subsidiary in exchange for stock and, soon after the exchange, listed
the subsidiary in the stock exchange.
● Scenario : Suppose straightforward property in exchange of stock → ok lang ○ The taxpayer then sold its shares of stock, paying the then ¼ of 1%
no issue (now 6/10 of 1%) stock transaction tax. BIR Ruling No. 219-90, Nov.
● Scenario : transferor transferred this property in exchange of stock with an 23, 1990.
agreement that the transferee corporation will assume liability of this ■ If it had sold the share after the exchange it would have paid
property to be transferred Capital Gains Tax of 15% but it first listed the company and
● Ex. B has a property valued at 5M, but outstanding mortgage with a bank of sold the shares afterwards
1M. This property is collateral in favour of BDO. When property transfered to ■ “Step Transaction Doctrine” → When you sold the shares of
XYZ corp, for stocks, B and XYZ agreed taht XYZ will assume the mortgage. stock there is no valid business purpose and therefore BIR is
What is the effect of the assumption of XYZ’s 1M liability? to consider all the steps taken by the taxpayer to determine
○ Sec 40 ©(4)(a) the collective steps taken and may disregard/ collapsed as a
preconceived plan with no valid business purpose other than
to reduce tax liable.
● If the amount of the liabilities assumed plus the amount of the 1M to which the
● Baniqued’s Analysis
property is subject exceed the total of the adjusted 500K of the property
○ If the taxpayer in BIR Ruling No. 219-90 had not done a tax-free
transferred pursuant to such exchange,
exchange and sold the land, it would have paid the regular corporate
○ then such excess 500K shall be considered as a gain from the sale or
income tax of 35% [now 20%-25%].
exchange of a capital asset or of property which is not a capital asset,
○ If it had done a tax-free exchange but not listed the shares, it would
as the case may be.
have paid 10%-20% [now 15%] capital gains tax on sale of unlisted
shares. But the taxpayer went much further and maximized the tax
Given: benefit by listing the shares.
● 1M OUTSTANDING MORTGAGE ● Similarly, in BIR Ruling No. 163-90, August 27, 1990, the taxpayer spun-off its
● BASIS: 500K packaging division to a new company by transferring newly appraised
● PROPERTY: 5M FMW machineries and equipment to the latter in exchange for shares of stock. A few
● Transferred to corporation in exchange for shares of stock worth 4M plus months after the tax-free exchange, the taxpayer sold the shares, paying capital
corp assumes my liability to corporation with an outstanding value of 1M gains tax of 10% - 20% [now 15%].
● Baniqued’s Analysis :
Gains from Dealings in Property
○ BIR can invoke STEP sumthing doctrine → wag daw abusado sabi ni
● Benefit of Merge → Merger : Corporation will get bigger thus banks will want
Baniqued hahah
○ “time period” between tax free exchange til disposition , the longer the to transact more
better, para hindi daw sabihin ng BIR na pre-meditated. ; rule of thumb
1 year difference Illustrations of Merger
● Merger of Tagaytay Highlands Corporation (THC) and Belle Resources
Corporation (BRC), with BRC as the surviving corporation. Under the Plan of
Merger, shareholders of THC received 8 BRC shares in exchange for 1 THC share,
or an 8:1 ratio. BIR Ruling No. 472-93, December 3, 1993.
● Business reasons given for the merger include the following:
○ increased financial strength; and
Requirements of a Statutory Merger ○ rationalization of overall business expenses, particularly administrative
expenses.
1st option for requirements 2nd option for requirements ● Merger of Bristol Laboratories (Phils.) Inc. and E.R. Squibb & Sons Phils. Corp.,
with Bristol as the surviving corporation., in order to realize economies in
operations and management considering that both are now owned and
1. A corporation, which is a party to 1. A shareholder or security holder
controlled by Bristol-Myers Company U.S.A. BIR Rul. No. 038-93, Jan. 18, 1993
a merger or consolidation, must of a corporation, which is a party
● Merger of BDO and Equitable PCI Bank, with BDO as the surviving corporation.
transfer property to a to a merger or consolidation,
BIR Rul. DA-701-06, Dec. 13, 2006
corporation; must transfer stock or securities
○ Business purpose: BSP encouraged the merger of banks to strengthen
2. The transferee corporation must in such corporation;
the banking industry through the merger or consolidation of banks and
also be a party to the merger or 2. The transferee corporation must
financial institutions and in order to realize economies of scale.
consolidation; also be a party to the merger or
3. The transfer must be solely in consolidation;
exchange for stock in such 3. The transfer must be solely in ● These mergers as a non recognition transaction applies to entities organizes
transferee corporation; and exchange for stock or securities a stock corporations
4. The transfer must be for a bona in such transferee corporation; ● You cannot have a merge of non stock corporations
fide business purpose. 4. The transfer must be for a bona
fide business purpose.
● Sec. 40(C)(2), however, applies only to merger or consolidation of entities
organized as stock corporations.
Practical Applications of Statutory Merger
● Merger of General Milling Corporation (GMC), Holland Milk Products, Inc. ○ Thus, it does not apply to merger or consolidation of non-stock
(HOMPI), and Basic Food Corporation (BFC), with GMC as surviving corporation. corporations. BIR Rul. No. DA-084-03, March 19, 2003
● All assets and liabilities of HOMPI and BFC transfer to GMC, with GMC issuing ○ Baniqued’s analysis :
shares of stock directly to the stockholders of HOMPI and BFC in accordance with
the exchange ratio fixed in the Plan of Merger. BIR Ruling No. 327-88, July 15, ■ Nonetheless, the CIR ruled above that no gain or loss was
1988 realized by the parties to the merger, Mother Seton Hospital
● Business reasons given for the merger include the following: (MSH) and Colegio de Santa Isabel (surviving entity), since
○ more productive use of the properties of the constituent corporations MSH did not receive any cash or property for the transfer of
(parties to the merger); its assets.
○ consolidation of their assets will allow procurement of financing and ■ The reason is not a good explanation for no gain or loss.
credit facilities under more favorable terms;
○ integration of their administrative facilities will result in greater ■ Note: No realization because there was no consideration as
economy of scale and efficiency of operations; and there was no transfer of assets or stocks.
○ merger will eliminate duplicate functions relating to parallel activities. ■ Baniqued: They should not have called it a merger because
non- stock corporations may not enter into mergers
● Holland Milk and Basic Food – Transferring their assets
● General Milling – Surviving corporation ● Merger – Corporation ceases to exist by operation of law
● Issue shares of stock to corporations which will cease to exist ● No gain or loss was realized because there was no consideration at all. There
Gains from Dealings in Property
was no transfer of assets or stocks.

Upstream and Downstream Merger

Upstream Merger Downstream Merger

When a wholly owned subsidiary that When a parent company merges

merges upwards into its parent company, downwards into its wholly owned
thus, the parent is the surviving entity. subsidiary, thus, the subsidiary is the
surviving entity.

Examples of Upstream Merger

● Clavecilla Radio Systems (CRS), wholly owned by Globe Mackay Cable and Radio
Corp. (GMCR), merges into GMCR.
● Since the stockholder of CRS is GMCR itself, there is no need for GMCR to issue
shares unto itself.
● Hence, BIR said that GMCR had no DST due and payable too. BIR Rul. No. 210-
93, May 13, 1993
● Similarly, in BIR Rul. No. S-40-221-2001, Nov. 5, 2001, Sugarland Beverage
Corporation (SBC), SMC Juice, Inc. (SMCJ), and Metro Bottled Water Corp.
(MBWC), wholly-owned subsidiaries of La Tondeña Distillers, Inc. (LTDI), merged
into LTDI, the parent company, pursuant to a tax-free statutory merger.

● Parent — GMCR
● Subsidiary — CRS
○ In this case, the surviving company is GMCR. Since the stockholder
of CRS is GMCR itself, GMCR did not have to issue shares to itself.
○ BIR Confirming that ok lang if no issuance of shares as the parent
company is himself/ itself the stockholder of the subsidiary

● In BIR Rul. No. 141-84, Aug. 27, 1984, Filinvest Credit Corporation (FCC), a
wholly-owned subsidiary of Family Bank & Trust Company (FBTC), merged into
its parent.
● The CIR explained that FBTC ordinarily must receive its own shares in exchange
for the FCC shares it surrendered pursuant to the merger, but FBTC was waiving
such right since these new shares would be deemed held in treasury or retired
anyway.
○ Note : Parent company must receive its own shares

Baniqued : All ceased to exist thus all their assets are now in LTDI

Example of Upstream Merge :

Gains from Dealings in Property
● BPI Investment Corp. (BPIIC) merged into its parent, BPI, that owned
approximately 88% of its issued and outstanding stock. BIR Rul. No. 138-85,
Aug. 26, 1985

Still on Upstream Merge :

● A former CIR, however, ruled that an upstream merger partakes the nature of a
donation subject to donor’s tax.

○ It is as if the subsidiary donated its assets to the parent company since the
latter did not issue any shares of stock to the subsidiary in exchange for
the assets received by the parent. BIR Rul. No. 508-2012, Aug. 8, 2012

● The CIR also ruled that an upstream merger is essentially equivalent to dissolving
and liquidating the subsidiary without payment of taxes applicable to liquidation.

Baniqued’s Commentary :
● NOTE: For the longest time upstream mergers are not taxable but due to the
BIR commissioner above it is now taxed differently.
● If you do an upstream merge the BIR will treat it as a dissolving and
liquidating the subsidiary.

Downstream Merger
● In BIR Rul. No. 137-99, Aug. 31, 1999, Sanofi Phils., which owned 50.1% of
Sanofi Winthrop (with the remaining 49.9% being owned by Sanofi France), Baniqued :
merged into Sanofi Winthrop. Sanofi Winthrop issued shares to Sanofi Phils.’s ● Parent company merging with the subsidiary corporation.
shareholder, namely, Sanofi France, in exchange for the assets transferred to it ● Downstream Merger Diagram :
by Sanofi Phils. pursuant to the merger. ○ Sanofi, which owned 50.1% of SWI, merged pababa.
○ Synthelabo PH merged into SWI
○ SWI is existing alone, 100% of its capital stock is owned by Santofi-
Synthelabo France

● United Steel Center Manila, Inc. (USCMI), which owns 100% of the capital stock
of Calamba Steel Center, Inc. (CSCI), merged with its subsidiary, CSCI, with the
latter as the surviving entity.
● CSCI issued its shares of stock to USCMI shareholders, Sumitomo Corporation
and Mitsui & Co. Ltd., which owned 90% and 10%, respectively, of USCMI. BIR
Rul. No. DA-(S40M-003) 094-09, Feb. 18, 2009

Requirement of “Business Purpose”

● Merger or consolidation “must be undertaken for a bona fide business purpose
and not solely for the purpose of escaping the burden of taxation.”
● See e.g., BIR Rul. Nos. 327-88 (Holland Milk, Gen. Milling) and 472-93 (Tagaytay
Highlands and Belle Resources).
● In CIR v. Rufino, 148 SCRA 42 (1987), a corporation whose corporate life was
about to expire merged into a newly organized corporation, also owned by the
Gains from Dealings in Property
same group of shareholders, for the purpose of continuing the business of the
expiring corporation.
Requirement of Continuity of Interest
● There must be a showing that the transferor corporation or its shareholders
retained a substantial proprietary stake in the transferee corporation
represented by a material interest in the affairs of the latter, and that such
retained interest represents a substantial part of the value of the property
transferred.
● Hence, the requirement in Sec. 40(C)(2) that the shareholders of the absorbed
corporation must receive stock in the surviving or consolidated corporation in
exchange for the properties transferred.
● Substantial interest does not mean control it may merely be a minority interest.
● Baniqued under corp law : all rights powers whatever that the absorbed
entities have → by operation of law will transfer without further act or deed
to the surviving corporation
● Shareholders of the absorbed must end up having a substantial interest in
the transferee corporation. BUT it doesn’t have to be controlled bec it might
be a minority interest, but that’s still substantial enough. (In contrast to the
non-recognition transaction #1)
Carry-Over of Tax Attributes of Absorbed Corporation
● In a statutory merger or consolidation, the surviving corporation or consolidated
corporation steps into the shoes of the absorbed or constituent corporation/s,
thus, acquiring all the rights, privileges, powers, assets and liabilities of the latter
by operation of law, without further act or deed. See also Rev. Corp. Code
○ Assets: cash, receivables, land etc. as well as Deferred Tax Assets
○ Liabilities
Baniqued’s Commentary :
● If entities merge into a surviving corporation, all assets and liabilities, rights
and privileges, that the absorbed entities have, will transfer by operation of
law without further act of the surviving corporation.
Deferred Tax Assets
● Consequently, the tax attributes of the absorbed or constituent corporation/s
(e.g., net operating loss carryover (NOLCO), over-withheld creditable withholding
tax, input VAT credits, and excess MCIT), as well as earnings and profits,
deficiency tax assessments, and refundable taxes, etc., are all inherited by the
surviving or consolidated corporation.
● In BIR Rul. No. 137-99, Aug. 31, 1999, the surviving corporation got to carry
forward and credit the excess MCIT of the absorbed corporations against its
normal income tax due for the 3 immediately succeeding taxable years pursuant
to Section 27(E)3).
● As a result of the merger, any excess input VAT credits as well as unutilized
creditable withholding taxes in the books of the absorbed corporation transfer to
the surviving corporation.
○ See BPI v. CIR, 363 SCRA 840 (2001) re. excess creditable withholding
taxes.
● Similarly, any excess and unutilized CWT, as well as the excess and unexpired
MCIT, of the absorbed corporations, Cole Pacific, Extenso, Vincit, and Liberum,
transfer by operation of law to Wilcon Builder’s Depot, Inc., the surviving
corporation. BIR Rul. No. 1422-18, Dec. 7, 2018
Prevailing BIR Ruling: NOLCO Does Not Transfer
● Note: NOLCO – Net Operating Loss Carry- Over Deduction
● However, in Wilcon Builder’s Depot and some other rulings, the CIR ruled that
NOLCO is not one of the assets or tax attributes of the absorbed entity that can
be transferred to the surviving corporation, supposedly because this privilege or
deduction can be availed of by the absorbed corporation only. BIR Rul. Nos. 214-
2012, March 28, 2012, and 100-2017, March 2, 2017
○ BIR : Not all deferred tax assets will transfer to the Corporation
○ NOLCO is not one of the assets that could transfer
● Above rulings lack legal basis.
● How does a dissolved and liquidated corporation absorb NOLCO
● Ruling does not make sense since all deferred tax assets should transfer to
the surviving corporation thus this should include NOLCO
Sec. 40, NIRC
SEC. 40. Determination of Amount and Recognition of Gain or Loss. -
(C) Exchange of Property. -
(1) General Rule. - Except as herein provided, upon the sale or exchange or property,
the entire amount of the gain or loss, as the case may be, shall be recognized.
(2) Exception. - No gain or loss shall be recognized on a corporation or on its stock or
securities if such corporation is a party to a reorganization and exchanges property in
pursuance of a plan of reorganization solely for stock or securities in another
corporation that is a party to the reorganization. A reorganization is defined as:
(a) 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; or
(b) The acquisition by one corporation, in exchange solely for all or a part of its
voting stock, or in exchange solely for all or part of the voting stock of a
corporation which is in control of the acquiring corporation, of stock of another
corporation if, immediately after the acquisition, the acquiring corporation has
control of such other corporation whether or not such acquiring corporation
had control immediately before the acquisition; or
(c) The acquisition by one corporation, in exchange solely for all or a part of its
voting stock or in exchange solely for all or part of the voting stock of a
corporation which is in control of the acquiring corporation, of substantially all
of the properties of another corporation. In determining whether the exchange
Gains from Dealings in Property
is solely for stock, the assumption by the acquiring corporation of a liability of
the others shall be disregarded; or
(d) A recapitalization, which shall mean an arrangement whereby the stock and
bonds of a corporation are readjusted as to amount, income, or priority or an
agreement of all stockholders and creditors to change and increase or
decrease the capitalization or debts of the corporation or both; or
(e) A reincorporation, which shall mean the formation of the same corporate
business with the same assets and the same stockholders surviving under a
new charter.
No gain or loss shall also be recognized if property is transferred to a corporation by a
person, alone or together with others, not exceeding four (4) persons, in exchange for
stock or unit of participation in such a corporation of which as a result of such exchange
the transferor or transferors, collectively, gains or maintains control of said corporation:
Provided, That stocks issued for services shall not be considered as issued in return for
property.
Sale or exchanges of property used for business for shares of stock covered under this
Subsection shall not be subject to value-added tax.
In all of the foregoing instances of exchange of property, prior Bureau of Internal
Revenue confirmation or tax ruling shall not be required for purposes of availing the tax
exemption.
(3) Exchange Not Solely in Kind
(a) If, in connection with an exchange described in the above exceptions, an
individual, a shareholder, a security holder or a corporation receives not only
stock or securities permitted to be received without the recognition of gain or
loss, but also money and/or property, the gain, if any, but not the loss, shall
be recognized but in an amount not in excess of the sum of the money and
fair market value of such other property received: Provided, That as to the
shareholder, if the money and/or other property received has the effect of a
distribution of a taxable dividend, there shall be taxed as dividend to the
shareholder an amount of the gain recognized not in excess of his
proportionate share of the undistributed earnings and profits of the
corporation; the remainder, if any, of the gain recognized shall be treated as
a capital gain.
(b) If, in connection with the exchange described in the above exceptions, the
transferor corporation receives not only stock permitted to be received
without the recognition of gain or loss but also money and/or other property,
then (i) if the corporation receiving such money and/or other property
distributes it in pursuance of the plan of merger or consolidation, no gain to
the corporation shall be recognized from the exchange, but (ii) if the
corporation receiving such other property and/or money does not distribute it
in pursuance of the plan of merger or consolidation, the gain, if any, but not
the loss to the corporation shall be recognized but in an amount not in excess
of the sum of such money and the fair market value of such other property so
received, which is not distributed.
(4) Assumption of Liability
(a) If the taxpayer, in connection with the exchanges described in the foregoing
exceptions, receives stock or securities which would be permitted to be
received without the recognition of the gain if it were the sole consideration,
and as part of the consideration, another party to the exchange assumes a
liability of the taxpayer, or acquires from the taxpayer property, subject to a
liability, then such assumption or acquisition shall not be treated as money
and/or other property, and shall not prevent the exchange from being within
the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the liabilities to
which the property is subject exceed the total of the adjusted basis of the
property transferred pursuant to such exchange, then such excess shall be
considered as a gain from the sale or exchange of a capital asset or of property
which is not a capital asset, as the case may be.
(5) Basis
(a) The basis of the stock or securities received by the transferor upon the
exchange specified in the above exception shall be the same as the basis of
the property, stock or securities exchanged, decreased by
(1) the money received, and
(2) the fair market value of the other property received, and increased by
(a) the amount treated as dividend of the shareholder and
(b) the amount of any gain that was recognized on the exchange:
Provided, That the property received as 'boot' shall have as basis its
fair market value:
Provided, further, That if as part of the consideration to the
transferor, the transferee of property assumes a liability of the
transferor or acquires form the latter property subject to a liability,
such assumption or acquisition (in the amount of the liability) shall,
for purposes of this paragraph, be treated as money received by the
transferor on the exchange:
Provided, finally, That if the transferor receives several kinds of stock
or securities, the Commissioner is hereby authorized to allocate the
basis among the several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the transferee shall be
the same as it would be in the hands of the transferor increased by the amount
of the gain recognized to the transferor on the transfer.
(6) Definitions
(a) The term “securities” means bonds and debentures but not 'notes" of
whatever class or duration.
(b) The term “merger” or “consolidation”, when used in this Section, shall be
understood to mean:
Gains from Dealings in Property
(i) the ordinary merger or consolidation, or
(ii) the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock: Provided, That for
a transaction to be regarded as a merger or consolidation within the
purview of this Section, it must be undertaken for a bona fide
business purpose and not solely for the purpose of escaping the
burden of taxation: Provided, further, That in determining whether a
bona fide business purpose exists, each and every step of the
transaction shall be considered and the whole transaction or series
of transaction shall be treated as a single unit:
Provided, finally, That in determining whether the property
transferred constitutes a substantial portion of the property of the
transferor, the term “property” shall be taken to include the cash
assets of the transferor.
(c) The term “control”, when used in this Section, shall mean ownership of stocks
in a corporation after the transfer of property possessing at least fifty-one
percent (51%) of the total voting power of all classes of stocks entitled to vote:
Provided, That the collective and not the individual ownership of all classes of
stocks entitled to vote of the transferor or transferors under this Section shall
be used in determining the presence of control.
(d) The Secretary of Finance, upon recommendation of the Commissioner, is
hereby authorized to issue rules and regulations for the purpose “substantially
all” and for the proper implementation of this Section.
Consolidation
● The constituent corporations cease to exist and, in their place, an entirely new
corporation (consolidated corporation) is borne.
● The former stockholders of the constituent corporations receive shares of stock
of the consolidated corporation (new corporation) based on the agreed exchange
ratio.
○ Ex. For every 1 share of X corp there is 5 shares for new corporation
● Same requirements for a merger must be complied with in a consolidation, such
as bona fide business purpose and continuity of interest.
○ Must be proven to the BIR
○ Continuity of interest: Shareholders must end up receiving shares of
stock from the new corporation
Rationale for not recognizing the gain or the loss
● because the investment remains unliquidated , the shareholders may have
acquired an investment but that investment is merely a continuation of the
old investment thus they did not yet cash out and there is no realization of
the gain yet.
Practical Application of Consolidation
● An illustrative case is one where seven corporations that each operated Odyssey
CD’s and Tapes stores and had more or less common shareholders and
interlocking directors and officers decided to consolidate under the name of
Mega Music, Inc. BIR Rul. No. 087-95, June 14, 1995
Business Reasons For the Consolidation to be Provent to BIR
1. Strengthen the capital base of the consolidated corporation;
2. Eliminate possible conflicts of interest between the constituent corporations;
3. Obtain operating economies and efficiencies since all departments with similar
functions would be combined;
4. To be able to offer a broader and more complete range of services and products
to customers.
De Facto Merger
● Normally resorted to when a contemplated business transaction could not
qualify as a “tax-free exchange of asset for shares of stock” or “statutory
merger”.
● Not commonly used but could be handy, particularly when it is the only other way
to avoid tax.
○ Many don’t even know it exists in the NIRC as this is usually resorted to
if not qualified as a statutory merger
Requirements of a De Facto Merger
1. A corporation, which is a party to the de facto merger, must transfer substantially
(at least 80%) all of its properties to a corporation;
2. The transferee corporation must also be a party to the de facto merger;
3. The transfer must be solely in exchange for stock in such transferee corporation;
and
4. Shareholders nung corporation itself to the transferee corporation must end up
owning shares of stock
5. The transfer must be for a bona fide business purpose.
Practical Application of De Facto Merger
● In BIR Rul. No. 019-97, Feb. 27, 1997, Aboitiz Shipping (AS) and Gothong Lines
(GL) transferred assets worth P2.89B to WGA in exchange for stock with a par
value of P710.8M (note the huge premium!). The assets transferred allegedly
comprised more than 80% of the assets of AS and GL. AS and GL acquired only
35% - 42% of WGA. All 3 companies continued to exist. The Commissioner ruled
this was a de facto merger.
○ NOTE: Cannot be Statutory merger or consolidation as the companies
continued to exist.
Gains from Dealings in Property
acquired corporation receive, in exchange for their stock, voting stock of the
acquiring corporation or voting stock of the latter’s parent.
● Consequently, in a Type B reorganization, the shareholders of the acquired
corporation end up owning shares, or additional shares (in case they are already
existing shareholders), of the acquiring corporation or the latter’s parent.

Baniqued:
● To avoid income tax
● When vista land transferred all their properties → Vista land in exchange of
stocks in vista land, para they won’t have to pay income tax and VAT ; this is
a tax free exchange

“B” Reorganization:
Sec. 40 C (2) (b)
(C) Exchange of Property
(2) Exception. - No gain or loss shall be recognized on a corporation or on its stock
or securities if such corporation is a party to a reorganization and exchanges
Business reasons given for de facto merger: property in pursuance of a plan of reorganization solely for stock or securities in
1. Optimize use of resources through realization of operating economies and another corporation that is a party to the reorganization. A reorganization is defined
efficiencies by eliminating duplication of effort, facilities and personnel relating as:
to parallel activities, and reducing overall business and administrative expenses. (b) The acquisition by one corporation, in exchange solely for all or a part of its
2. Increase financial strength and facilitate the procurement of financing and credit voting stock, or in exchange solely for all or part of the voting stock of a
facilities under more favorable terms; and corporation which is in control of the acquiring corporation, of stock of another
3. Enable a broader and more complete range of services to be offered to the public corporation if, immediately after the acquisition, the acquiring corporation has
and thus better meet the increasing needs of the growing Philippine economy. control of such other corporation whether or not such acquiring corporation had
control immediately before the acquisition; or
De Facto Merger vs. Transfer
● In a way, de facto merger is somewhat similar to a transfer to a controlled
corporation, except that at least 80% of the transferor’s assets, including cash,
must be transferred to the transferee.

De Facto Merger Transfer

In a de facto, the transferor is a The transferor may either be a

corporation corporation or an individual

In a de facto, there is no requirement of There is a requirement

control (51%) in order to qualify for
nonrecognition of gain or loss

“B” Reorganization
● No gain or loss shall also be recognized if one corporation acquires stock of
another corporation in exchange solely for all or part of its voting stock, or in
exchange solely for all or part of the voting stock of a corporation which is in
control of the acquiring corporation, provided that, immediately after the
acquisition, the acquiring corporation has control of such other corporation
whether or not such acquiring corporation had control immediately before the
acquisition. Thus, under this Type B reorganization, the shareholders of the 1st Scenario: Blue Link 2nd Scenario: Red Link
Gains from Dealings in Property
● Z becomes a wholly owned
subsidiary of Y
● A & B who used to own Z now
owns share of stock in Y
○ “ownership of stocks in a corporation after the transfer of property
● Y acquires stock from A&B possessing at least fifty-one percent (51%) of the total voting power of
● Parent Company X issues all classes of stocks entitled to vote.”
stocks to A & B
“C” Reorganization

“B” Reorganization
● However, if the shareholders of the acquired corporation, numbering more than
five (5), acquire control or further control of the acquiring corporation in
exchange for their stock in the acquired corporation, this Type B reorganization
is essentially no different from an asset-for-share swap falling under the third to
the last paragraph of Section 40(C)(2).
● Moreover, if the acquired corporation is liquidated or dissolved pursuant to a pre-
arranged plan, the Type B reorganization is also essentially no different from an
upstream merger, which should be treated generally as a non-recognition
statutory merger, except that the BIR disagrees with such treatment and
characterizes an upstream merger as a liquidation with all of its attendant tax
consequences.
● Furthermore, a Type B reorganization may also overlap with a Type C
reorganization when the acquiring corporation, in exchange for its voting stock ● No gain or loss shall also be recognized if one corporation acquires substantially
or that of its parent, acquires a holding company whose assets consist solely or all of the properties of another corporation in exchange solely for all or part of its
entirely of stock in a subsidiary, since the transaction partakes of an acquisition voting stock, or in exchange solely for all or part of the voting stock of a
by the acquiring corporation of substantially all of the properties of the acquired corporation which is in control of the acquiring corporation. In determining
corporation in exchange for its stock or that of its parent. whether the exchange is solely for stock, the assumption by the acquiring
● In this last scenario, a Type B reorganization may also overlap with a de facto corporation of a liability of the other corporation shall be disregarded.
merger defined in Section 40(C)(6)(b) as “the acquisition by one corporation of ● As mentioned earlier above, a Type C reorganization may also overlap with a
all or substantially all of the properties of another corporation solely for stock.” Type B reorganization when the acquiring corporation, in exchange for its voting
stock or that of its parent, acquires a holding company whose assets consist
solely or entirely of stock in a subsidiary, since the transaction partakes of an
acquisition by the acquiring corporation of substantially all of the properties of
the acquired corporation in exchange for its stock or that of its parent.
● Moreover, a Type C reorganization may also overlap with a de facto merger
defined in Section 40(C)(6)(b) as “the acquisition by one corporation of all or
substantially all of the properties of another corporation solely for stock.”

Corporation A and B owning “Z”

Y wants to acquire corporation “T”
T “ hey Z i want to acquire your assets” just so happened Z’s sole asset is shares of
stock in T.
Y acquires asset of Z, which consists of shares of stock of T. T becomes subsidiary of
Y.
● It must also be emphasized that, in a Type B reorganization, the acquiring
corporation must obtain control or further control of the acquired corporation
immediately after the acquisition.
● As Section 40(c)(2)(b) states:
○ it does not matter “whether or not such acquiring corporation had
control immediately before the acquisition.”
● As in the other forms of exchanges or reorganizations that require control in
order for non-recognition of gain or loss to apply.
● The term “control”, as used in Section 40(C)(2), means:
Gains from Dealings in Property
Y can cause parents company X to issue shares of stock to Z
The assets of Z here can be stock, lands and building any assets for that matter
It just so happen here that Z’s assets consists stocks only. In this overlaps C-Reorg
with B-Reorg
Recapitalization (As a part of a Non- Recognition Transaction)
● No gain or loss shall also be recognized when the stock and bonds of a
corporation are readjusted as to amount, income, or priority, or when all
stockholders and creditors of a corporation agree to change and increase or
decrease the capitalization or debts of the corporation or both.
● Some forms of recapitalization may include exchange of preferred shares for
common shares of the same corporation and vice versa, exchange of bonds
(including debentures, long-term notes, or other securities) for preferred or
common shares of the corporation, exchange of common for common, exchange
of preferred for preferred, exchange of stock for debentures, and exchange of
bonds or other securities for new securities.
Recapitalization
● Recapitalization connotes “reshuffling of a capital structure within the
framework of an existing corporation” or a “readjustment of the financial
structure of a single corporation.”
● The characterization of recapitalization as some form of “reorganization” where
no gain or loss shall be recognized is particularly important only to the persons
who have exchanged their stock or securities for other stock or securities of the
corporation.
● Thus, in a recapitalization, the corporation does not receive any property other
than the stock or securities surrendered by the shareholders or creditors.
Moreover, the corporation remains in existence, thus its deferred tax assets or
tax attributes, such as NOLCO, excess MCIT, unutilized input VAT, excess
withholding tax credits, etc., are not affected by the exchange.
● The essence of recapitalization is that the exchange of shares or securities
“represents merely a new form of the previous participation in an enterprise
involving no change of substance in the rights and relations of the interested
parties one to another or to the corporate assets.”
○ Thus, where securities were received pro rata by shareholders in
exchange for their stock, and the securities were readily marketable or
the corporation’s financial status permitted an immediate retirement
of the securities, the securities might be treated as “virtually cash”,
instead of being afforded the cloak of immunity as a recapitalization-
reorganization.
● Thus, care must be exercised in recapitalization transactions, lest the revenue
authorities treat such recapitalizations as nothing but schemes to avoid tax on
distribution of earnings and profits.
Addition from CREATE Law: Reincorporation
● No gain or loss shall also be recognized when a corporation is reincorporated
such as when it has lost its legal personality by reason of the expiration of its
charter but its corporate existence is later revived with the same corporate
business, same assets and the same shareholders albeit under a new charter.
● Under Republic Act No. 11232, otherwise known as the Revised Corporation
Code of the Philippines, “[a] corporation whose term has expired may apply for
a revival of its corporate existence, together with all the rights and privileges
under its certificate of incorporation and subject to all its duties, debts and
liabilities existing prior to its revival.” Upon approval by the Securities and
Exchange Commission of its application for revival, the corporation shall be
issued a certificate of revival of corporate existence, which shall give it perpetual
existence unless its application for revival provided otherwise.
● It appears from the above-cited provision of the Revised Corporation Code that
a corporation may apply for revival of its corporate existence only if its charter
has expired. It is unclear if the corporation may avail of non-recognition of gain
or loss, if any, pursuant to reincorporation or whether the corporation may apply
at all for revival of its corporate existence after its charter has been revoked by
reason, for example, of its failure to formally organize and commence its
business within five (5) years from the date of its incorporation, or after it has
been involuntarily dissolved motu propio by the SEC or upon filing of a verified
complaint by any interested party on grounds provided for by law.
How Does Government Collect the Deferred Tax in a Tax- Free Exchange or
Reorganization?
Concept of “Boot”
● If the transferor in a tax-free exchange or reorganization receives not only stock
but also money and/or property (termed as “boot”), the gain, if any, but not the
loss, shall be recognized (meaning, taxed) to the extent of the boot. Section
40(C)(3), NIRC
● “Tax deferral scheme “ → transferor receives “boot”
● Moreover, if the liability assumed by the transferee exceeds the transferor’s
adjusted basis in the property transferred, then such excess shall be treated as
a gain from the sale or exchange of a capital asset or ordinary asset, as the case
may be, and taxed accordingly. Section 40(C)(4)(b), NIRC
Concept of Historical Cost
Gains from Dealings in Property
● Tax-free exchanges and reorganizations are essentially merely tax-deferral. The
law is worded in such a manner that the gain or loss that went unrecognized at
the time of the exchange or reorganization would be recognized when the
transferor liquidates his investment.
● This is achieved by requiring the transferor to adopt as his basis in the stock
received in the exchange the same basis that he had in the property transferred,
decreased by the amount of the “boot” and increased by the amount of any gain
that he recognized on the exchange. For basis purposes only, liability assumed
by the transferee is treated as “money received”. Section 40(C)(5)(a), NIRC
● Similarly, the law requires the transferee corporation to adopt as basis of the
property transferred to it the same basis that the transferor had in the said
property, increased by the amount of gain that the transferor recognized on the
exchange. Section 40(C)(5)(b), NIRC
● The net effect of all of these “basis” rules is that when either the transferor sells
the stock or the transferee sells the property received, the gain or loss to be
recognized at that point shall be computed based on the original acquisition cost
of the transferor in the property (“historical cost”) rather than “stepped-up basis.”
● To make sure that “historical cost” or “substituted basis” is used in a subsequent
disposition of the shares received or the property transferred, Rev. Regs. No. 18-
2001, Nov. 13, 2001, requires compliance with certain administrative
requirements and that the following be annotated on the back of the stock
certificates issued and of the new TCT/CCT issued by the Register of Deeds after
the tax-free exchange:

“The acquisition of the property described in this title/certificate is by virtue of a tax-free

exchange pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997 per
Deed of Exchange/Assignment dated _____. The substituted basis pursuant to Section
40(C)(5) of the National Internal Revenue Code of 1997 is in the amount of _______.”

Necessity of a Tax Ruling

● The Supreme Court held in Commissioner of Internal Revenue v. Co that no prior
confirmatory ruling from the Commissioner of Internal is required before a
transaction qualifies as a tax-free exchange.
● Moreover, affirming the holding of the CTA En Banc, the Supreme Court said
“there is nothing in Section 40 (C) (2) of the NIRC of 1997, as amended, which
requires the taxpayer to first secure a prior confirmatory ruling before the
transaction may be considered as a tax-free exchange.”
● The Court further remarked that “BIR should not impose additional
requirements not provided by law, which would negate the availment of the tax
exemption” and “instead of resorting to formalities and technicalities, the BIR
should have made its own determination of the merits of respondents' claim for
exemption in respondents' administrative application for refund.”
● Above holding is now codified in Sec. 40(C)(2) of the NIRC, pursuant to the
CREATE Law.
Exclusions from Gross Income
Exclusions from Gross Income
NOTE: If lumpsum → invest in tax free portfolio
Life Insurance Proceeds
● Proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured, whether in lump sum or otherwise. Sec. 32B First on the list is life insurance proceeds
● It also does not matter if the recipient of the proceeds is a person other than an
heir or member of the family of the insured. The law does not consider as
includable income insurance proceeds paid to “beneficiaries”, without Life Insurance Proceeds
distinction as to whether the beneficiary is an heir or relative of the insured. Thus, ● Not recognized as taxable income
a financial institution designated as a beneficiary in a mortgage redemption ● But bear in mind the following: Beneficiaries to who receives the life insurance
insurance (MRI) obtained by the insured/borrower for the benefit of the financial proceeds are not limited to family members or heirs of the insured. They can
institution will not be taxable on the insurance proceeds received by it upon the be any third party.
death of the insured borrower. ○ Ex. Bank made Baniqued buy a life insurance policy, with the
● Neither would an employer be taxable on the insurance proceeds paid to it as beneficiary as the bank, in exchange for a loan. Such proceeds will
beneficiary in a keyman insurance policy taken by it on the life of a key officer not be taxable
or employee. Same logic with insurance proceeds paid to business partners ● What is excluded would be the benefits or proceeds of the life insurance
designated as beneficiaries under a cross- or buy-sell insurance obtained by the policy. It does not cover any interest that may be paid.
insured and his partners on each other’s life. ○ Sec. 32B1 “It does not matter whether the insurance proceeds are
● However, if the recipient receives the insurance proceeds other than as an heir paid in a lump sum” So the interest will be taxable
or a beneficiary, such as a purchaser of the policy and other assignees for value,
then the recipient is taxed if he receives more than he paid for the policy.
Amounts Received as Return of Premiums
● It does not matter whether the insurance proceeds are paid “in a single sum”
● Amounts received by the insured by way of a return of premiums paid by him
(i.e., lump sum) or on installment.
under a life insurance, endowment or annuity contracts, either during the term
● However, if the proceeds are paid on installment subject to an obligation on the
or at the maturity of the term mentioned in the contract or upon surrender of the
part of the insurance company to pay interest, the interest component shall
contract, are exempt from income tax. Sec. 32(B)(2)
constitute taxable income on the part of the recipient beneficiaries. Thus,
● The exemption covers only the amount representing return of premiums, i.e., the
Section 32(B)(1) provides that “if such amounts (i.e., insurance proceeds) are
taxpayer’s investment in the contract. Hence, the interest component of the
held by the insurer under an agreement to pay interest thereon, the interest
payments will constitute taxable income to the insured.
payments shall be included in gross income.”
○ The following exclusion ratio formula may be used to determine the
● If the insurance proceeds are, by agreement, to be paid out by the insurer in
portion representing return of premiums (investment) in an annuity
annual equal installments (inclusive of interest) over a period of ten (10) years,
contract: premiums or other consideration paid divided by the expected
for example, then the amount held by the insurer must be prorated equally over
return or aggregate amount to be received computed under the
the installments and the excess shall be taxable to the beneficiaries as interest
actuarial tables prescribed multiplied by the annuity payments
income.
received during the taxable year.
● Does it make sense at all for the heirs or beneficiaries to leave the proceeds with
● The “investment” is the aggregate amount of the premiums or other
the insurance company in consideration of the payment of interest?
consideration paid, less premium refunds, dividends, and any excludable
● Interest subject to income tax presumably at the graduated rate of 20% to 35%
amounts received under the contract before the annuity starting date. Prof.
for individuals. If the heirs or beneficiaries had received the proceeds in lump
Bittker, Fundamentals of Federal Income Taxation (1983)
sum and invested them in long-term (at least five (5) years maturity) deposit or
savings, common or individual trust funds, deposit substitutes, investment
ILLUSTRATION:
management accounts, and other investments evidenced by BSP-prescribed
A 56-year-old taxpayer paid $5,000 to an insurance company, either in lump sum or
certificates, the interest is exempt from income tax under Section 24(B)(1).
installments, for an annuity contract under which he was to be paid $1,000 a year, starting
Similarly, if the insurance proceeds were invested in bonds, debentures or other
at age 65 and continuing for the rest of his life, with no refund if he should die prematurely
certificates of indebtedness with a maturity of more than five (5) years, the gain
(i.e., either before reaching 65, or thereafter but before receiving as much as the $5,000
from the sale thereof would be exempt from income tax pursuant to Section
investment). If he lives exactly as long as the average person reflected by the mortality
32(B)(g). The same is true if the proceeds are invested in shares of stock of a
tables used by the company in fixing the amount to be paid (14 years), he will receive a
mutual fund company pursuant to Section 32(B)(h) where the gain realized upon
total of $14,000. If the annuitant’s life is longer or shorter than the average, however, he
redemption of the shares is exempt from income tax.
will benefit from a “mortality gain” or suffer a “mortality loss”. Prof. Bittker, supra

Gifts, Bequests and Devises

Exclusions from Gross Income
● Section 32(B)(3) excludes from gross income the value of property acquired by
gift (i.e., donation inter vivos) or through bequest, devise, or descent (i.e.,
testamentary or intestate succession). Property includes money, securities, or
other property.
● Determining whether or not there is a gift may at times be difficult to determine
with certainty.
● In Pirovano v. CIR, an employer took out some life insurance policies on the life
of its President and General Manager. The employer designated itself as the
beneficiary. Upon the death of the employee, the employer decided to renounce
all its rights and interests to the insurance proceeds in favor of the minor children
of the deceased employee. The renunciation was subject, however, to the
condition that the employer would retain the proceeds for a given period of time
in the nature of a loan to it, subject to the payment of interest at 5% per annum.
The taxpayer’s widow accepted the “donation” on behalf of her children. About
four years later, however, the majority stockholders of the employer voted to
revoke the resolution approving the donation in favor of the taxpayer’s children,
prompting the insured’s widow to challenge the revocation in court. The Supreme
Court held the donation valid and perfected, but classifying it “remunerative” in
●
nature.
Shortly after the decision was handed down in Pirovano, the BIR assessed
donees’ gift tax, plus surcharges and interest. Taxpayer’s widow argued that the
employer’s renunciation of the insurance proceeds did not constitute a gift but
rather an additional compensation for services rendered in the past by her
deceased husband.
● The Supreme Court held that the consideration for the renunciation or donation
was the employer’s generosity and gratitude for the decedent’s services but not
the services themselves. The conveyance of the proceeds was, therefore, a gift
subject to donees’ gift tax.
● The donees’ gift tax had long been repealed. The NIRC now imposes only a
donor’s gift tax.
Another exclusion from gross income: cash, or any property received by way of gift or by
inheritance
● If you receive cash from your parents, no matter how much it is or if you receive
property after getting married, these will be excluded from gross income.
● Likewise, any cash or property received will NEVER be taxable income
● In a gift, there must be a donative intent, a detached and disinterested
generosity.
○ If what you received is a remuneration for something else, then that is
taxable
○ Ex. You are an employee. For outstanding work in the last couple of
years, you were gifted an automobile. Is this a gift or compensation for
services rendered? It is a compensation for services rendered in light
of the employer-employee relationship.
○ Ex. If you are a managerial employee, what would the BIR do? Fringe
benefit.
Donee’s gift tax (no longer present now, just donor’s)
● In order for donor’s gift to apply, the U.S. Supreme Court held in CIR v. Duberstein
that a gift must proceed from a “detached and disinterested generosity” or “out
of affection, respect, admiration, charity or like impulses”. Thus, the U.S.
Supreme Court concurred with the decision of the Tax Court which held that a
Cadillac automobile received by the taxpayer from a businessman to whom he
had occasionally given the names of potential customers was not a tax-free gift
even though the taxpayer insisted that the transferor owed him nothing and the
latter said that the car was a present. The Supreme Court said that “despite the
characterization of the transfer of the Cadillac by the parties and the absence of
any obligation, even of a moral nature, to make it, it was at bottom a
recompense for Duberstein’s past services, or an inducement for him to be of
further service in the future.”
Read the original of Philippine American Life
● Issue: Whether what was received was a gift (so that it may not be subjected
to income tax BUT subjected to donor’s tax)
● BIR: Your selling price is lower than the book value of the shares. Therefore,
the excess of the consideration you received shall be deemed a gift.
● Law applicable to determine whether the thing is a gift: Sec. 100
○ Old Tax Code: Sec. 100
■ Law applicable at the time of the case
○ New Tax Code: Sec. 100 “Provided however…”
■ If decided in the amendment, Philam would have won
○ New Tax Code: 24D
■ “Whichever is higher”
■ So it will not be classified as a gift
Philippine American Life and General Insurance Company
● In Philippine American Life and General Insurance Company, Philamlife sold
through a competitive bidding its shares of stock representing 40.89% of the
issued and outstanding capital stock of Philam Care Health Systems, Inc.
(“PhilamCare”). The highest and winning bidder, STI Investments, Inc., paid the
amount of USD2,190,000.00 or Php104,259,330.00 based on the prevailing
exchange rate at the time of the sale. When petitioner applied for a CAR after
filing the requisite CGT return and DST declaration, the BIR informed petitioner
that it needed to secure a BIR ruling from the national office that the sale was
not subject to donor’s tax considering that the winning bid price was lower than
the book value of the shares based on PhilamCare’s most recent audited
financial statements. Petitioner so applied for a ruling but the CIR denied the
request through BIR Ruling No. 015-12, dated January 4, 2012, which held
petitioner liable for donor’s tax at the rate of 30% then (being a donation to
strangers) based on the price difference between the bid price and the book
value of the shares pursuant to then Section 100 of the NIRC.
Exclusions from Gross Income
● Essentially, PhilamCare argued that the transaction is not subject to donor’s tax
since (1) there was no donative intent, (2) the shares were sold at their actual
market value and at arm’s length, (3) having been conducted at arm’s length,
the sale was a bona fide business arrangement done in the ordinary course of
business, and (4) donor’s tax does not apply to sale of shares through an open
bidding process.
● The SC, however, without the benefit of any extended discussion of the
implications of lack of donative intent, simply held that the absence of donative
intent does not exempt the sale of the shares at lower than their book value from
donor’s tax. Then Sec. 100 of the NIRC treated the difference between the
selling price and the fair market value/book value of the shares as a donation
“by fiction of law” even if there was no actual donation, according to the Supreme
Court.
● The new language of Sec. 100 now states that “a sale, exchange, or other
transfer of property made in the ordinary course of business (a transaction which
is bona fide, at arm’s length, and free from any donative intent) will be
considered as made for an adequate and full consideration in money or money’s
worth.
● While Section 32(B)(3) excludes from gross income the property acquired by gift,
bequest, devise, or descent, it does not exclude “income from such property, as
well as gift, bequest, devise or descent of income from any property, in cases of
transfers of divided interest.” Thus, the donee, devisee or legatee must report
rental income, dividends, interest and other investment income thereafter
derived from the property earlier acquired by gift, bequest, devise or descent.
This is to prevent perpetual immunization from tax of the investment income
derived from family fortunes. Prof. Bittker, supra, at 3.14
The book value is bigger than the selling price in other words, selling shares of stock
for a price lower your book value. Under sec 100 of NIRC. Back then wala pa yung new
provision. Note now , no more 30% donation tax.
NEW provision.
SEC. 100. Transfer for Less Than Adequate and Full Consideration - Where property,
other than real property referred to in Section 24(D), is transferred for less than an
adequate and full consideration in money or money's worth, then the amount by
which the fair market value of the property exceeded the value of the consideration
shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall
be included in computing the amount of gifts made during the calendar year.
Provided, however, That a sale, exchange, or other transfer of property made in the
ordinary course of business (a transaction which is a bona fide, at arm’s length, free
from any donative intent), will be considered as made for an adequate and full
consideration in money or money’s worth
Something extraordinary about Sec. 32(B)(3):
● Ex. I am a parent of Mr. Supan. I gifted him a condo. What is excluded from
gross income is the __; but the exclusion only covers that property. Doesn’t
include the income of that unit. it doesn’t mean that Supan will not be liable
for the income of that property.
● Suppose Supan inherited it, still the income from that unit will be taxed
COMPENSATION FOR PERSONAL INJURIES OR SICKNESS
● Amounts received, through accident or health insurance or under workmen’s
compensation acts, as compensation for personal injuries or sickness are
excluded from gross income.
○ Same with amounts received by way of damages on account of such
injuries or sickness, irrespective of whether these are received or
awarded pursuant to litigation or by way of agreement or settlement.
Section 32(B)(4).
● The law does not say whether the injuries must be physical in order for the
compensation to be excludable from gross income.
○ Reading the entire provision, however, may lead one to conclude that
the provision applies only to physical injuries
○ because non-physical injuries, such as defamation, libel, slander,
emotional distress, breach of promise to marry, alienation of affection,
and the like, are not compensable under an accident or health
insurance, much less under a workmen’s compensation act. → these
are not compensable
Another exclusion from gross income is compensation for personal injuries or
sickness
● Neither does the law say if compensation for injuries suffered as a result of some
penal offense, like physical injuries, attempted homicide, reckless imprudence
resulting in physical injuries and the like, is excludable from gross income.
○ While the law does not expressly provide exemption from such
amounts received, the prevailing view is that such compensation
and/or damages received as a result of such unlawful acts are
excludable from gross income in the same manner that
reimbursements for wrongful death or injury are not includable in gross
income.
○ Therefore, it does not matter that the compensation is not paid
pursuant to some accident or health insurance or workmen’s
compensation act –Otherwise, taxing such indemnification for
wrongful death or injury would not only be heartless but unjust and
oppressive.
● There is also good reason to argue that compensation for lost wages, if
occasioned by personal injury or sickness, would be excludable from gross
income notwithstanding the general rule that recoveries are taxable if they
compensate for the amounts that would have been taxable if received in due
course. Bittker at 5.5
● Under the withholding tax regulations on compensation income, “actual, moral,
exemplary and nominal damages received by an employee or his heirs pursuant
to a final judgment or compromise agreement arising out of or related to an
employer-employee relationship” are excludable from gross income.
Exclusions from Gross Income
○ Note: There is no mention of back wages, obviously because such
wages would have been taxable had the employee received them in
the regular course of employment. Sec. 2.78.1(B)(6), Rev. Regs. No.
02-98, as amended
Income Exempt Under a Treaty
● Principles of international law dictate that a signatory state must honor its
commitment or obligations under a treaty or convention.
● For example, under most income tax treaties, capital gains derived from the sale
of shares of stock in a Philippine corporation are not subject to Philippine income
tax. See, e.g., Goodyear Philippines. Some tax treaties require though that not
more than 50% of the assets of the Philippine company whose shares are being
sold must consist of real property interest. See, for example, the RP-US Tax
Treaty.
● Similarly, business profits derived from Philippine sources by a resident of a
contracting state are exempt from Philippine income tax provided that such
business profits are not attributable to a “permanent establishment” that such
resident of a contracting state has or maintains in the Philippines.
● Income from dependent or independent personal services performed in the
Philippines may, under some circumstances, be exempt from Philippine income
tax, too.
De Sagun, Espina, et al. v. Commissioner of Internal Revenue, CTA Case No. 9084, March
11, 2020
● Officers, employees, experts and consultants of the Asian Development Bank
(“ADB”) who are not nationals or citizens of the Philippines are exempt from
income tax.
● The CIR issued Revenue Memorandum Circular No. 31-13, in the exercise of his
power to interpret the provisions of the NIRC, in relation to the Agreement
Between the Asian Development Bank and the Government of the Republic of
the Philippines Regarding the Headquarters of the Asian Development Bank.
● Exempt: foreign employees of the bank
● Employees from the embassy who are foreigners are exempt from income
tax under the Vienna Convention and other applicable international
agreements
● CIR is correct in this case
● The BIR requires that an application for tax treaty relief (whether for exemption
or preferential rate) be filed with the International Tax Affairs Division (ITAD) at
the BIR National Office before the taxpayer may invoke a treaty exemption or
preferential tax rate in relation to an income payment to a resident of a treaty
country.
● In the recent case, however, of Deutsche Bank AG Manila Branch[read in the
original] , the Supreme Court held that no prior application or approved ITAD
ruling is necessary before the treaty preferential treatment may be availed of.
● At the most, such ruling would be merely confirmatory of the entitlement of the
taxpayer to the treaty exemption or preferential treatment, as the case may be.
See also CIR v. Interpublic Group of Companies, Inc., G.R. No. 207039, August
14, 2019
Deutsche Bank AG Manila Branch
● Read in the original
● BIR was requiring the taxpayers who wish to invoke the provisions of
exemption of tax treaties to file an application for tax exemption before the
taxpayer may have exemption.
● SC: No this is not required
Retirement, Benefits, and Pensions
● In the interest of social justice, the law excludes from gross income retirements
benefits of employees, whether in the public or private sector, provided that in
the case of the latter, the retirement benefits are paid in accordance with a
reasonable private benefit plan.
● A “reasonable private benefit plan” means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for the benefit of some or all of
his officials or employees, wherein contributions are made by such employer for
the officials or employees, or both, for the purpose of distributing to such officials
and employees the earnings and principal of the fund thus accumulated, and
wherein it is provided in said plan that at no time shall any part of the corpus or
income of the fund be used for, or be diverted to, any purpose other than for the
exclusive benefit of the said officials and employees.
● The law also requires that the retiring official or employee:
1. must have been in the service of the same employer for at least ten
(10) years and
2. is at least fifty (50) years of age at the time of retirement.
Note: Failure to meet these two requirements will result in taxability of the
retirement benefits.
● In a recent ruling, however, the CIR ruled that retirement benefits paid to
employees who retire under a multi-employer employee retirement plan are
taxable if the retiring employees have not rendered at least 10 years of service
to a single employer under the multi-employer retirement plan. BIR Rul. No. 068-
14, Feb. 25, 2014 It does not matter if the retiring employee has been employed
by the same group of affiliated companies and seconded or moved around at
will by the employer throughout his employment.
○ The recent ruling of the CIR is out of touch with modern business
practices of affiliated companies or employers establishing one
common retirement plan for their employees for economies of scale
and equalization of benefits to their employees.
○ Moreover, pension and other similar benefits received by resident or
non-resident Filipino citizens or aliens who come to reside permanently
in the Philippines from foreign government agencies and other
institutions, private or public, are likewise exempt from income tax.
○ SSS and GSIS benefits are likewise exempt.
● Must submit retirement plan to BIR, BIR will determine whether in compliance
● Ex. The Ayala has a multiple employee retirement plan. Miss Cuevas was
Exclusions from Gross Income
employed by BPI for 5 years. One day, Ms. Cuevas was assigned to Ayala Land
where she worked for another 5 years. Towards the end of her fifth year in
Ayala Land, her boss tells her to be assigned to Manila Water where she
worked for another 5 years. Ms. Cuevas was hired back to Ayala Corporation
itself where she was made Executive VP. She stayed there for 5 years. Will her
retirement benefits be exempt from income tax?
○ No. She did not work for at least 10 years for one employer. (BIR
interpretation)
○ Baniqued: This is a literal interpretation. She should have been
exempted.
Prizes and Awards
Separation Benefits
● Amounts received by an official or employee or by his heirs from the employer
as a consequence of separation of such official or employee from the service of
the employer because of death, sickness or other physical disability or for any
cause beyond the control of the said official or employee are also excludable
from gross income.
● In short, the separation from employment must be involuntary such as when the
employee dies or incapacitated or otherwise unable to continue his employment
due to illness or some other physical ailment.
● The involuntariness has been interpreted to also include separation from
employment due to retrenchment, redundancy, closure of business due to
losses, or as a result of a merger or consolidation with an acquiring company, or
change of management control arising from corporate take-over or corporate
reorganization, as well as termination of employment of casual government
employees on account of the expiration of the term of office of the person who
appointed them (co-terminus).
○ BIR Rul. No. DA 008-06, Jan. 13, 2006 (involving separation gratuity
and loyalty cash gifts given to laid-off employees following a
reorganization or change in ownership) and BIR Rul. No. 143-98, Sept.
30, 1998
● In case of dismissal that is later judicially determined to be illegal and the
dismissed employee is thereby awarded back wages and separation pay, the
portion of the award corresponding to the separation pay is exempt from income
and withholding tax. However, the back wages are subject to income tax and
consequently to the withholding tax on compensation corresponding to the year
they were supposedly earned. For this purpose, the amount of back wages shall
be allocated throughout the years the employee was separated from
employment up to the final judgment of the court. BIR Rul. No. DA-073-2008,
Feb. 6, 2008; see also BIR Rul. No. DA-360-2008, June 13, 2008
● The termination must not, however, be of the employee’s own making. Thus, if
an employee is dismissed for cause, like due to neglect of duty or
insubordination, any separation benefits paid to such dismissed employee
constitute taxable compensation income regardless of whether the employer is
legally obliged to make such payment by contract, statute or otherwise. Sec.
2.78.1(B)(1)(b), Rev. Regs. No. 02-98, as amended. See also BIR Rul. No. 020,
Feb. 14, 1991
Another exclusion from gross income is separation benefits.
Separation Benefits
● Important that these are received on account of involuntary separation of
employment
● If nagresign ka, you’re not entitled to separation benefits
● If yung employer nag-establish ng early retirement program giving the
employees the option to retire early or not, tapos nag-apply yung employee ng
early retirement, you’re not entitled to separation benefits
● Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievements are excluded from
gross income.
● The exclusion is conditioned, however, on
(a) the recipient having been selected without any action on his part to
enter the contest or proceeding, and
(b) the recipient not being under any obligation to render substantial future
services as a condition to receiving the prize or award.
● Thus, the recipient must have not applied to join the contest.
● However, if consequently short-listed and thereafter required to submit some
personal data or information or appear for an interview by the board of judges
before final selection of the winner or winners, this should not jeopardize the
exclusion of the prize or award because he did not initially apply to enter the
contest or proceeding. See Bittker at 3.17 He has been actually selected or short-
listed without any action on his part. Neither would the fact that the recipient is
required to perform some ceremonial or ministerial functions attendant to the
prize or award (like ambassadorial duties required to be performed after
selection) jeopardize the exclusion of the prize or award from gross income.
● Similarly, prizes and awards given to athletes in local and international sports
competitions and tournaments, whether held in the Philippines or abroad and
sanctioned by their national sports associations, are excluded from gross
income.
● National sports associations refer only to those sports associations duly
accredited by the Philippine Olympic Committee (POC). BIR Rul. No. 026-00,
June 13, 2000.
○ Hence, if the sports association that hosted or organized a sporting
event is not accredited by the POC, then the prize money or award given
to the winners is not exempt from income tax.
● While there does not seem to be an express exemption provided for by law
specifically pertaining to scholarships and fellowships, such awards may still be
excludable from gross income under Section 32(B)(7)(c) if made primarily in
recognition of educational achievement provided the two conditions mentioned
therein and as discussed above are met.
● Also excluded from gross income is prizes and awards.
Prizes and Award
Exclusions from Gross Income
● Observe the conditions:
a. You should not have applied
■ Ramon Magsaysay awardees should be excluded
b. You should not be obliged to render future services as a condition to
receive the award
■ Ex. You are a POIM Awardee. You have to render x amount
of hours as community service. Not excluded
● Olympics: sanctioned and accredited by the national sports association
○ Car given to hidilyn from companies like megaworld etc: not really a
prize or award, but WILL BE EXCLUDED because it is a gift
○ Doesn’t mean megaworld will be exempt from donor’s tax
● Scholarships and fellowships: may be excluded from GI if made primarily in
recognition of educational achievement provided conditions are met
○ aka not under any obligation to render substantial services, you
should not have applied, because you are being recognized for
educational achievement
13th Month Pay and Other Benefits
● This blanket exemption of maximum P90,000/year applies to all employees in
the private and public sector.
● Included in the said amount are the 13th month pay, and all other employee
benefits such as productivity incentives, Christmas bonus, loyalty award, and
other payments in cash or in kind.
● It does not cover basic salary and other allowances. [these are, by law, treated
as compensation income]
● Another exclusion from gross income is 13th month pay and other benefits
Also excluded are the following:
● De minimis benefits are not included in the computation of the said P90,000
ceiling. De minimis benefits are, by themselves, a separate exclusion from gross
income.
● Hence, arguably, any amount in excess of the thresholds prescribed for de
minimis benefits may be included in the computation of the P90,000 ceiling,
provided such excess, along with the other employee benefits (i.e.,13th month
pay, Christmas bonus and other incentives), does not exceed P90,000.
● Similarly, benefits paid or furnished to employees for the benefit or advantage
of the employer are not included in the computation of the P90,000 cap.
● Employee benefits furnished for the “convenience of the employer” likewise
constitute a separate class of exclusion from gross income.
De minimis benefits are also excluded from gross income
● Provided that they do not exceed the max amount provided by law
● Kung merong excess from the 90k na di pa nagagamit, dun na isaksak yung
de minimis benefits na extra in order to be excluded from gross income
Gain from Sale of Long-Term Bonds, Debentures and Other Certificates of Indebtedness
● Meant to enhance the development of the Philippine capital market by
promoting investments in bonds, debentures, and other certificates of
indebtedness.
● By way of incentive for making such investments, the law excludes from gross
income “gains realized from the sale or exchange or retirement of bonds,
debentures, and other certificates of indebtedness with a maturity of more than
five (5) years.”
● The exclusion refers to “gains” realized from the sale or exchange or retirement
of bonds, debentures, or other certificates of indebtedness.
● Consequently, “interests” currently received periodically by a bondholder in case
of coupon-bearing bonds are not excludable from gross income. Malayan
Reinsurance Corp. v. Commissioner of Internal Revenue, CA-G.R. SP No. 74339,
May 20, 2008; See also Nippon Insurance cases
● Distinguish “interest income” from “trading gain”. Must read Banco de Oro.
○ Interest income –
○ Trading gain – derive a gain from sale or exchange or trading the bonds
you invested in, bonds change hands among investors, it is only the
interest that is subject to tax
● RELEVANT provision Sec 32 : “(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.”
Baniqued : Suppose 5 years and 6 months, B’s intention to hold bonds long term, in
the meantime, if the bonds pay 6.5% quarterly, the interest B earns is not exempted
from tax.
Nag mature, so binalik yung 1M kay B. Of course,
● Bonds may either be interest bearing bonds or zero coupon bonds.
● An interest bearing bond pays a fixed rate of interest periodically (e.g., quarterly
or annually) over the term of the bond.
● If the bond qualifies as a deposit substitute in that it is issued to 20 or more
lenders at the time of original issue, the interest paid periodically by the issuer
is subject generally to 20% final withholding tax pursuant to Sections 24(B)(1)
and 27(D) of the NIRC.
● A zero coupon bond, however, does not pay any interest periodically but, rather,
the interest comes in the form of a discount granted at the time of the original
issue of the bond.
note : interest comes into a form of discount
Suppose the agreement is 10% per interest per annum ; instead purchase bond for
500K, the 500K is the interest component → zero coupon bond, wala kang tatanggapin
na interest ; na kumbra mo na yung interest at the time the bond was issued.
Exclusions from Gross Income
Interest bearing bond - may tatanggapin na interest periodically over the tenor until
maturity
yung isa, wala. comes in the form of discount on the bond
● 10% per annum yung interest, 5 years. Time of interest, binili mo lang yung
bond for 500k.
BDO case
● Issue: Whether the interest that the investors would have received at the time
of maturity of the bonds would be subject to the 20% withholding tax.
● If you go back to the facts, the bonds were issued as early as 2001. Unang
holder ng bonds was a non-stock entity called “Couples..”, an NGO, with RCBC
as its financial adviser. Yung bureau of treasury issued this to the NGO thru
RCBC. After it acquired the bonds, the NGO traded the bonds to investors. Over
the life of the bonds til maturity, the bonds changed hands. Iba-iba yung
investors na bumili ng bonds over the 10-year period.
● Note however, before the bonds were issued by the bureau of treasury, they
sought rulings from BIR that the redemption of the proceeds from the bonds
would be exempt from the withholding tax of 20%. As a matter of fact, there
were several rulings by the BIR reiterating that the proceeds from the
redemption of the bonds upon maturity will be exempt from the 20% bonds
and they will not be considered as deposit substitutes.
● Unfortunately, 10 days before maturity, the former BIR Commissioner
Minares saying na yung bonds is subject to the 20% withholding tax. Thus, she
directed the bureau of treasury to withhold the bonds.
● Investors went to court challenging the position taken by the BIR.
● SC: They applied the 20 lending rule.
○ there should be 20+ corporate lenders in any one time. This would
be determinative whether the instrument would be considered as a
substitute. Then, this will be subject to the 20% final withholding tax
● BIR’s Basis of 20% final withholding tax: Sec. 27D
○ BIR’s Conclusion: Bonds issued in this case were considered as a
passive income
● If the investor is an individual, look at Sec. 24B1 for passive income
● If the investor were a foreign corporation, look at Sec. 28A6
● What is a deposit substitute?
○ Sec. 22Y.
● BIR: Regardless of the number of lenders in that one transaction, you would
only consider the issuance of those transactions.
● Petitioner: Look at the time of the issuance of the bonds. At the time, only one
lender (NGO)
● BIR: The words at “any one time” under Sec. 22Y means any or all transactions
entered into in the secondary market are not only the time of issuance of the
bonds. Rather, at any transaction in the secondary market or primary market
in connection with the purchase or sale of securities. So if sinama mo yung
transactions after the issuance of the bonds, then there would a lot of
transactions that would be considered as giving rise to 20 or more lenders.
note → TRADING GAIN [the amount he realizes in excess of basis]
if more than 5 years → sec 32,7(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.
this BDO case → mother of scams
Gain from Redemption of Shares in Mutual Fund Company
● Likewise excluded from gross income are “gains realized by the investor upon
redemption of shares of stock in a mutual fund company”.
● A mutual fund company means an “open-end and close-end investment
company”.
● An "investment company”, in turn, means any issuer which is or holds itself out
as being engaged primarily, or proposes to engage primarily, in the business of
investing, reinvesting, or trading in securities.” Either of the following :
○ "Open-end company" means an investment company which is offering
for sale or has outstanding any redeemable security of which it is the
issuer. (free to get out as you please cash in surrender at any given
time)
○ "Closed-end company" means any investment company other than an
open-end company . Rep. Act No. 2629, otherwise known as the
Investment Company Act
● Baniqued: Mutual Fund company either open or close end
Interest Income from Long Term Deposits or Investments
● Another exclusion from gross income is interest income derived by individuals
from “long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts
and other investments evidenced by certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP).” (to encourage Filipinos to put money in the
bank)
● Exemption may be availed only by Filipino citizens, resident aliens and non-
resident aliens engaged in trade or business in the Philippines. Sec. 24(B)(1) and
Sec. 25(A)(2)
● Moreover, unlike the exemption of gains realized from sale or exchange or
retirement of bonds, debentures, and other certificates of indebtedness and
gains realized upon redemption of shares of stock in a mutual fund company,
corporations may not avail of the above income tax exemption of interest from
long-term deposit or investment in savings, common or individual trust funds,
deposit substitutes, investment management accounts and other investments.
Exclusions from Gross Income
● To avail of the exemption, the law requires that the holder of the investment
certificate should not pre-terminate the deposit or investment before the end of
five (5) years. Otherwise, the entire interest income shall be subject to a final
withholding tax at the rate of 5% - 20% depending on the remaining maturity of
the deposit or investment certificate, namely:
Rev. Regs. No. 14-2012, how tax
consequence is determined with the “5 year”
● Rev. Regs. No. 14-2012, dated November 7, 2012, illustrates what happens
when an individual’s long-term deposit or investment is terminated before the
lapse of the required 5-year maturity.
● Example :
○ Mr. X, a resident citizen, invested in an instrument with a maturity
period of 10 years. Two (2) years later, he transfers the instrument to
Mr. Y, a resident alien. Mr. Y held on to the investment for eight (8)
years. In this scenario, Mr. X shall be taxable at 20% on the interest
income derived from the investment. Mr. Y, on the other hand, is
exempt from income tax on the interest derived. If Mr. X had held the
instrument for 3 years, Mr. Y for 2 years before transferring it to Mr. Z
who held it until maturity date, Mr. X shall be taxed at 12% on the
interest income, Mr. Y at 20%, while Mr. Z shall be exempt.
● Q : What if, to the extent possible, the bank pays currently or periodically interest
on the long-term investment and does not withhold any tax since the investment
is supposed to be exempt if held for at least five (5) years, but, before maturity
date, the investor transfers the instrument? In a case like this, the bank will re-
compute the withholding tax due on the interest income paid to the investor on
the basis of the remaining maturity, with the maturity period reckoned to end as
of the date of pre-termination and remit to the BIR the incremental withholding
tax due as recomputed.
● Example :
○ Mr. X invested P5,000,000.00 on January 1, 2010, with the investment
supposed to be held for five (5) years. However, on January 1, 2013,
Mr. X transferred the instrument to Mr. Y. In the meantime, the bank
had been paying Mr. X interest since January 1,2011 at the rate of 2%
p.a., or P100,000 annually, free of withholding tax. Under the law,
because of the pre-termination, the interest income paid to Mr. X
should be subject to withholding tax at the rate of 12%. Consequently,
the bank shall withhold such tax due from the proceeds of the pre-
termination and remit the tax so withheld to the BIR along with its
remittance of other withholding taxes for the month (i.e., January
2013) in which the pre-termination is effected.
Income Derived by Government
● Income derived by the Philippine government or any of its political subdivisions
from the operation of a public utility or from the exercise of any essential
governmental function is excluded from gross income. The exclusion applies not
only to the national government but also to the local governments (“political
subdivisions”).
● Examples : fees collected by the Land Transportation Office for
issuance/renewal of driver’s license, registration of automobiles, or fees
collected by the Register of Deeds for issuance or cancellation of land titles, or
filing fees assessed by the Securities and Exchange Commission for
incorporation, and similar assessments by government agencies are excluded
from gross income.
● Note, however, that income derived by government-owned or controlled
corporations (GOCCs) or by agencies or instrumentalities of Government
performing proprietary functions is not excludable from gross income. In fact,
Section 27(C) of the NIRC provides that “all corporations, agencies, or
instrumentalities owned or controlled by the Government, except the GSIS, SSS,
PHIC, and the local water districts, shall pay such rate of tax upon their taxable
income as are imposed by [Section 27] upon corporations or associations
engaged in a similar business, industry, or activity.”
Commissioner of Internal Revenue v. Bases Conversion Development Authority
That the proceeds derived by the Bases Conversion Development Authority (BCDA)
● Notwithstanding the above mentioned provision of Section 27(C), the Supreme
Court held in Commissioner of Internal Revenue v. Bases Conversion
Development Authority, that the proceeds derived by the Bases Conversion
Development Authority (BCDA) from the sale of four (4) parcels of land in
Bonifacio Global City, with a total area of 12,036 square meters, to the NET
Consortium for a sum of Php2.032 Billion are exempt from income and/or
withholding tax in light of the express exemption granted to BCDA by its charter,
Republic Act No. 7227, a special law.
● The said statute expressly appropriated the proceeds from the sale for specific
purposes and beneficiaries, among them the modernization of the Armed Forces
of the Philippines (AFP), transfer of military camps, construction of new camps,
expansion of AFP medical facilities, and modernization of government arsenal
(all of which were allotted 35% of the sale proceeds), construction and upgrading
of infrastructure, such as highways, railways, airports, etc. (for which 27.5% of
the proceeds was allotted), etc.
● Interest income from bank deposits in the Philippines or earnings from
investments in loans, stocks, bonds, and other domestic securities derived by :
(a) foreign governments, (b) financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and (c) international or regional financial
institutions established by foreign governments
● Also excluded from gross income.
● See, e.g., Commissioner of Internal Revenue v. Manila Electric Company
(MERALCO), involving a claim for refund/tax credit of taxes withheld on
interest payments made by Meralco on loans obtained from NORD/LB, a
government-owned financing institution of Germany.
Exclusions from Gross Income
● A notarized and authenticated certification issued by the Ministry of Finance of
a foreign government, duly certified by the Philippine Consulate in that foreign
country, is sufficient to prove that a corporation is a financial institution owned
and controlled by that foreign government. See the two cases of Government of
Singapore Investment Corporation Pte., Ltd. v. Commissioner of Internal
Revenue
Income Already Subjected to Final Tax
● There are items of income that, by law, are subject to final tax to be paid by the
income recipient, e.g., 15% CGT on sale of shares of stock in a domestic
corporation and the 6% CGT on sale of real property classified as a capital asset,
or the final tax required to be withheld by the payor of the income, e.g., 20% final
withholding tax on interest on bank deposits and yield from deposit substitutes
or trust funds, 10% tax on dividends paid to individual shareholders, 20% tax on
royalties (except on books and other literary works and musical compositions
which are subject to 10% tax), and 20% tax on prizes and winnings.
● All such items of income already subjected to final tax are no longer included in
the computation of gross income.
● The BIR, however, nonetheless requires such items of income be reported in an
Account Information Return (AIR) filed along with the ITR. This enables the BIR
to monitor and counter check such income received vis-à-vis income reported in
prior years’ tax returns. Somehow, the accumulation of such wealth that
produced such passive income as interest and dividends must be duly supported
by earnings reported in the past.
Foreign-Source Income of OFWs and Non-Resident Citizens
Non- Resident Citizen
Sec. 23 (B), NIRC
SEC. 23. General Principles of Income Taxation in the Philippines. - Except when
otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived
from sources within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within
the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker is taxable only on income derived
from sources within the Philippines: Provided, That a seaman who is a citizen
of the Philippines and who receives compensation for services rendered
abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only
on income derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within
and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the
Philippines.
● Under Section 23(B), “a non-resident citizen is taxable only on income derived
from sources within the Philippines.” Likewise, Section 23(C) provides that “an
individual citizen of the Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on income from sources
within the Philippines.”
● OFW working in Europe, yung salary abroad excluded from gross income ; but
suppose this OFW has this condominium here in PH , may rental income → this
is taxable income.
● Yung employees daw ng Ph sa embassies abroad , considered as “non-resident”
● To be considered an OCW or OFW, the Filipino citizen must be duly registered as
such with the POEA with a valid Overseas Employment Certificate (OEC). Rev.
Regs. No. 001-2011, Feb. 24, 2011
● Under the source rules in Section 42 of the NIRC, compensation for services is
considered derived from the place or country where the services are performed.
Consequently, salaries and wages and other remuneration of non-resident
Filipinos working abroad, whether professionals, business executives,
entrepreneurs, or the typical overseas contract workers performing skilled or
non-skilled labor, are exempt from income tax.
● Example : Mr. Pangilinan president of Metro Pacific Investments HK , based in
HK. Obviously he is a non-resident citizen, his income as such executive will not
be subject to tax here in the Philippines. Suppose that 10M earning in salary or
wages, he buys office buildings in HK , the rent from there is also tax exempt.
● Example : executive of DMCI based on Dubai, is his salary taxable in the
Philippines?
(a) a Filipino citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite intention
to reside therein, or
(b) a Filipino citizen who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis, or
(c) a Filipino citizen who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the
time during the taxable year.
● Thus, employees assigned abroad for less than 183 days but whose
compensation is paid for by the foreign employer are still considered resident
citizens and, therefore, subject to Philippine income tax. BIR Rul. No. 052-2010,
Sept 7, 2010
○ EX. If a Filipino citizen who has been previously considered a
nonresident citizen returns to the Philippines to reside here
permanently, he shall still be treated as a non-resident citizen for the
taxable year in which he arrives in the Philippines with respect to his
income from abroad and, therefore, his income derived from abroad
until the date of his arrival in the Philippines shall remain exempt from
income tax. With respect, however, to income earned, whether from
abroad or from Philippine sources, after his arrival in the Philippines,
the same would now be subject to income tax since he would no longer
qualify as a non-resident citizen. BIR Rul. No. DA-430-2007, Aug. 6,
2007
Exclusions from Gross Income

Latest Commissioner Ruling: Subject to Legal Challenge

● The Commissioner has expressed the view that if the Filipino employee remains
employed by his Philippine employer and continues to be paid by the latter, he
shall not be considered as a non-resident citizen. Consequently, his
compensation cannot be considered as income derived from a foreign source
even if he stays abroad most of the time, like a maximum of 214 days per
calendar year. BIR Rul. 512-2011, Dec. 20, 2011 (involving Filipino field
engineers assigned abroad for a maximum of 214 days per calendar year by
Philippine employer). See also Rev. Regs. No. 001-11, Feb. 24, 2011
● This ruling issued by the Commissioner is susceptible to legal challenge.
○ First, as stated earlier, compensation for services performed outside
the Philippines is considered derived from foreign source pursuant to
the source rules laid down in Section 42(A)(3) and 42(C)(3) of the NIRC,
regardless of where payment is made or who makes actual payment.
○ Second, in defining a “non-resident citizen” as it pertains to a Filipino
working overseas, Section 22(E)(3) of the NIRC does not distinguish
between a Filipino with a foreign employer and a Filipino with a
Philippine employer, the essential fact being that both must be working
and deriving income from abroad and, by reason of such employment,
they are physically present abroad most of the time during the calendar
year.
● The phrase “employment thereat” does not refer to the nationality of the
employer but rather to the location or territory where the Filipino worker renders
services.

Excess Campaign Contributions

● GR: As a general rule, campaign contributions are not includible in gross income
because they are intended to be spent for the candidate’s electoral campaign
rather than for his personal enrichment.
● EXPN: However, unutilized or excess campaign contributions are treated as
income subject to tax in the hands of the donee-candidate, and the latter is
required to report this in his income tax return for the subject taxable year. Sec.
2, Rev. Regs. No. 7-2011, Feb. 16, 2011
Ordinary and Necessary Business Expense
Ordinary and Necessary Business Expense
Sec. 34, NIRC
SEC. 34. Deductions from Gross Income. - 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:
[45]
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or Professional Expenses.-
(a) In General. - There shall be allowed as deduction from gross income all the ordinary
and necessary expenses paid or incurred during the taxable year 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, including:
(i) A reasonable allowance for salaries, wages, and other forms of compensation for
personal services actually rendered, including the grossed-up monetary value of fringe
benefit furnished or granted by the employer to the employee: Provided, That the final
tax imposed under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and abroad, while away from home
in the pursuit of trade, business or profession;
(iii) A reasonable allowance for rentals and/or other payments which are required as a
condition for the continued use or possession, for purposes of the trade, business or
profession, of property to which the taxpayer has not taken or is not taking title or in
which he has no equity other than that of a lessee, user or possessor;
(iv) A reasonable allowance for entertainment, amusement and recreation expenses
during the taxable year, that are directly connected to the development, management
and operation of the trade, business or profession of the taxpayer, or that are directly
related to or in furtherance of the conduct of his or its trade, business or exercise of a
profession not to exceed such ceilings as the Secretary of Finance may, by rules and
regulations prescribe, upon recommendation of the Commissioner, taking into account
the needs as well as the special circumstances, nature and character of the industry,
trade, business, or profession of the taxpayer: Provided, That any expense incurred for
entertainment, amusement or recreation that is contrary to law, morals public policy or
public order shall in no case be allowed as a deduction.
(v) An additional deduction from taxable income of one-half of the value of labor training
expenses incurred for skills development of enterprise-based trainees enrolled in public
senior high schools, public higher education institutions, or public technical and
vocational institutions and duly covered by an apprenticeship agreement under
Presidential Decree No. 442, Series of 1974, or the “Labor Code of the Philippines”, as
amended, shall be granted to enterprises: Provided, further, That for the additional
deduction for enterprise-based training of students from public educational institutions,
the enterprise shall secure proper certification from the DepEd, TESDA, or CHED:
Provided, finally, That such deduction shall not exceed ten percent (10%) of direct labor
wage. [46]
(b) Substantiation Requirements. - No deduction from gross income shall be allowed
under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient
evidence, such as official receipts or other adequate records: (i) the amount of the
expense being deducted, and (ii) the direct connection or relation of the expense being
deducted to the development, management, operation and/or conduct of the trade,
business or profession of the taxpayer.
(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income
shall be allowed under Subsection (A) hereof for any payment made, directly or
indirectly, to an official or employee of the national government, or to an official or
employee of any local government unit, or to an official or employee of a government-
owned or -controlled corporation, or to an official or employee or representative of a
foreign government, or to a private corporation, general professional partnership, or a
similar entity, if the payment constitutes a bribe or kickback.
(2) Expenses Allowable to Private Educational Institutions. - In addition to the expenses
allowable as deductions under this Chapter, a private educational institution, referred
to under Section 27 (B) of this Code, may at its option elect either: (a) to deduct
expenditures otherwise considered as capital outlays of depreciable assets incurred
during the taxable year for the expansion of school facilities or (b) to deduct allowance
for depreciation thereof under Subsection (F) hereof.
(B) Interest. -
(1) In General. - The amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer's profession, trade or business shall be
allowed as deduction from gross income: Provided, however, That the taxpayer's
otherwise allowable deduction for interest expense shall be reduced by twenty percent
(20%) of the interest income subjected to final tax: Provided, finally, That if the interest
income tax is adjusted in the future, the interest expense reduction rate shall be
adjusted accordingly based on the prescribed standard formula as defined in the rules
and regulations to be promulgated by the Secretary of Finance, upon the
recommendation of the Commissioner of Internal Revenue.
(2) Exceptions. - No deduction shall be allowed in respect of interest under the
succeeding subparagraphs:
(a) If within the taxable year an individual taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest is paid in advance through discount or
otherwise: Provided, That such interest shall be allowed as a deduction in the year the
indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic
amortizations, the amount of interest which corresponds to the amount of the principal
amortized or paid during the year shall be allowed as deduction in such taxable year;
Ordinary and Necessary Business Expense
(b) If both the taxpayer and the person to whom the payment has been made or is to
be made are persons specified under Section 36 (B); or
(c) If the indebtedness is incurred to finance petroleum exploration.
(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest
incurred to acquire property used in trade business or exercise of a profession may be
allowed as a deduction or treated as a capital expenditure.
(C) Taxes.-
(1) In General. - Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business, shall be allowed as deduction, except:
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this deduction shall
be allowed in the case of a taxpayer who does not signify in his return his desire to have
to any extent the benefits of paragraph (3) of this subsection (relating to credits for
taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited, shall be
included as part of gross income in the year of receipt to the extent of the income tax
benefit of said deduction.
(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in
trade or business in the Philippines and a resident foreign corporation, the deductions
for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to
the extent that they are connected with income from sources within the Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his
return his desire to have the benefits of this paragraph, the tax imposed by this Title
shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of
a domestic corporation, the amount of income taxes paid or incurred during the taxable
year to any foreign country; and
(b) Partnerships and Estates. - In the case of any such individual who is a member of a
general professional partnership or a beneficiary of an estate or trust, his proportionate
share of such taxes of the general professional partnership or the estate or trust paid
or incurred during the taxable year to a foreign country, if his distributive share of the
income of such partnership or trust is reported for taxation under this Title.
An alien individual and a foreign corporation shall not be allowed the credits against
the tax for the taxes of foreign countries allowed under this paragraph.
(4) Limitations on Credit. - The amount of the credit taken under this Section shall be
subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country shall
not exceed the same proportion of the tax against which such credit is taken, which the
taxpayer's taxable income from sources within such country under this Title bears to his
entire taxable income for the same taxable year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's taxable income from sources
without the Philippines taxable under this Title bears to his entire taxable income for
the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from
the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole
or in part, the taxpayer shall notify the Commissioner; who shall re-determine the
amount of the tax for the year or years affected, and the amount of tax due upon such
re-determination, if any, shall be paid by the taxpayer upon notice and demand by the
Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to
the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a
condition precedent to the allowance of this credit may require the taxpayer to give a
bond with sureties satisfactory to and to be approved by the Commissioner in such sum
as he may require, conditioned upon the payment by the taxpayer of any amount of tax
found due upon any such redetermination. The bond herein prescribed shall contain
such further conditions as the Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this
Section may, at the option of the taxpayer and irrespective of the method of accounting
employed in keeping his books, be taken in the year which the taxes of the foreign
country were incurred, subject, however, to the conditions prescribed in Subsection
(C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the
taxes of the foreign country accrued, the credits for all subsequent years shall be taken
upon the same basis and no portion of any such taxes shall be allowed as a deduction
in the same or any succeeding year.
(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed
only if the taxpayer establishes to the satisfaction of the Commissioner the following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred to which
is claimed as a credit under said paragraph, such amount to be determined under rules
and regulations prescribed by the Secretary of Finance; and
(c) All other information necessary for the verification and computation of such credits.
Ordinary and Necessary Business Expense
(D) Losses. -
(1) In General. - Losses actually sustained during the taxable year and not compensated
for by insurance or other forms of indemnity shall be allowed as deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss arises from
fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.
The Secretary of Finance, upon recommendation of the Commissioner, is hereby
authorized to promulgate rules and regulations prescribing, among other things, the
time and manner by which the taxpayer shall submit a declaration of loss sustained
from casualty or from robbery, theft or embezzlement during the taxable year: Provided,
however, That the time limit to be so prescribed in the rules and regulations shall not
be less than thirty (30) days nor more than ninety (90) days from the date of discovery
of the casualty or robbery, theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if at the time of the
filing of the return, such loss has been claimed as a deduction for estate tax purposes
in the estate tax return.
(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation,
the losses deductible shall be those actually sustained during the year incurred in
business, trade or exercise of a profession conducted within the Philippines, when such
losses are not compensated for by insurance or other forms of indemnity. The secretary
of Finance, upon recommendation of the Commissioner, is hereby authorized to
promulgate rules and regulations prescribing, among other things, the time and
manner by which the taxpayer shall submit a declaration of loss sustained from
casualty or from robbery, theft or embezzlement during the taxable year: Provided, that
the time to be so prescribed in the rules and regulations shall not be less than thirty
(30) days nor more than ninety (90) days from the date of discovery of the casualty or
robbery, theft or embezzlement giving rise to the loss; and
3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise
for any taxable year immediately preceding the current taxable year, which had not
been previously offset as deduction from gross income shall be carried over as a
deduction from gross income for the next three (3) consecutive taxable years
immediately following the year of such loss: Provided, however, That any net loss
incurred in a taxable year during which the taxpayer was exempt from income tax shall
not be allowed as a deduction under this Subsection: Provided, further, That a net
operating loss carry-over shall be allowed only if there has been no substantial change
in the ownership of the business or enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued
shares., if the business is in the name of a corporation, is held by or on behalf of the
same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if
the business is in the name of a corporation, is held by or on behalf of the same persons.
For purposes of this subsection, the term 'net operating loss' shall mean the excess of
allowable deduction over gross income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss without the
benefit of incentives provided for under Executive Order No. 226, as amended,
otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first
ten (10) years of operation may be carried over as a deduction from taxable income for
the next five (5) years immediately following the year of such loss. The entire amount
of the loss shall be carried over to the first of the five (5) taxable years following the
loss, and any portion of such loss which exceeds the taxable income of such first year
shall be deducted in like manner form the taxable income of the next remaining four
(4) years.
(4) Capital Losses. -
(a) Limitations. - Loss from sales or Exchanges of capital assets shall be allowed only
to the extent provided in Section 39.
(b) Securities Becoming Worthless. - If securities as defined in Section 22 (T) become
worthless during the taxable year and are capital assets, the loss resulting therefrom
shall, for purposes of this Title, be considered as a loss from the sale or exchange, on
the last day of such taxable year, of capital assets.
(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock
or securities as provided in Section 38.
(6) Wagering Losses. - Losses from wagering transactions shall be allowed only to the
extent of the gains from such transactions.
(7) Abandonment Losses. -
(a) In the event a contract area where petroleum operations are undertaken is partially
or wholly abandoned, all accumulated exploration and development expenditures
pertaining thereto shall be allowed as a deduction: Provided, That accumulated
expenditures incurred in that area prior to January 1, 1979 shall be allowed as a
deduction only from any income derived from the same contract area. In all cases,
notices of abandonment shall be filed with the Commissioner.
(b) In case a producing well is subsequently abandoned, the un-amortized costs thereof,
as well as the un-depreciated costs of equipment directly used therein , shall be allowed
as a deduction in the year such well, equipment or facility is abandoned by the
contractor: Provided, That if such abandoned well is re-entered and production is
resumed, or if such equipment or facility is restored into service, the said costs shall be
included as part of gross income in the year of resumption or restoration and shall be
amortized or depreciated, as the case may be.
Ordinary and Necessary Business Expense
(E) Bad Debts. -
(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and
charged off within the taxable year except those not connected with profession, trade
or business and those sustained in a transaction entered into between parties
mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts
previously allowed as deduction in the preceding years shall be included as part of the
gross income in the year of recovery to the extent of the income tax benefit of said
deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are
ascertained to be worthless and charged off within the taxable year and are capital
assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank
or trust company incorporated under the laws of the Philippines a substantial part of
whose business is the receipt of deposits, for the purpose of this Title, be considered as
a loss from the sale or exchange, on the last day of such taxable year, of capital assets.
(F) Depreciation. –
(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear (including reasonable allowance for
obsolescence) of property used in the trade or business. In the case of property held by
one person for life with remainder to another person, the deduction shall be computed
as if the life tenant were the absolute owner of the property and shall be allowed to the
life tenant. In the case of property held in trust, the allowable deduction shall be
apportioned between the income beneficiaries and the trustees in accordance with the
pertinent provisions of the instrument creating the trust, or in the absence of such
provisions, on the basis of the trust income allowable to each.
(2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in the
preceding paragraph shall include, but not limited to, an allowance computed in
accordance with rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, under any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate which would
have been used had the annual allowance been computed under the method described
in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) Any other method which may be prescribed by the Secretary of Finance upon
recommendation of the Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under
rules and regulations prescribed by the Secretary of Finance upon recommendation of
the Commissioner, the taxpayer and the Commissioner have entered into an
agreement in writing specifically dealing with the useful life and rate of depreciation of
any property, the rate so agreed upon shall be binding on both the taxpayer and the
national Government in the absence of facts and circumstances not taken into
consideration during the adoption of such agreement. The responsibility of establishing
the existence of such facts and circumstances shall rest with the party initiating the
modification. Any change in the agreed rate and useful life of the depreciable property
as specified in the agreement shall not be effective for taxable years prior to the taxable
year in which notice in writing by certified mail or registered mail is served by the party
initiating such change to the other party to the agreement:
Provided, however, that where the taxpayer has adopted such useful life and
depreciation rate for any depreciable and claimed the depreciation expenses as
deduction from his gross income, without any written objection on the part of the
Commissioner or his duly authorized representatives, the aforesaid useful life and
depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall
be considered binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An allowance for
depreciation in respect of all properties directly related to production of petroleum
initially placed in service in a taxable year shall be allowed under the straight-line or
declining-balance method of depreciation at the option of the service contractor.
However, if the service contractor initially elects the declining-balance method, it may
at any subsequent date, shift to the straight-line method.
The useful life of properties used in or related to production of petroleum shall be ten
(10) years of such shorter life as may be permitted by the Commissioner.
Properties not used directly in the production of petroleum shall be depreciated under
the straight-line method on the basis of an estimated useful life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an allowance for
depreciation in respect of all properties used in mining operations other than petroleum
operations, shall be computed as follows:
(a) At the normal rate of depreciation if the expected life is ten (10) years or less; or
(b) Depreciated over any number of years between five (5) years and the expected life
if the latter is more than ten (10) years, and the depreciation thereon allowed as
deduction from taxable income: Provided, That the contractor notifies the
Commissioner at the beginning of the depreciation period which depreciation rate
allowed by this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or
Resident Foreign Corporations. - In the case of a nonresident alien individual engaged
in trade or business or resident foreign corporation, a reasonable allowance for the
deterioration of Property arising out of its use or employment or its non-use in the
business trade or profession shall be permitted only when such property is located in
the Philippines.
Ordinary and Necessary Business Expense
(G) Depletion of Oil and Gas Wells and Mines. –
(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for
depletion or amortization computed in accordance with the cost-depletion method shall
be granted under rules and regulations to be prescribed by the Secretary of finance,
upon recommendation of the Commissioner. Provided, That when the allowance for
depletion shall equal the capital invested no further allowance shall be granted:
Provided, further, That after production in commercial quantities has commenced,
certain intangible exploration and development drilling costs: (a) shall be deductible in
the year incurred if such expenditures are incurred for non-producing wells and/or
mines, or (b) shall be deductible in full in the year paid or incurred or at the election of
the taxpayer, may be capitalized and amortized if such expenditures incurred are for
producing wells and/or mines in the same contract area.
'Intangible costs in petroleum operations' refers to any cost incurred in petroleum
operations which in itself has no salvage value and which is incidental to and necessary
for the drilling of wells and preparation of wells for the production of petroleum:
Provided, That said costs shall not pertain to the acquisition or improvement of property
of a character subject to the allowance for depreciation except that the allowances for
depreciation on such property shall be deductible under this Subsection.
Any intangible exploration, drilling and development expenses allowed as a deduction
in computing taxable income during the year shall not be taken into consideration in
computing the adjusted cost basis for the purpose of computing allowable cost
depletion.
(2) Election to Deduct Exploration and Development Expenditures. - In computing
taxable income from mining operations, the taxpayer may at his option, deduct
exploration and development expenditures accumulated as cost or adjusted basis for
cost depletion as of date of prospecting, as well as exploration and development
expenditures paid or incurred during the taxable year: Provided, That the amount
deductible for exploration and development expenditures shall not exceed twenty-five
percent (25%) of the net income from mining operations computed without the benefit
of any tax incentives under existing laws. The actual exploration and development
expenditures minus twenty-five percent (25%) of the net income from mining shall be
carried forward to the succeeding years until fully deducted.
The election by the taxpayer to deduct the exploration and development expenditures
is irrevocable and shall be binding in succeeding taxable years.
'Net income from mining operations', as used in this Subsection, shall mean gross
income from operations less 'allowable deductions' which are necessary or related to
mining operations. 'Allowable deductions' shall include mining, milling and marketing
expenses, and depreciation of properties directly used in the mining operations. This
paragraph shall not apply to expenditures for the acquisition or improvement of
property of a character which is subject to the allowance for depreciation.
In no case shall this paragraph apply with respect to amounts paid or incurred for the
exploration and development of oil and gas.
The term 'exploration expenditures' means expenditures paid or incurred for the
purpose of ascertaining the existence, location, extent or quality of any deposit of ore
or other mineral, and paid or incurred before the beginning of the development stage
of the mine or deposit.
The term 'development expenditures' means expenditures paid or incurred during the
development stage of the mine or other natural deposits. The development stage of a
mine or other natural deposit shall begin at the time when deposits of ore or other
minerals are shown to exist in sufficient commercial quantity and quality and shall end
upon commencement of actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien
individual or Foreign Corporation. - In the case of a nonresident alien individual engaged
in trade or business in the Philippines or a resident foreign corporation, allowance for
depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be
authorized only in respect to oil and gas wells or mines located within the Philippines.
(H) Charitable and Other Contributions. –
(1) In General. - Contributions or gifts actually paid or made within the taxable year to,
or for the use of the Government of the Philippines or any of its agencies or any political
subdivision thereof exclusively for public purposes, or to accredited domestic
corporation or associations organized and operated exclusively for religious, charitable,
scientific, youth and sports development, cultural or educational purposes or for the
rehabilitation of veterans, or to social welfare institutions, or to non-government
organizations, in accordance with rules and regulations promulgated by the Secretary
of finance, upon recommendation of the Commissioner, no part of the net [48] income
of which inures to the benefit of any private stockholder or individual in an amount not
in excess of ten percent (10%) in the case of an individual, and five percent (%) in the
case of a corporation, of the taxpayer's taxable income derived from trade, business or
profession as computed without the benefit of this and the following subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding
subparagraph, donations to the following institutions or entities shall be deductible in
full:
(a) Donations to the Government. - Donations to the Government of the Philippines or
to any of its agencies or political subdivisions, including fully-owned government
corporations, exclusively to finance, to provide for, or to be used in undertaking priority
activities in education, health, youth and sports development, human settlements,
science and culture, and in economic development according to a National Priority Plan
determined by the National Economic and Development Authority (NEDA), In
consultation with appropriate government agencies, including its regional development
councils and private philanthropic persons and institutions: Provided, That any donation
which is made to the Government or to any of its agencies or political subdivisions not
in accordance with the said annual priority plan shall be subject to the limitations
prescribed in paragraph (1) of this Subsection;
Ordinary and Necessary Business Expense
(b) Donations to Certain Foreign Institutions or International Organizations. - donations
to foreign institutions or international organizations which are fully deductible in
pursuance of or in compliance with agreements, treaties, or commitments entered into
by the Government of the Philippines and the foreign institutions or international
organizations or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. -The term 'nongovernment
organization' means a non-profit domestic corporation:
(1) Organized and operated exclusively for scientific, research, educational, character-
building and youth and sports development, health, social welfare, cultural or charitable
purposes, or a combination thereof, no part of the net [49] income of which inures to
the benefit of any private individual;
(2) Which, not later than the 15th day of the third month after the close of the
accredited nongovernment organizations taxable year in which contributions are
received, makes utilization directly for the active conduct of the activities constituting
the purpose or function for which it is organized and operated, unless an extended
period is granted by the Secretary of Finance in accordance with the rules and
regulations to be promulgated, upon recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on an annual basis, conform with
the rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of
the total expenses; and
(4) The assets of which, in the event of dissolution, would be distributed to another non-
profit domestic corporation organized for similar purpose or purposes, or to the state
for public purpose, or would be distributed by a court to another organization to be used
in such manner as in the judgment of said court shall best accomplish the general
purpose for which the dissolved organization was organized.
Subject to such terms and conditions as may be prescribed by the Secretary of Finance,
the term 'utilization' means:
(i) Any amount in cash or in kind (including administrative expenses) paid or utilized to
accomplish one or more purposes for which the accredited nongovernment
organization was created or organized.
(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out
one or more purposes for which the accredited nongovernment organization was
created or organized.
An amount set aside for a specific project which comes within one or more purposes of
the accredited nongovernment organization may be treated as a utilization, but only if
at the time such amount is set aside, the accredited nongovernment organization has
established to the satisfaction of the Commissioner that the amount will be paid for the
specific project within a period to be prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner,
but not to exceed five (5) years, and the project is one which can be better accomplished
by setting aside such amount than by immediate payment of funds.
(3) Valuation. - The amount of any charitable contribution of property other than money
shall be based on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if
verified under the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(I) Research and Development.-
(1) In General. - A taxpayer may treat research or development expenditures which are
paid or incurred by him during the taxable year in connection with his trade, business
or profession as ordinary and necessary expenses which are not chargeable to capital
account. The expenditures so treated shall be allowed as deduction during the taxable
year when paid or incurred.
(2) Amortization of Certain Research and Development Expenditures. - At the election
of the taxpayer and in accordance with the rules and regulations to be prescribed by
the Secretary of Finance, upon recommendation of the Commissioner, the following
research and development expenditures may be treated as deferred expenses:
(a) Paid or incurred by the taxpayer in connection with his trade, business or profession;
(b) Not treated as expenses under paragraph (1) hereof; and
(c) Chargeable to capital account but not chargeable to property of a character which is
subject to depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed as deduction
ratably distributed over a period of not less than sixty (60) months as may be elected
by the taxpayer (beginning with the month in which the taxpayer first realizes benefits
from such expenditures).
The election provided by paragraph (2) hereof may be made for any taxable year
beginning after the effectivity of this Code, but only if made not later than the time
prescribed by law for filing the return for such taxable year. The method so elected, and
the period selected by the taxpayer, shall be adhered to in computing taxable income
for the taxable year for which the election is made and for all subsequent taxable years
unless with the approval of the Commissioner, a change to a different method is
authorized with respect to a part or all of such expenditures. The election shall not apply
to any expenditure paid or incurred during any taxable year for which the taxpayer
makes the election.
(3) Limitations on Deduction. - This Subsection shall not apply to:
(a) Any expenditure for the acquisition or improvement of land, or for the improvement
of property to be used in connection with research and development of a character
Ordinary and Necessary Business Expense
which is subject to depreciation and depletion; and
(b) Any expenditure paid or incurred for the purpose of ascertaining the existence,
location, extent, or quality of any deposit of ore or other mineral, including oil or gas.
(J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide
for the payment of reasonable pensions to his employees shall be allowed as a
deduction (in addition to the contributions to such trust during the taxable year to cover
the pension liability accruing during the year, allowed as a deduction under Subsection
(A)(1) of this Section) a reasonable amount transferred or paid into such trust during
the taxable year in excess of such contributions, but only if such amount (1)has not
theretofore been allowed as a deduction, and (2) is apportioned in equal parts over a
period of ten (10) consecutive years beginning with the year in which the transfer or
payment is made.
(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid
or payable which is otherwise deductible from, or taken into account in computing gross
income or for which depreciation or amortization may be allowed under this Section,
shall be allowed as a deduction only if it is shown that the tax required to be deducted
and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance
with this Section 58 and 81 of this Code.
(L) Optional Standard Deduction (OSD). - In lieu of the deductions allowed under the
preceding Subsections, an individual subject to tax under Section 24, other than a
nonresident alien, may elect a standard deduction in an amount not exceeding forty
percent (40%) of his gross sales or gross receipts, as the case maybe. In the case of a
corporation subject to tax under Sections 27(A) and 28 (A)(1), it may elect a standard
deduction in an amount not exceeding forty percent (40%) of its gross income as
defined in Section 32 of this Code. Unless the taxpayer signifies in his return his
intention to elect the optional standard deduction, he shall be considered as having
availed himself of the deductions allowed in the preceding Subsections. Such election
when made in the return shall be irrevocable for the taxable year for which the return
is made: Provided, That an individual who is entitled to and claimed for the optional
standard deduction shall not be required to submit with his tax return such financial
statements otherwise required under this Code: Provided, further, That a general
professional partnership and the partners comprising such partnership may avail of the
optional standard deduction only once, either by the general professional partnership
or the partners comprising the partnership: [50] Provided, finally, That except when the
Commissioner otherwise permits, the said individual shall keep such records pertaining
to his gross sales or gross receipts, or the said corporation shall keep such records
pertaining to his gross income as defined in Section 32 of this Code during the taxable
year, as may be required by the rules and regulations promulgated by the Secretary of
Finance, upon, recommendation of the Commissioner.
Notwithstanding the provision of the preceding Subsections, The Secretary of Finance,
upon recommendation of the Commissioner, after a public hearing shall have been held
for this purpose, may prescribe by rules and regulations, limitations or ceilings for any
of the itemized deductions under Subsections (A) to (J) of this Section: Provided, That
for purposes of determining such ceilings or limitations, the Secretary of Finance shall
consider the following factors: (1) adequacy of the prescribed limits on the actual
expenditure requirements of each particular industry; and (2)effects of inflation on
expenditure levels: Provided, further, That no ceilings shall further be imposed on items
of expense already subject to ceilings under present law.
Sec. 36, NIRC
SEC. 36. Items not Deductible. -
(A) General Rule. - In computing net income, no deduction shall in any case be allowed
in respect to -
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;
This Subsection shall not apply to intangible drilling and development costs incurred in
petroleum operations which are deductible under Subsection (G) (1) of Section 34 of
this Code.
(3) Any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried on by
the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy.
(B) Losses from Sales or Exchanges of Property. - In computing net income, no
deductions shall in any case be allowed in respect of losses from sales or exchanges of
property directly or indirectly –
(1) Between members of a family. For purposes of this paragraph, the family of an
individual shall include only his brothers and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation, between an individual and
corporation more than fifty percent (50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between two corporations more
than fifty percent (50%) in value of the outstanding stock of which is owned, directly or
indirectly, by or for the same individual if either one of such corporations, with respect
to the taxable year of the corporation preceding the date of the sale of exchange was
under the law applicable to such taxable year, a personal holding company or a foreign
personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
Ordinary and Necessary Business Expense
Computing Income from Conduct of Business and the Exercise of Profession
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust
if the same person is a grantor with respect to each trust; or
Gross Sales or Receipts P100,000.00
(6) Between a fiduciary of a trust and beneficiary of such trust. Less: Cost of goods sold 30,000.00
Less: Returns, DIscounts 10,000.00
Sec. 119 to 120, Rev. Regs. No. 2 Gross Profit/Gross Income P60,000.00
Less: O/N Business Expenses 50,000.00
SECTION 119. Personal, living, and family expenses. — Personal, living, and family Net Profit/Net Income P10,000.00
expenses are not deductible. Insurance paid on a dwelling owned and occupied by a Multiplied by Tax Rate .25
taxpayer is a personal expense and not deductible. Premiums paid for life insurance by Income Tax Due P2,500.00
the insured are not deductible. In the case of a professional man who rents a property Less: Tax Credits 1,000.00
for residential purposes, but incidentally receives his clients, patients, or callers in Income Tax Payable P1,500.00
connection with his professional work (his place of business being elsewhere), no part
of the rent is deductible as a business expense. If however, he uses part of the house
for his office, such portion of the rent as is properly attributable to such office is ● In computing net income subject to tax, (conduct of business, exercise of
deductible. Where the father is legally entitled to the services of his minor children, any profession. not items of passive income where subject to final tax nor
allowances which he gives them, whether said to be in consideration of services or compensation income where no deduction is allowed)
otherwise, are not allowable deductions in his return of income. Alimony, and an
● Cost of Goods sold includes depreciation, salary of people, costs, transpo etc.
allowance paid under a separation agreement are not deductible from gross income.
● Ordinary Business expenses to be deducted from GROSS PROFIT
SECTION 120. Capital expenditures. — No deduction from gross income may be made ○ Ex. salaries, wages of marketing personnel and sales personnel,
for any amounts paid out for new buildings or for permanent improvements or utilities in the office, etc.
betterments made to increase the value of the taxpayer's property, or for any amount ● Net profit
expended in restoring property or in making good the exhaustion thereof for which an ○ figure to be multiplied by 20 or 25%
allowance for depreciation or depletion or other allowance is or has been made.
○ 25 - rate that will apply UNLESS the corp’s taxable income does not
Amounts expended for securing a copyright and plates, which remain the property of
the person making the payments, are investments of capital. The cost of defending or exceed 5M and the gross assets does not exceed 100M.
perfecting title to property constitutes a part of the cost of the property and is not a ○ If the net income exceeds 5M or the gross assets exceed 100M, you
deductible expense. The amount expended for the architect's services is part of the cost will be subject to 25% Income Tax.
of the building. Commissions paid in purchasing securities are a part of the cost of such ○ (Check again parang mali ng sabi si sir, isa dapat 20%)
securities. Commissions paid in selling securities are an offset against the selling price.
Expenses of the administration of an estate, such as court costs, attorney's fees, and
executor's commissions, are chargeable against the "corpus" of the estate and are not Ordinary and Necessary Business Expenses from Gross Income
allowable deductions. Amounts to be assessed and paid under an agreement between ● Taxpayers, other than compensation earners and those deriving purely passive
bondholders or shareholders of a corporation, to be used in a reorganization of the income, are allowed to deduct from gross income derived from conduct of trade
corporation, are investments of capital and not deductible for any purpose in return of or business or exercise of profession ordinary and necessary business expenses.
income. In the case of a corporation, expenses for organization, such as incorporation ● E.g., aside from those specifically mentioned in Sec. 34, rent, salaries and
fees, attorney's fees and accountants' charges, are ordinarily capital expenditures; but wages, utilities, fuel, supplies, representation and travel, internet, repairs and
where such expenditures are limited to purely incidental expenses, a taxpayer may maintenance, professional fees, marketing expenses, etc.
charge such items against income in the year in which they are incurred. A holding ○ SEC. 34. Deductions from Gross Income. [45 - Except for taxpayers
company which guarantees dividends at a specified rate on the stock of a subsidiary earning compensation income arising from personal services rendered
corporation for the purpose of securing new capital for the subsidiary and increasing under an employer-employee relationship where no deductions shall
the value of its stockholdings in the subsidiary may not deduct amounts paid in carrying be allowed under this Section, in computing taxable income subject to
out this guaranty in computing its net income, but such payments may be added to the income tax under Sections 24(A); 25(A); 26; 27(A), (B), and (C); and
cost of its stock in the subsidiary. 28(A)(1), there shall be allowed the following deductions from gross
income: xxx
Ordinary and Necessary Business Expense
If you are a corporation engaged in business, you can deduct rental expense, etc.
Rules in Deducting: Items not deductible
● However, Personal Living Family expenses are not deductible.
○ SEC. 36. Items not Deductible. (A) General Rule. - In computing net
income, no deduction shall in any case be allowed in respect to
○ (1) Personal, living or family expenses;
● Capital expenditures are not deductible outright, but rather only in the form of
depreciation allowances. (NOTE: Useful life depreciation deduction)
○ (2) Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of any
property or estate; This Subsection shall not apply to intangible drilling
and development costs incurred in petroleum operations which are
deductible under Subsection (G) (1) of Section 34 of this Code.
○ (3) Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made
● Premiums on keyman and business insurance also not deductible.
○ (4) Premiums paid on any life insurance policy covering the life of any
officer or employee, or of any person financially interested in any trade
or business carried on by the taxpayer, individual or corporate, when
the taxpayer is directly or indirectly a beneficiary under such policy.
● Bribes and kickbacks, whether paid to a gov’t employee or in the private sector,
including fines or penalties paid to government for violation of a law, are also
not deductible. How about lobbying and political expenditures?
Personal living and family expenses
● Sec. 36
● Ex. kakain sa Cibo, you go to Balesin, etc.--> di mo pwede i deduct yang
because these are PLF
○ You call them capital expenditures
● Ex. You bought a new laptop and you use it in the exercise of your profession
as a lawyer, and the laptop costs 50k. If you bought it in 2022, you can’t
deduct 50k at 2022. You need to amortize the value. If the life is 5 years, you
deduct 10k for each year. You call this depreciation
○ For capital expenditures, you have to spread out your cost or expense
over the useful life of the asset.; HAVE TO SPREAD IT out as
depreciation
○ Same goes for assets, useful improvements
● Premiums on keyman and business insurance are not deductible Sec.
○ 35(a)(4)
○ Keyman insurance — life insurance policy bought by a company on
the life of an employee who is essential to its business
○ Business insurance — class of insurance coverage intended for
purchase by businesses rather than individuals.
○ Suppose the beneficiaries are the wife and children of the employee.
Deductible?
■ YES, DEDUCTIBLE. The payment of the life insurance when
the beneficiaries are the family, it becomes taxable
compensation income na.
Bribes and kickbacks are not deductible
● Sec. 34(a)(1)(c)
● Includes both the public and private sector
● Ex. You bribed the purchasing manager of PLDT and you are a supplier of
telephone equipment used by telecommunications companies. When you
give a bribe to the purchase manager, that is not deductible?
● nako naka attorney’s fees or consultancy fees → para “deductible“ ;
businesses “gross-up” to cover the tax made to pay [bro wtf]
Meaning of Ordinary and Necessary
● “Ordinary” means normal, usual, or common in relation to the business of the
taxpayer and the surrounding circumstances.
● “Necessary” means appropriate and helpful in developing the taxpayer’s
business. Need not be indispensable or unavoidable. Atlas Consolidated Mining,
102 SCRA 246 (1981)
Sec. 34
● all expenses to be deducted are ordinary and necessary
● if not ordinary and necessary, not allowable as a deduction on gross income
● The phrase “ordinary and necessary” includes the element of “reasonableness”.
DISALLOWED DEDUCTIONS :
1. Thus, inordinately large amounts paid to taxpayer’s founder and controlling
shareholder, representing 50% of its revenues, supposedly as supervision fees
and commissions, on top of monthly salaries and annual bonuses, were
disallowed. C.M. Hoskins, 30 SCRA 434, See also Aguinaldo Industries, 112
SCRA 136
● Disallowed because unreasonably
2. Similarly, bonuses, on top of salaries, paid to officers notwithstanding that during
the years in question the corporation suffered net losses were held as
unreasonable. Kuenzle
● likewise disallowed as deduction
3. Excessive media advertising expense to promote a single product/brand
(“Tang”), representing almost ½ of the taxpayer’s total marketing, advertising
and promotional expenses and almost double the amount of its general and
administrative expenses was likewise disallowed for being excessive. Required
to be capitalized. General Foods
Ordinary and Necessary Business Expense
● If payment is excessive, amount conceded to be reasonable is properly
deductible. 3M Phils., involving partially disallowed payment for royalty allocable
to imported finished products.
● Cf. Algue, where the SC allowed held as reasonable promotional fee paid to the
shareholders amounting to 60% of total commission received by the family-
owned corporation for their “no mean feat” in inducing prominent businessmen
to invest in an experimental enterprise requiring millions of pesos (Sudeco).
○ SC: Shareholders who were given a huge commission had exceptional
efforts in inducing profits thus 60% of total commission is not
unreasonable
Personal, Living or Family Expense
● Generally, non-deductible.
● Exceptions:
○ Allocation between business expense and PLF is, however, possible.
Jamir, involving use by a lawyer of his automobile for business and
personal and was allowed deduction for ¾ of depreciation and driver’s
salary.
○ See also Zamora, 8 SCRA 163, where the SC allowed 50% allocation
of travel expenses of wife who accompanied husband on a combined
business and medical trip.
■ Due to the wife’s efforts in the business
○ How about a professional or self-employed who holds office in his
residence? Can he claim, say 50%, of the utilities? A : Yes he may claim
to the extent that it was beyond what he used to incur
● Basic rules on deductibility of expenses include the requirement that the
expense must be a business expense, and not a personal, living or family
expense
● Jamir: lawyer used his automobile for professional and personal use. SC:
allowed deduction for 3/4 of depreciation and driver’s salary because
evidence showed that the car was used more for business than personal
Zamora: wife’s travel expenses
○ SC: 50% was deducted
● Capital expenditures will be added to cost of property, depreciation allowance
will decrease = adjusted basis in property
● No deduction is allowable for rentals and/or other payments for the continued
use or possession of a property owned by the taxpayer or in which he has equity
even if the taxpayer uses the property in the conduct of his trade or business or
in the exercise of his profession. Sec. 34(A)(1)(a)(iii)
○ NOTE: Owner may not claim deduction for rentals on his own property
Capital Expenditures
● The law defines capital expenditures as “amounts paid out for new buildings or
for permanent improvements or betterments made to increase the value of the
taxpayer’s property,” or “amounts expended in restoring property or in making
good the exhaustion thereof for which an allowance for depreciation is or has
been made.“ Sec. 36(A)(2) and (3), NIRC; Sec. 120, Income Tax Regulations.
● No deduction is allowed for “the cost of acquisition, construction, or erection of
buildings, machinery and equipment, furniture and fixtures, and similar property
having a useful life substantially beyond the taxable year,” or for “amounts paid
or incurred (1) to add to the value, or substantially prolong the useful life, of
property owned by the taxpayer, such as plant or equipment, or (2) to adapt
property to a new or different use.”
Still on Capital Expenditures
● Non-deductibility of capex from current income prevents a taxpayer from utilizing
currently a deduction that is properly attributable, through amortization, to later
tax years when the capital asset becomes income producing.
● Capex added to the basis of the acquired or improved property after which they
are either (a) depreciated over the property’s useful life, or (b) in case of non-
depreciable property, such as land, held in abeyance until the property is sold or
disposed of, at which time the cost is deducted from the amount realized in
computing gain or loss.
CIR v. A. Soriano y Cia, 38 SCRA 67
● E.g., amounts paid for service fees in pile-driving to meet certain specs relative
to the load bearing factor of timber piles in the taxpayer’s land and for architect’s
fees are capex.
● However, cost of incidental repairs that neither materially increase the value of
the property nor appreciably prolong its life but simply keep it in good operating
condition may be deducted outright as ordinary and necessary business
expense.
Ordinary and Necessary Business Expense
Withholding Tax as a Requirement for Deductibility of an Expense
● Before there was no limit in representation and entertainment expense →
hence you see companies abuse this
● DOF then decided to limit this
● When you claim any expense that you claim to be ord and nec in the conduct
of trade etc, you must always be ready to substantiate that particular
expense. You must be able to produce OFFICIAL RECEIPTS WITH INVOICES,
the amount and the relation of that expense with ur business
● YOU SHOULD HAVE PROOF OF THE EXPENSE THAT YOU INCURRED (official
receipts, invoices, indicating connection of that expense with the conduct of
trade etc.)
○ e. g. you treated a client, u should make an annotation at the back
of the receipt that you did it for a client
Substantiation
● No deduction is allowable unless the taxpayer substantiates it with sufficient
evidence, such as ORs or invoices, that indicate the
○ (1) amount of the expense, and
○ (2) the direct connection or relation to the conduct of trade or business
or exercise of profession. Sec. 34(A)(1)(b)
○ Ex. Treated a client, when you get the OR at the back you should make
an annotation who you treated to dinner
● See Pilmico-Mauri Foods Corp., 802 SCRA 618, where receipts and invoices had
alterations, intercalations and other discrepancies, while some purchases were
not supported by any invoices at all.
Optional Standard Deduction
● When you claim deduction you need to substantiate that particular expense
by producing receipts indicating the amount of the expense relating to the
exercise of profession
○ Hindi puwede yung NBS receipts, dapat BIR approved
● Pilmico: naturally, the BIR would disallow those expenses
● Section 34(K) states that “any amount paid or payable which is otherwise
deductible from, or taken into account in computing gross income or for which
depreciation or amortization may be allowed under Section 34, shall be allowed
as a deduction only if it is shown that the tax required to be deducted and
withheld therefrom has been paid to the Bureau of Internal Revenue in
accordance with this Section [34], Sections 58 and 81 of this Code.”
● In recent revenue regulations, however, the BIR now allows the deduction
provided the taxpayer pays during the BIR audit the tax supposed to have been
withheld, plus surcharge and interest.
● When you are making an income payment to suppliers for purchase of goods
or services and that particular expense is subject to withholding tax under the
regulations of the BIR, you have to make sure that you withhold the applicable
withholding tax on that particular income payment.
● Ex. Suppose you are a lawyer leasing from a company that owns that
particular office space. Under existing regulations, a person who rents an
office space, land, or building, for the exercise of profession, is required to
withhold a 5% tax on that rental income. Before you pay your landlord, you
have to withhold 5% to pay the BIR.
○ What if you pay the landlord your rental but you don’t withhold?
■ That rental expense will be disallowed as a deduction
because Sec. 34 states that that expense is allowed as a
deduction if you showed that the tax required to be
deducted has been paid to the BIR
● Ex. Suppose DONNY is a businessman in a construction business. May
kinontrata ka na gumawa ng building. Donny got sued.Donny’s lawyer’s fee
is subject to withholding tax. If not withhold, Donny won’t be able to claim as
business expense.
TWO OPTIONS:
1. Itemize all expenses, all kinds of expenses in pursuit of business and exercise
of profession are listed down as a deduction from gross income
2. Optional standard deduction
Ordinary and Necessary Business Expense
● In lieu of itemized deductions, the taxpayer, other than a non-resident alien and
otherwise: Provided, That such interest shall be allowed as a deduction in the year the
non-resident foreign corporation, may avail of the OSD equivalent to 40% of the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic
individual’s gross sales or gross receipts, or 40% of the corporation’s gross amortizations, the amount of interest which corresponds to the amount of the principal
income. Sec. 34(L), NIRC amortized or paid during the year shall be allowed as deduction in such taxable year;
● Why is the 40%, in the case of individuals, based on gross sales/receipts? So, a
trader, for example, cannot deduct his cost of sales from gross sales? (b) If both the taxpayer and the person to whom the payment has been made or is to
● Individual availing of OSD need not submit audited F/S along with his ITR. be made are persons specified under Section 36 (B); or
● The taxpayer must signify in his ITR the intention to elect OSD. Otherwise, he
(c) If the indebtedness is incurred to finance petroleum exploration.
shall be deemed to have elected itemized deductions.
(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest
incurred to acquire property used in trade business or exercise of a profession may be
All expenses incurred during in pursuit of businesses, deductible generally unless
allowed as a deduction or treated as a capital expenditure.
proscribed by the statute. But doesn’t mean the list is exclusive.

● For a taxpayer with a business income from trade or business, two options: ● Incurred on indebtedness in connection with trade or business or exercise of
profession.
1. itemize your expenses or deductions — business expenses are listed ● Interest incurred in acquisition of property used in t or b or exercise of profession
down may be
2. Optional standard deduction — you don’t claim deductions item by ○ deducted outright or
item, rather you claim, across the board, 40% of the individual’s ○ treated as capital expenditure, at the option of the taxpayer [ interest
gross sales or gross receipts or 40% of the corporation’s gross will be added to the basis of the property and then deduct it as
income depreciation]
a. May be claimed if Itemized option yields ● Characterization issue – Boise Cascade
a lower deduction from an across the
board 40% ● Individual
1. claim interest expense outright
Interest Expense 2. treat it as a capital expenditure — in effect, the interest will be added
Sec. 34 (B), NIRC to the basis of the property
● Ex. Interest on the loan you obtained from the bank may be claimed as a
(B) Interest. - deduction from gross income year after year OR treat it as a capital
expenditure by deducting it as depreciation expense over time
(1) In General. - The amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer's profession, trade or business shall be
● In order for the interest expense to be deductible, it must be incurred on an
indebtedness
allowed as deduction from gross income: Provided, however, That the taxpayer's
otherwise allowable deduction for interest expense shall be reduced by twenty percent ○ If no indebtedness, no deduction because it will be treated as an
(20%) of the interest income subjected to final tax: Provided, finally, That if the interest equity rather than a debt
income tax is adjusted in the future, the interest expense reduction rate shall be
adjusted accordingly based on the prescribed standard formula as defined in the rules Boise Cascade
and regulations to be promulgated by the Secretary of Finance, upon the ● the BIR said the interest u claimed to have incurred not in connection with
recommendation of the Commissioner of Internal Revenue. [45] indebtedness ; rather it wa connected with investment and equity ; dapat hindi
yan deductible because rather it is a dividend
(2) Exceptions. - No deduction shall be allowed in respect of interest under the
succeeding subparagraphs: Q: Suppose Donny invests in preferred shares of stock [priority in payment of dividends
because dividend is a fixed rate, there could be an issue whether Donny is receiving
(a) If within the taxable year an individual taxpayer reporting income on the cash basis dividends or interests.
incurs an indebtedness on which an interest is paid in advance through discount or A:
1. The company’s capital is very thin – a thinly capitalized corporation → capital
Ordinary and Necessary Business Expense
of the interest income subjected to final tax.
stock niya 1M, debt niya 50M.
2. Will be paid only if there is profit in Donny’s company. ● Meant to bar taxpayers from sheltering business income by deducting large
3. If Donny’s company cannot pay the loan, the creditor is lumped with other amounts of interest on debts incurred to acquire investments that are not
creditors – i.e. Donny is just like a shareholder. expected to produce income currently, or when the income is either exempt or
4. When company wasn’t able to pay there was no demand. Hence Donny’s taxed at preferential rate.
would be interest than dividend.
Note : interest is deductible in gross income only if indebtedness in relation to business
or conduct of profession
● Tax arbitrage
○ needs to be reduced by an amount equivalent to 20%
● Interest paid in advance – deductible only in the year indebtedness is paid.
● If indebtedness is payable in periodic amortizations, the amount of interest
● Suppose Corporation X borrows from BPI 100M. It pays interest at the rate of
10% as annual interest. For every P100 of interest the corporation pays, how
corresponding to the amount of principal amortized during the year is deductible
much is the tax benefit of the deduction to the taxpayer?
in such year.
● Interest on indebtedness between related persons – non-deductible. ○ Taxpayer is subject to a tax benefit of 35%
○ ex. the law looks at the transaction with a fair amount of suspicion ;
Suppose Donny borrows from Kiko , claiming Donny paying interest ,
● In addition to the aforementioned facts, if the corporation uses the loan
proceeds to invest in a time deposit or some other investment that yields a
but for all we know Kiko will return the interest passive income subject to 25% income tax,
● Also non-deductible is interest incurred to finance petroleum operations. [more
on industry issue, not as imp] ○ the law now considers tax arbitrage
○ the interest expense will be reduced by an amount equivalent to
20% of the income subject to the final withholding tax.
● Cascade: Shareholder advanced money to a corporation. The corporation was
● If the income interest expense is 100, interest income subject to final
claiming interest expense as deduction on gross income.
withholding tax, yung amount of reduction na i-claim to that interest expense
○ BIR: the interest you claim to have been incurred is not connected is 20% of the income subjected to withholding tax. you don’t reduce the
with indebtedness, but in investment or equity. Thus, that cannot be interest expense by 20% agad.
deductible because it’s not an expense but a dividend payable
● Shareholder invested in preferred shares of stock. If you’re holding a preferred Taxes
shares of stock, you enjoy priority in the payment of dividend. Dividends are
● Incurred in trade or business or exercise of profession.
paid at a fixed amount.
● Non-deductible:
○ In Cascade, maliit yung capitalizations but yung shareholders
○ Income tax under Title II
advances ay malaki. This is a thinly capitalized corporation.
○ Foreign income tax (unless taxpayer waives benefit of foreign tax
● Ex. Loan with interest of 6%, Donny’s company expecting windfall. Donny credit) Exception : the taxpayer option to claim tax credit or tax
needs expense to reduce the taxable income. Donny’s scheme would resort
deduction
to borrow heavily a big amount and then offer to pay INTEREST agad to
coincide with the tax year ; the windfall profit will be offset by an interest ○ Estate tax [separate taxable estate]
expense paid in advance – rather than year after year. Under the law, Donny ○ Donor’s tax
cannot do that. ○ Taxes assessed against local benefits inuring directly to the property
assessed (e.g., street, sidewalk, etc.)
● Tax arbitrage – loan proceeds channeled to investments that generate passive
income subject to final tax.
○ Happens when Donny incurs a loan from a financial institution by a Baniqued on “foreign income tax” → foreign tax credit against tax due
bank ; Donny uses the loan to generate income.
○ Suppose Donny Corporation borrows 100M from BPI ; interest is at ● If foreign tax credit, it will come from income tax due. If discount, deduction
10% annually. For every 100 pesos that of interest that Donny Corp from gross income.
pays how much is the ????
● GR: Foreign income tax deductible from gross income?
● In which case, the deductible interest is reduced by an amount equivalent to 20%
Ordinary and Necessary Business Expense
○ EXC:
note on estate tax → see Chapter 10 Estates and Trusts Sec. 60
note on donation → Dela Cruz established trust. Dela Cruz wants to dispose property,
they are old and want to pass properties to children income producing. Dela Cruz
establishes irrevocable trust to his children ; terms of which controlled by them ; the
trustee cannot violate the terms that Sps. Dela Cruz (trustor) had specified under the
terms. These properties now , will have to pay income tax derived from this properties,
the trust becomes a separate taxable person.
→ the trust is treated like an ordinary person
→ trust under Chapter 10 separate person
→ ergo donor’s tax non-deductible
Foreign Taxes
● Foreign tax credit (if availed of) is subject to :
○ per country limitation and
○ global limitation,
→ both based on taxable income.
● Foreign tax credit generally more favorable since it is P1:P1.
● Taxes deductible only by the person upon whom they are imposed. Rev. Regs.
No. 2
○ Thus, the tenant cannot deduct the RPT payable by the landlord.
○ direct liability relevance, therefore cannot be deducted.
○ How can you deduct income tax from the landlord ? → XYZ should put
it under “rental” expense should include the amount of tax XYZ agreed
to bear
○ This is an indirect receipt
foreign tax credit illustration of “per country: Suppose 30% of B’s global income, only
30% of the taxes paid in that country shall be available as a tax credit against the Ph
tax due.
Losses
● Incurred in t or b, or exercise of profession. See Fernandez Hermanos re. issue
of whether the hacienda was operated solely for pleasure/hobby (race horses)
or for business (cattle farm).
● Loss due to fire, storm, shipwreck, or other casualties, or from robbery, theft or
embezzlement. Enumerated causes exclusive?
● and these losses are not compensated for by insurance or other forms of
indemnity. → those loss deductible from gross income
Suppose Donny’s toy inventory burnt → Donny can claim this as deductible from gross
income.
Suppose Donny’s store, there was a storm or robbed → inventory gone →
Examples of “Closed and Completed” Transactions
● Requirement of “closed and completed” transaction. See Fernandez Hermanos
re. loss claimed for worthless shares of stock in Mati Lumber Co. that went
insolvent and losses claimed in 1950 and 1951 for the coal mines that were
actually abandoned only in 1952.
● Demolition of old bldg, discarding of old machineries are other examples of
“closed and completed” transactions.
Suppose Donny’s building not yet demolished → Donny cannot claim this as loss
● ABANDONMENT LOSS
Examples of Non-deductible losses:
● Sales or exchanges between or among related parties
● Wash sales of stock or securities
● NOLCO, arising from a merger or consolidation, where there is a substantial
change of ownership of the business (less than 75%)
Taxes
Sec. 34 (C ), NIRC
(C) Taxes.-
(1) In General. - Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business, shall be allowed as deduction, except:
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this deduction
shall be allowed in the case of a taxpayer who does not signify in his return
his desire to have to any extent the benefits of paragraph (3) of this subsection
(relating to credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value
of the property assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited, shall be
included as part of gross income in the year of receipt to the extent of the income tax
benefit of said deduction.
(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in
trade or business in the Philippines and a resident foreign corporation, the deductions
for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to
the extent that they are connected with income from sources within the Philippines.
Ordinary and Necessary Business Expense
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his
return his desire to have the benefits of this paragraph, the tax imposed by this Title
shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines
and of a domestic corporation, the amount of income taxes paid or incurred
during the taxable year to any foreign country; and
(b) Partnerships and Estates. - In the case of any such individual who is a member
of a general professional partnership or a beneficiary of an estate or trust, his
proportionate share of such taxes of the general professional partnership or
the estate or trust paid or incurred during the taxable year to a foreign country,
if his distributive share of the income of such partnership or trust is reported
for taxation under this Title.
An alien individual and a foreign corporation shall not be allowed the credits against
the tax for the taxes of foreign countries allowed under this paragraph.
(4) Limitations on Credit. - The amount of the credit taken under this Section shall be
subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country
shall not exceed the same proportion of the tax against which such credit is
taken, which the taxpayer's taxable income from sources within such country
under this Title bears to his entire taxable income for the same taxable year;
and
(b) The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's taxable income from
sources without the Philippines taxable under this Title bears to his entire
taxable income for the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from
the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole
or in part, the taxpayer shall notify the Commissioner; who shall re-determine the
amount of the tax for the year or years affected, and the amount of tax due upon such
re-determination, if any, shall be paid by the taxpayer upon notice and demand by the
Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to
the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a
condition precedent to the allowance of this credit may require the taxpayer to give a
bond with sureties satisfactory to and to be approved by the Commissioner in such sum
as he may require, conditioned upon the payment by the taxpayer of any amount of tax
found due upon any such redetermination. The bond herein prescribed shall contain
such further conditions as the Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this
Section may, at the option of the taxpayer and irrespective of the method of accounting
employed in keeping his books, be taken in the year which the taxes of the foreign
country were incurred, subject, however, to the conditions prescribed in Subsection
(C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the
taxes of the foreign country accrued, the credits for all subsequent years shall be taken
upon the same basis and no portion of any such taxes shall be allowed as a deduction
in the same or any succeeding year.
(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed
only if the taxpayer establishes to the satisfaction of the Commissioner the following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred to
which is claimed as a credit under said paragraph, such amount to be
determined under rules and regulations prescribed by the Secretary of
Finance; and
(c) All other information necessary for the verification and computation of such
credits.
● Incurred in trade or business or exercise of profession.
● Non-deductible:
1. Income tax under Title II
2. Foreign income tax (unless taxpayer waives benefit of foreign tax
credit)
3. Estate tax
4. Donor’s tax
5. Taxes assessed against local benefits inuring directly to the property
assessed (e.g., street, sidewalk, etc.)
● Foreign tax credit (if availed of) is subject to per country limitation and global
limitation, based on taxable income.
● Foreign tax credit is generally more favorable since it is P1:P1.
● Taxes deductible only by the person upon whom they are imposed. Rev. Regs.
No. 2
● Thus, the tenant cannot deduct the Real Property Tax payable by the landlord.
○ How do you deduct income tax of a landlord? You must book this as
part of a rental
Baniqued
● “foreign income tax” → foreign tax credit against tax due
● If foreign tax credit, it will come from income tax due. If discount, deduction
from gross income.
● GR: Foreign income tax deductible from gross income?
○ EXC:
Estate tax → see Chapter 10 Estates and Trusts Sec. 60
Donation
● Ex. Dela Cruz established trust. Dela Cruz wants to dispose property, they are
old and want to pass properties to children income producing. Dela Cruz
establishes irrevocable trust to his children ; terms of which controlled by
them ; the trustee cannot violate the terms that Sps. Dela Cruz (trustor) had
specified under the terms. These properties now , will have to pay income tax
derived from this properties, the trust becomes a separate taxable person.
Ordinary and Necessary Business Expense
in the ownership of the business or enterprise in that -
Trust
● The trust is treated like an ordinary person (i) Not less than seventy-five percent (75%) in nominal value of outstanding issued
● Trust under Chapter 10 separate person shares., if the business is in the name of a corporation, is held by or on behalf of the
● Donor’s tax non-deductible same persons; or

(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if
Losses the business is in the name of a corporation, is held by or on behalf of the same persons.
Sec. 34 (D), NIRC
For purposes of this subsection, the term 'net operating loss' shall mean the excess of
allowable deduction over gross income of the business in a taxable year.
(D) Losses. -
Provided, That for mines other than oil and gas wells, a net operating loss without the
(1) In General. - Losses actually sustained during the taxable year and not compensated
benefit of incentives provided for under Executive Order No. 226, as amended,
for by insurance or other forms of indemnity shall be allowed as deductions:
otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first
(a) If incurred in trade, profession or business;
ten (10) years of operation may be carried over as a deduction from taxable income for
(b) Of property connected with the trade, business or profession, if the loss arises
the next five (5) years immediately following the year of such loss. The entire amount
from fires, storms, shipwreck, or other casualties, or from robbery, theft or
of the loss shall be carried over to the first of the five (5) taxable years following the
embezzlement. The Secretary of Finance, upon recommendation of the
loss, and any portion of such loss which exceeds the taxable income of such first year
Commissioner, is hereby authorized to promulgate rules and regulations
shall be deducted in like manner form the taxable income of the next remaining four
prescribing, among other things, the time and manner by which the taxpayer
(4) years.
shall submit a declaration of loss sustained from casualty or from robbery,
theft or embezzlement during the taxable year: Provided, however, That the
(4) Capital Losses. -
time limit to be so prescribed in the rules and regulations shall not be less
than thirty (30) days nor more than ninety (90) days from the date of discovery
(a) Limitations. - Loss from sales or Exchanges of capital assets shall be allowed only
of the casualty or robbery, theft or embezzlement giving rise to the loss.
to the extent provided in Section 39.
(c) No loss shall be allowed as a deduction under this Subsection if at the time of
the filing of the return, such loss has been claimed as a deduction for estate
(b) Securities Becoming Worthless. - If securities as defined in Section 22 (T) become
tax purposes in the estate tax return.
worthless during the taxable year and are capital assets, the loss resulting therefrom
shall, for purposes of this Title, be considered as a loss from the sale or exchange, on
(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation,
the last day of such taxable year, of capital assets.
the losses deductible shall be those actually sustained during the year incurred in
business, trade or exercise of a profession conducted within the Philippines, when such
(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock
losses are not compensated for by insurance or other forms of indemnity. The secretary
or securities as provided in Section 38.
of Finance, upon recommendation of the Commissioner, is hereby authorized to
promulgate rules and regulations prescribing, among other things, the time and
(6) Wagering Losses. - Losses from wagering transactions shall be allowed only to the
manner by which the taxpayer shall submit a declaration of loss sustained from
extent of the gains from such transactions.
casualty or from robbery, theft or embezzlement during the taxable year: Provided, that
the time to be so prescribed in the rules and regulations shall not be less than thirty
(7) Abandonment Losses. -
(30) days nor more than ninety (90) days from the date of discovery of the casualty or
robbery, theft or embezzlement giving rise to the loss; and
(a) In the event a contract area where petroleum operations are undertaken is partially
or wholly abandoned, all accumulated exploration and development expenditures
3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise
pertaining thereto shall be allowed as a deduction: Provided, That accumulated
for any taxable year immediately preceding the current taxable year, which had not
expenditures incurred in that area prior to January 1, 1979 shall be allowed as a
been previously offset as deduction from gross income shall be carried over as a
deduction only from any income derived from the same contract area. In all cases,
deduction from gross income for the next three (3) consecutive taxable years
notices of abandonment shall be filed with the Commissioner.
immediately following the year of such loss: Provided, however, That any net loss
incurred in a taxable year during which the taxpayer was exempt from income tax shall
(b) In case a producing well is subsequently abandoned, the un-amortized costs thereof,
not be allowed as a deduction under this Subsection: Provided, further, That a net
as well as the un-depreciated costs of equipment directly used therein , shall be allowed
operating loss carry-over shall be allowed only if there has been no substantial change
Ordinary and Necessary Business Expense
as a deduction in the year such well, equipment or facility is abandoned by the
contractor: Provided, That if such abandoned well is re-entered and production is
resumed, or if such equipment or facility is restored into service, the said costs shall be
included as part of gross income in the year of resumption or restoration and shall be
amortized or depreciated, as the case may be.
● Incurred in t or b, or exercise of profession. See Fernandez Hermanos re. issue
of whether the hacienda was operated solely for pleasure/hobby (race horses)
or for business (cattle farm).
● Loss due to fire, storm, shipwreck, or other casualties, or from robbery, theft or
embezzlement. Enumerated causes exclusive?
● Not compensated for by insurance or other forms of indemnity.
Requirement of “closed and completed” transaction.
● See Fernandez Hermanos re. loss claimed for worthless shares of stock in Mati
Lumber Co. that went insolvent and losses claimed in 1950 and 1951 for the
coal mines that were actually abandoned only in 1952.
● Demolition of old bldg, discarding of old machineries are other examples of
“closed and completed” transactions
Non-deductible losses:
● Sales or exchanges between or among related parties
● Wash sales of stock or securities
● NOLCO, arising from a merger or consolidation, where there is a substantial
change of ownership of the business (less than 75%)
Related parties (Non- Deductible Losses)
● Members of the same family (brothers and sisters, whether whole or half-blood,
spouse, ancestors and lineal descendants)
● Corporation and its controlling shareholder (more than 50%)
● Commonly owned or controlled corporations, where one of them was a PHC in
the preceding taxable year
● Grantor-fiduciary, fiduciary-fiduciary, fiduciary-beneficiary
Wash sales
● Within a period beginning 30 days before the date of sale of stock and ending
30 days after such date, the taxpayer has acquired, or contracted to acquire,
substantially identical stock.Disallowance meant to prevent the deduction of
paper losses.
NOLCO - Net Operating Loss Carry Over
● NOLCO is an excess of allowable deductions over gross income.
● May be carried over to the next 3 consecutive taxable years.
○ First in, first out.
● In case of merger or consolidation, NOLCO of absorbed corporation is allowed
only if there is no substantial change in ownership of the business or enterprise
(not less than 75% of the stock is owned by or on behalf of the same persons)
● See Paper Industries Corp. – PICOP merged Rustan Pulp and Rustan Mfg. into it
to avail of the NOLCO of Rustan Pulp to reduce PICOP’s taxable income. SC
disallowed the NOLCO deduction. Case decided prior to the allowance of NOLCO
under the NIRC.
○ NOLCO incurred during a taxable year when the taxpayer was exempt
from income tax is not allowable.
● NOLCO not among tax attributes of absorbed corporation that transfer to the
surviving corporation in a merger or consolidation. BIR Rul. Nos. 214-2012, 100-
2017, 1422-2018
● RULE: If the NOLCO does not move then it may be claimed
○ Unlike unutilized MCIT, excess input VAT, unutilized withholding tax
credits, etc.
Ex. 2019 na NOLCO will have to be applied or claimed first against/deducted from
Gross Income
Ex. What if three consecutive years is done? Suppose Donny’s NOLCO 2019 is 50M. In
2020, Donny’s income 10M. how will Donny claim NOLCO?
● GR : Donny won’t be able to use it if exceeds in 3 years
● EXPN: unless registered business enterprise under Create Law!!!
Wagering losses
● Allowed only to the extent of the gains from such transactions.
● Presupposes that the taxpayer is engaged in gambling as a business activity or
one conducted for profit.
Capital losses
● Allowed only to the extent of capital gains.
● If an individual sustains in any taxable year a net capital loss, such loss (in an
amount not in excess of the net income for such year) shall be entitled to a net
capital loss carry-over to the succeeding taxable year.
Bad debts
Sec. 34(E), NIRC
(E) Bad Debts. -
(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and
charged off within the taxable year except those not connected with profession, trade
Ordinary and Necessary Business Expense
or business and those sustained in a transaction entered into between parties
mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts
previously allowed as deduction in the preceding years shall be included as part of the
gross income in the year of recovery to the extent of the income tax benefit of said
deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are
ascertained to be worthless and charged off within the taxable year and are capital
assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank
or trust company incorporated under the laws of the Philippines a substantial part of
whose business is the receipt of deposits, for the purpose of this Title, be considered as
a loss from the sale or exchange, on the last day of such taxable year, of capital assets.
● Incurred in the conduct of trade or business, or exercise of profession.
● Ascertained to be worthless and charged off within the taxable year. Timing
could be an issue.
● If incurred in a transaction between related parties under Sec. 36(B), non-
deductible.
● To be considered worthless, prove the ff:
1. Valid and subsisting debt;
2. Actually ascertained to be worthless and uncollectible during the
taxable year;
3. Charged off during the taxable year;
4. Arose from the trade or business of the taxpayer; and
5. It is indeed uncollectible even in the future. Goodrich Int’l Rubber Co.
● Where circumstances are such that recovery is remote and legal action would
likely be futile, this will suffice to write off the debt.
○ E.g., bankruptcy or insolvency of the debtor, especially if debt is
unsecured.
● Taxpayer not required to be an “incorrigible optimist” BIR Rul. No. DA-696-2006
● See Philex Mining Corp. – bad debt written off was disallowed because advances
were treated as investment rather than advances or loan.
○ Recovery of bad debt previously written-off and claimed as a deduction
will result in taxable income under the “recovery of deducted items -
tax benefit” principle.
See Philex Mining Corp [read in full]
● Agreement → 50/50
● Philex as contractor, if no profit yung mine no profit Philex
● It did not pertain to contract for services; it was rather treated as an
investment, investor than creditor.
Depreciation
Sec. 34(F), NIRC
(F) Depreciation. –
(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear (including reasonable allowance for
obsolescence) of property used in the trade or business. In the case of property held by
one person for life with remainder to another person, the deduction shall be computed
as if the life tenant were the absolute owner of the property and shall be allowed to the
life tenant. In the case of property held in trust, the allowable deduction shall be
apportioned between the income beneficiaries and the trustees in accordance with the
pertinent provisions of the instrument creating the trust, or in the absence of such
provisions, on the basis of the trust income allowable to each.
(2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in the
preceding paragraph shall include, but not limited to, an allowance computed in
accordance with rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, under any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate which
would have been used had the annual allowance been computed under the
method described in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) Any other method which may be prescribed by the Secretary of Finance upon
recommendation of the Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under
rules and regulations prescribed by the Secretary of Finance upon recommendation of
the Commissioner, the taxpayer and the Commissioner have entered into an
agreement in writing specifically dealing with the useful life and rate of depreciation of
any property, the rate so agreed upon shall be binding on both the taxpayer and the
national Government in the absence of facts and circumstances not taken into
consideration during the adoption of such agreement. The responsibility of establishing
the existence of such facts and circumstances shall rest with the party initiating the
modification. Any change in the agreed rate and useful life of the depreciable property
as specified in the agreement shall not be effective for taxable years prior to the taxable
year in which notice in writing by certified mail or registered mail is served by the party
initiating such change to the other party to the agreement:
Provided, however, that where the taxpayer has adopted such useful life and
depreciation rate for any depreciable and claimed the depreciation expenses as
deduction from his gross income, without any written objection on the part of the
Commissioner or his duly authorized representatives, the aforesaid useful life and
depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall
be considered binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An allowance for
depreciation in respect of all properties directly related to production of petroleum
Ordinary and Necessary Business Expense
initially placed in service in a taxable year shall be allowed under the straight-line or
declining-balance method of depreciation at the option of the service contractor.
However, if the service contractor initially elects the declining-balance method, it may
at any subsequent date, shift to the straight-line method.
The useful life of properties used in or related to production of petroleum shall be ten
(10) years of such shorter life as may be permitted by the Commissioner.
Properties not used directly in the production of petroleum shall be depreciated under
the straight-line method on the basis of an estimated useful life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an allowance for
depreciation in respect of all properties used in mining operations other than petroleum
operations, shall be computed as follows:
(a) At the normal rate of depreciation if the expected life is ten (10) years or less;
or
(b) Depreciated over any number of years between five (5) years and the expected
life if the latter is more than ten (10) years, and the depreciation thereon
allowed as deduction from taxable income: Provided, That the contractor
notifies the Commissioner at the beginning of the depreciation period which
depreciation rate allowed by this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or
Resident Foreign Corporations. - In the case of a nonresident alien individual engaged
in trade or business or resident foreign corporation, a reasonable allowance for the
deterioration of Property arising out of its use or employment or its non-use in the
business trade or profession shall be permitted only when such property is located in
the Philippines.
● Reasonable allowance for the exhaustion, wear and tear of property used in
trade or business, or exercise of profession.
● Methods: straight-line, declining-balance using a rate not exceeding 2x the rate
for straight-line, sum-of-the-years-digits, or any other method as prescribed by
the Sec. of Finance.
● Depreciation limited to acquisition cost, plus improvements/capital
expenditures introduced.
Depreciation
● Ex. If you’re renting an office and entered into a lease for 10 years, and you
incurred improvements, you have to spread out the depreciation
● When you claim a depreciation deduction through the years, once you’ve fully
depreciated the assets to the extent of acquisition cost, then that will end your
depreciation.
○ Your depreciation is limited to acquisition cost plus capital
expenditures.
● Ex. You bought a laptop for 50k. Useful life is 5 years. You can only claim 10k
under the straight line method.
○ So if it’s 50K, one you have claimed 10K ever year, after 5 years it’s
fully depreciated ; you have claimed the entire depreciation cost.
○ EXP : 3rd year laptop motherboard broken → cost another 25K. →
this will be an additional capital expenditure.
○ Ergo acquisition cost increased , therefore depreciation will be
extended.
○ Once you have fully claimed your acquisition cost and capital
expenditure , no more claiming of depreciation.
○ If fully depreciated → basis is 0. Suppose sell it to 10K to employee,
the 10K becomes a whole taxable gain.
○ Every time you sell a fully depreciated item/asset → the entire
amount is taxable gain in full!
BIR Circular
● See Rev. Regs. No. 12-2012:
○ Barring depreciation for more than 1 automobile per officer or
employee, or costing more than P2.4M.
○ No depreciation is allowed also for yachts, helicopters, airplanes
and/or aircrafts.
○ Also, no expenses allowed for repairs and maintenance of an
automobile costing more than P2.4M.
○ Furthermore, no input VAT allowed for the purchase and maintenance
of such automobiles.
Baniqued: On BIR Rev. Regs. No. 12- 2012
● To disallow depreciation deduction when an automobile purchased by a
company more than 2.4M → lacks basis is unreasonable!
● When the automobile is used solely for business operations, it does not make
sense that they are not deductible as depreciation
● Susceptible to legal challenge for lack of legal basis
Baniqued Story time :
● Benguet Corporation in their Dizon Copper Mining area in Zambales
○ How about the helicopter sir rode? That will be disallowed
depreciation?
Methods of Depreciation
A. Straight-Line Method
● The straight-line method is the simplest. Under this method, the cost of the asset
is allocated or spread out ratably, in equal amounts, over its useful life. Thus, an
asset costing P100 and with a useful life of 5 years will be depreciated at 20%
or P20 every year. [100 / 5 = 20 ]
Ordinary and Necessary Business Expense
● Most common the others
B. Declining-Balance Method
● The declining-balance method allocates a bigger depreciation allowance to the
earlier years, with the amount of depreciation declining or becoming smaller
towards the later years.
● Thus, the same asset mentioned above with a cost of P100 and useful life of 5
years will be
○ depreciated at P40 in the first year [twice 20%, or 40% x P100],
○ P24 in the second year [40% x (P100 - P40)],
○ P14.40 in the third year [40% x (P100 – 40 - 24),
○ P8.64 in the fourth year [40% x (P100 – 40 – 24 – 14.40),
○ P5.184 in the fifth year [40% x (P100 – 40 – 24 – 14.40 – 8.64),
○ P3.1104 in the sixth year [40% x P100 – 40 – 24 – 14.40 – 8.64 –
5.184), and so on.
○ Note that the percentage used is constant and it is applied to the cost
remaining after subtracting the depreciation allowances claimed in the
prior years.
● Under the declining-balance method, the law permits a depreciation rate of up
to twice the rate under the straight-line method.
○ Thus, in the example above involving an asset with a useful life of 5
years and a cost of P100, the depreciation amounts to P20/year or
20%.
D. Obsolescence
○ Under the declining-balance method, as illustrated above, the
depreciation rate allowed shall not be more twice 20%, or 40%.
○ However, if the asset has a useful life of 10 years, instead of only 5, the
depreciation allowable under the straight-line-method is P10/year or
10%.
○ Thus, if the declining-balance-method were adopted for the said asset
with a useful life of 10 years and cost of P100, the law permits the
taxpayer to use a depreciation rate not exceeding twice 10%, or 20%
per annum.
● Percentage is constant
● 40% applied to the remaining cost after subtracting the depreciation
allowance in the years
● The law permits of depreciation rate up to double rate of straight-line method
C. Sum-of-the-Years-Digits Method
● Under the sum-of-the-years-digits method, the useful life of the asset is first
determined and then all the digits that make up the number of years of useful
life of the asset are summed up.
● Thus, if an asset has a useful life of 10 years :
○ the sum of the digits will be 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 =
55.
○ So, the asset will be depreciated at:
■ 10/55 of its cost in the first year,
■ 9/55 in the second year,
■ 8/55 in the third year, and so on until 1/55 in the 10th year.
→ In this way, the sum-of-the-years- digits method resembles the
declining balance method.
● Operates by adding all the digits that make up the number of years of useful
life
Baniqued on Methods of Depreciation
Q: What will make a taxpayer choose other than straight-line? Is there any
overwhelming reason why a taxpayer won’t use a straight-line, and some of the years
declining-balance or sum-of-the-years?
A: If operating cycle taking to account revenue in the early years , might be to your
advantage to use declining balance → gives u bigger deductions
Note : tax payer is given the option to choose which depreciation method to use. Once
you adopt one, u should have reasonable reason. Otherwise BIR might compel you to
use another one.
● If the whole or any portion of a physical property is clearly shown to be affected
by economic conditions that result in its being abandoned prior to the end of its
normal useful life and depreciation deductions alone are insufficient to return
the cost or other basis at the end of its economic term of usefulness, the owner
of such property may claim a reasonable allowance for obsolescence in addition
to depreciation.
○ However, no deduction for obsolescence shall be allowed merely
because the taxpayer thinks that the property may become obsolete at
some later time. Sec. 110, Rev. Regs. No. 2
● The allowance for obsolescence is limited to such portion of the property that
has clearly sustained obsolescence, rather than on the entire property
○ Unless all portions thereof are affected by the conditions that justified
the allowance for obsolescence in the first place.
● Suppose Donny produces 1M units a year, then there’s a new equipment that
can produce 5M.
○ If Donny is able to show that the machine is obsolete (out of date)
and no longer sufficient, then Donny can claim Obsolescence.
Ordinary and Necessary Business Expense
Depletion
Sec. 34(G), NIRC
(G) Depletion of Oil and Gas Wells and Mines. –
(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance
for depletion or amortization computed in accordance with the cost-depletion
method shall be granted under rules and regulations to be prescribed by the
Secretary of finance, upon recommendation of the Commissioner. Provided,
That when the allowance for depletion shall equal the capital invested no
further allowance shall be granted: Provided, further, That after production in
commercial quantities has commenced, certain intangible exploration and
development drilling costs: (a) shall be deductible in the year incurred if such
expenditures are incurred for non-producing wells and/or mines, or (b) shall
be deductible in full in the year paid or incurred or at the election of the
taxpayer, may be capitalized and amortized if such expenditures incurred are
for producing wells and/or mines in the same contract area.
'Intangible costs in petroleum operations' refers to any cost incurred in petroleum
operations which in itself has no salvage value and which is incidental to and necessary
for the drilling of wells and preparation of wells for the production of petroleum:
Provided, That said costs shall not pertain to the acquisition or improvement of property
of a character subject to the allowance for depreciation except that the allowances for
depreciation on such property shall be deductible under this Subsection.
Any intangible exploration, drilling and development expenses allowed as a deduction
Depletion (Oil & Gas Wells, Mines)
in computing taxable income during the year shall not be taken into consideration in
computing the adjusted cost basis for the purpose of computing allowable cost
depletion.
(2) Election to Deduct Exploration and Development Expenditures. - In computing
taxable income from mining operations, the taxpayer may at his option,
deduct exploration and development expenditures accumulated as cost or
adjusted basis for cost depletion as of date of prospecting, as well as
exploration and development expenditures paid or incurred during the taxable
year: Provided, That the amount deductible for exploration and development
expenditures shall not exceed twenty-five percent (25%) of the net income
from mining operations computed without the benefit of any tax incentives
under existing laws. The actual exploration and development expenditures
minus twenty-five percent (25%) of the net income from mining shall be
carried forward to the succeeding years until fully deducted.
The election by the taxpayer to deduct the exploration and development expenditures
is irrevocable and shall be binding in succeeding taxable years.
'Net income from mining operations', as used in this Subsection, shall mean gross
income from operations less 'allowable deductions' which are necessary or related to
mining operations. 'Allowable deductions' shall include mining, milling and marketing
expenses, and depreciation of properties directly used in the mining operations. This
paragraph shall not apply to expenditures for the acquisition or improvement of
property of a character which is subject to the allowance for depreciation.
In no case shall this paragraph apply with respect to amounts paid or incurred for the
exploration and development of oil and gas.
The term 'exploration expenditures' means expenditures paid or incurred for the
purpose of ascertaining the existence, location, extent or quality of any deposit of ore
or other mineral, and paid or incurred before the beginning of the development stage
of the mine or deposit.
The term 'development expenditures' means expenditures paid or incurred during the
development stage of the mine or other natural deposits. The development stage of a
mine or other natural deposit shall begin at the time when deposits of ore or other
minerals are shown to exist in sufficient commercial quantity and quality and shall end
upon commencement of actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien
individual or Foreign Corporation. - In the case of a nonresident alien individual
engaged in trade or business in the Philippines or a resident foreign
corporation, allowance for depletion of oil and gas wells or mines under
paragraph (1) of this Subsection shall be authorized only in respect to oil and
gas wells or mines located within the Philippines.
● Allowance for the exhaustion of the capital value of the deposits or reserve used
up by production.
● Once the allowance for depletion has equaled the capital invested, no further
allowance to be granted.
● After commercial production has commenced, certain intangible exploration
and development drilling costs may be deducted in the year incurred (for non-
producing wells/mines), or, at the option of the taxpayer, deducted or
capitalized/amortized (for producing wells/mines).
● However, above intangible exploration/development costs that are deducted
during the year are no longer included in the computation of the adjusted cost
basis for purposes of computing allowable cost depletion.
● The term “intangible costs in petroleum operations” refers to “any cost incurred
in petroleum operations which in itself has no salvage value and which is
incidental to and necessary for the drilling of wells and preparation of wells for
the production of petroleum.”
● It does not, however, include costs for the acquisition or improvement of property
of a character subject to the allowance for depreciation, which depreciation
allowances on such property shall be deductible under Section 34(G).
● In computing taxable income from mining operations, the taxpayer may elect to
deduct exploration and development expenditures accumulated as cost or
Ordinary and Necessary Business Expense
adjusted basis for cost depletion as of date of prospecting, and exploration and
development expenditures paid or incurred during the taxable year. Once such
election to deduct exploration and development expenditures is made, it is
irrevocable in succeeding taxable years.
● The total amount deductible for exploration and development expenditures shall
not exceed 25% of the net income from mining operations computed without
the benefit of any tax incentives under existing laws. The excess of exploration
and development expenditures over 25% of the net income from mining
operations shall be carried forward to the succeeding taxable years until fully
deducted.
● Net income or taxable income from mining operations means gross income from
operations less “allowable deductions” which are necessary or related to mining
operations.
● The term “allowable deductions”, in turn, includes “mining, milling and
marketing expenses, and depreciation of properties directly used in the mining
operations” but excludes “expenditures for the acquisition or improvement of
property of a character which is subject to the allowance for depreciation.”
● The term “exploration expenditures” means “expenditures paid or incurred for
the purpose of ascertaining the existence, location, extent, or quality of any
deposit of ore or other mineral, and paid or incurred before the beginning of the
development stage of the mine or deposit.
● The term “development expenditures”, on the other hand, means “expenditures
paid or incurred during the development stage of the mine or other natural
deposits. The development stage of a mine or other natural deposit begins at the
time when deposits of ore or other minerals are shown to exist in sufficient
commercial quantity and quality and ends upon commencement of actual
commercial extraction.”
Charitable and Other Contributions
Sec. 34 (H), NIRC
SEC. 34. Deductions from Gross Income. - 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:
(H) Charitable and Other Contributions. –
(1) In General. - Contributions or gifts actually paid or made within the taxable year to,
or for the use of the Government of the Philippines or any of its agencies or any political
subdivision thereof exclusively for public purposes, or to accredited domestic
corporation or associations organized and operated exclusively for religious, charitable,
scientific, youth and sports development, cultural or educational purposes or for the
rehabilitation of veterans, or to social welfare institutions, or to non-government
organizations, in accordance with rules and regulations promulgated by the Secretary
of finance, upon recommendation of the Commissioner, no part of the net [48] income
of which inures to the benefit of any private stockholder or individual in an amount not
in excess of ten percent (10%) in the case of an individual, and five percent (%) in the
case of a corporation, of the taxpayer's taxable income derived from trade, business or
profession as computed without the benefit of this and the following subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding
subparagraph, donations to the following institutions or entities shall be deductible in
full:
(a) Donations to the Government. - Donations to the Government of the
Philippines or to any of its agencies or political subdivisions, including fully-
owned government corporations, exclusively to finance, to provide for, or to be
used in undertaking priority activities in education, health, youth and sports
development, human settlements, science and culture, and in economic
development according to a National Priority Plan determined by the National
Economic and Development Authority (NEDA), In consultation with
appropriate government agencies, including its regional development
councils and private philanthropic persons and institutions: Provided, That any
donation which is made to the Government or to any of its agencies or political
subdivisions not in accordance with the said annual priority plan shall be
subject to the limitations prescribed in paragraph (1) of this Subsection;
(b) Donations to Certain Foreign Institutions or International Organizations. -
donations to foreign institutions or international organizations which are fully
deductible in pursuance of or in compliance with agreements, treaties, or
commitments entered into by the Government of the Philippines and the
foreign institutions or international organizations or in pursuance of special
laws;
(c) Donations to Accredited Nongovernment Organizations. -The term
'nongovernment organization' means a non-profit domestic corporation:
(1) Organized and operated exclusively for scientific, research,
educational, character-building and youth and sports development,
health, social welfare, cultural or charitable purposes, or a
combination thereof, no part of the net [49] income of which inures
to the benefit of any private individual;
(2) Which, not later than the 15th day of the third month after the close
of the accredited non government organizations taxable year in
which contributions are received, makes utilization directly for the
active conduct of the activities constituting the purpose or function
for which it is organized and operated, unless an extended period is
granted by the Secretary of Finance in accordance with the rules and
regulations to be promulgated, upon recommendation of the
Commissioner;
(3) The level of administrative expense of which shall, on an annual
basis, conform with the rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner,
but in no case to exceed thirty percent (30%) of the total expenses;
and
Ordinary and Necessary Business Expense
(4) The assets of which, in the event of dissolution, would be distributed
to another non-profit domestic corporation organized for similar
purpose or purposes, or to the state for public purpose, or would be
distributed by a court to another organization to be used in such
manner as in the judgment of said court shall best accomplish the
general purpose for which the dissolved organization was organized.
Subject to such terms and conditions as may be prescribed by the Secretary of Finance,
the term 'utilization' means:
(i) Any amount in cash or in kind (including administrative expenses) paid or
utilized to accomplish one or more purposes for which the accredited non
government organization was created or organized.
(ii) Any amount paid to acquire an asset used (or held for use) directly in
carrying out one or more purposes for which the accredited non government
organization was created or organized.
An amount set aside for a specific project which comes within one or more purposes of
the accredited non government organization may be treated as a utilization, but only if
at the time such amount is set aside, the accredited non government organization has
established to the satisfaction of the Commissioner that the amount will be paid for the
specific project within a period to be prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner,
but not to exceed five (5) years, and the project is one which can be better accomplished
by setting aside such amount than by immediate payment of funds.
(3) Valuation. - The amount of any charitable contribution of property other than money
shall be based on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if
verified under the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
Charitable Contributions:
● Filling in for Gov’t in discharging the latter’s obligations to the citizenry.
● Deductible if:
(1) Made to a ”qualified recipient”,
(2) Constitutes a “contribution” rather than payment for goods or services,
(3) Satisfies a “payment” requirement,
(4) Made in cash or property,
(5) Does not exceed specified percentage (10% of taxable income for
individuals, 5% for corporations, computed w/o the benefit of the
deduction for charitable contribution), unless qualified for full
deductibility pursuant to Sec. 34(H)(2).
Qualifications for Deduction of Charitable Contributions
1. Qualified recipient
a. Law specifies who these are, not all recipients of a charitable
contribution will qualify for deductibility on the part of the donor
2. Contribution rather than payment for goods or services
3. Satisfies a payment requirement
4. Charitable contribution made in cash or property
a. Not in services rendered
5. Cannot exceed, in the case of indiv, 10% of the indiv’s taxable income. In the
case of corp, 5%
a. In both cases, computed without the benefit of the deduction for
charitable contribution.
b. Recall how to arrive at taxable income. When you claim necessary
and business expenses, you don’t include charitable contributions as
per Sec. 34(H)(2),
c. Exclude charitable contribution, apply 10% (if indiv) or 5% (corp).
These ceilings are the GENERAL RULE.
i. Under certain circumstances can be deducted in full, or
100%
Qualifications for Deductibility
A. Qualified Recipient
1. Gov’t, its agencies or political subdivisions
2. Accredited domestic corps established exclusively for religious, charitable,
scientific, youth and sports development, cultural or educational purposes, or
for rehab of veterans
3. Social welfare institutions
4. NGOs
Donation to political party → not deductibility ; not taxable income on the part of the
politician or political party, but any unutilized is taxable income
B. Contribution (Donative Intent)
● Contribution must be due to detached or disinterested generosity. Not payment
for goods or services. E.g., bazaars, concerts, sports tournaments
● How do you classify donation of land to an LGU for use as a road, park, or other
public facility where the donor is a real estate developer seeking a rezoning of
the neighborhood or approval of its subdivision project therein?
○ The reason for the donation is for the benefit of the real estate
developer.
○ No it is not deductible, if you can prove that there is no donative intent
and this is merely to benefit the real estate developer.
Ordinary and Necessary Business Expense
● Ex. You have a charitable institution that invites a concert queen. When you
sell tickets, you can’t claim the purchase price for the ticket as a charitable
contribution. Because that’s not from detached or disinterested generosity but
a payment.
● Ex. The parish held a 2-month long bazaar. When you purchase goods there.
Does not count.
● Ex. Charitable institution invites Federrer for an exhibition tournament. Tickets
cost 10k per head. Does not count.
C. Requirement of Payment
● Wording of Sec. 34(H) speaks of contributions or gifts “actually paid or made”
○ Thus, a mere pledge does not count.
○ Neither does a postdated check.
○ But a credit card charge is good ; Ex. Donny donated thru credit card
→ this is under the wording of “payment”
○ Ex. Carita Manila 1M , but Donny does not deliver ; not “payment”
○ Ex. Donny issued a post-dated check to PATAFA , dated Jan 1 2023,
obviously Donny cannot claim that ; “not payment.”
● Payment is understood to refer only to cash or property.
○ Volunteer or free services do not count
○ E.g., blood donation to Red Cross, broadcast time, advertising space,
free accommodation, etc.
○ Ex. If ABSCBN allots a 10-min slot for LGU, the value of that broadcast
time does not count.
○ Ex. If a hotel allows a free accommodation from refugees, this does
not count.
D. Form of Donation
● If donation is in the form of property, the amount of charitable contribution for
deduction purposes is based on the acquisition cost of the property.
● If donation is in cash, the amount thereof is the basis of the deduction for
charitable contribution.
● How do you maximize tax benefit from the donation of property if deduction is
limited to the acquisition cost of the property?
Donny bought a parcel of land before 1M, with a fair market value of 25M.
● If Donny donates it to charitable institution, then deductible for only 1M
because under the law, the deduction is limited to acquisition cost of the
property.
Q : How to circumvent?
A : Donny will now sell it first to the third party Juan Dela Cruz at 25M. Even though
Donny pays 6% CGT, Donny will now donate it to the charitable institution.
● Pero Donny, since he sold it, he can claim deduction, but limited to 1M, not
the fair market value of 25M.
● So ang puwede gawin is ibenta muna, tapos donate sa charity para makuha
yung buong value.
Deductions in Full (100% deduction)
A. Full deductibility allowed for donations to the following:
1. Gov’t, its agencies or political subdivisions, including fully-owned gov’t corps,
a. for use in priority activities in education, health, youth and sports
development, human settlements, science and culture and economic
development according to NEDA-approved National Priority Plan;
2. Certain foreign institutions or international organizations pursuant to
agreements, treaties, etc.
3. Accredited NGOs organized as non-profit domestic corporations for use
exclusively for scientific, research, educational, character-building and youth and
sports development, health, social welfare, cultural or charitable purposes.
● Take note of the word “accredited.”
○ The NGO should be accredited by PCNC - Philippine Council for NGO
Certification
B. Additional Conditions for Full Deductibility of Donations to NGOs
1. Non- Inurement Clause
a. No part of net income shall inure to the benefit of any private
individual;
2. “Utilize” the contributions no later than the 15th day of the 3rd month from close
of taxable year;
3. Annual administrative expenses must not exceed 30% of total expenses;
a. 70% at least of the charitable institution should be used for charitable
purposes not administrative expenses
4. In case of dissolution, assets shall be distributed to another non-profit domestic
corporation organized for similar purposes, or to the State, or another
organization named by a court bearing in mind the general purpose for which
the dissolved entity was organized; and
5. NGO is duly accredited by the PCNC. Track record of 3 years required for PCNC
accreditation.
Meaning of “Utilization”
● Means any amount in cash or in kind (including administrative expenses) paid or
utilized to accomplish one or more of the purposes of the NGO or amount paid
to acquire an asset used directly in carrying out one or more of its purposes
● As long as the NGO makes initial disbursements of any amount forming part of
the donation, it is deemed to have made utilization of the donation.
Ordinary and Necessary Business Expense
○ The term “make utilization” does NOT require that the entire amount
donated be fully disbursed by the donee institution not later than the
15th day of the 3rd month after the close of its taxable year in which
charitable contributions are received.
● Setting aside an amount for a specific project which comes within one or more
of the purposes of the NGO may be considered as “utilization”
○ Provided, at the time such amount is set aside, the NGO has
established to the satisfaction of the Commissioner of Internal
Revenue that:
(a) the project is one which can be better accomplished by
setting aside such amount than by immediate payment of
funds, and
(b) the amount will be disbursed for that specific project within a
period prescribed in the rules and regulations but not to
exceed 5 years. Mariposa Properties, Inc. v. Commissioner of
Internal Revenue, CTA Case No. 6402, Feb. 13, 2007
Violations of Non-Inurement Clause:
No part of the income would inure to the benefit of any individual
● Payment of salaries or honorarium to trustees
● Exorbitant salaries to employees
● Welfare aid or financial assistance to employees
● Donation to any person or entity (except to those organized for similar purposes)
● Purchase of goods or services for amounts in excess of FMV from entities that
pose conflict of interest to trustees or officers
● Distribution of assets to trustees, officers, or members in case of dissolution.
RMC No. 51-2014
Research and Development
Sec. 34 (I), NIRC
(I) Research and Development.-
(1) In General. - A taxpayer may treat research or development expenditures which are
paid or incurred by him during the taxable year in connection with his trade, business
or profession as ordinary and necessary expenses which are not chargeable to capital
account. The expenditures so treated shall be allowed as deduction during the taxable
year when paid or incurred.
(2) Amortization of Certain Research and Development Expenditures. - At the election
of the taxpayer and in accordance with the rules and regulations to be prescribed by
the Secretary of Finance, upon recommendation of the Commissioner, the following
research and development expenditures may be treated as deferred expenses:
(a) Paid or incurred by the taxpayer in connection with his trade, business or
profession;
(b) Not treated as expenses under paragraph (1) hereof; and
(c) Chargeable to capital account but not chargeable to property of a character
which is subject to depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed as deduction
ratably distributed over a period of not less than sixty (60) months as may be elected
by the taxpayer (beginning with the month in which the taxpayer first realizes benefits
from such expenditures).
The election provided by paragraph (2) hereof may be made for any taxable year
beginning after the effectivity of this Code, but only if made not later than the time
prescribed by law for filing the return for such taxable year. The method so elected, and
the period selected by the taxpayer, shall be adhered to in computing taxable income
for the taxable year for which the election is made and for all subsequent taxable years
unless with the approval of the Commissioner, a change to a different method is
authorized with respect to a part or all of such expenditures. The election shall not apply
to any expenditure paid or incurred during any taxable year for which the taxpayer
makes the election.
(3) Limitations on Deduction. - This Subsection shall not apply to:
(a) Any expenditure for the acquisition or improvement of land, or for the
improvement of property to be used in connection with research and
development of a character which is subject to depreciation and depletion;
and
(b) Any expenditure paid or incurred for the purpose of ascertaining the existence,
location, extent, or quality of any deposit of ore or other mineral, including oil
or gas.
● This is another exception to the general rule that capital expenditures are not
deductible from gross income but need to be amortized.
● Sec. 34(I) allows a taxpayer to deduct from gross income research and
development expenditures paid or incurred by him in connection with his trade,
business or profession.
● The option given to the taxpayer to claim deduction for research and
development expenditures does not extend, however, to:
(a) an expenditure for the acquisition or improvement of land, or for the
improvement of property to be used in connection with research and
development of a character which is subject to depreciation and
depletion, and
(b) an expenditure paid or incurred for the purpose of ascertaining the
existence, location, extent, or quality of any deposit of ore or other
mineral, including oil or gas.
Contributions to Employees’ Pension Trusts
Sec. 34 (J), NIRC
Ordinary and Necessary Business Expense
1) Digitized Social Security System ID
(J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide
for the payment of reasonable pensions to his employees shall be allowed as a 2) Government Service Insurance System ID
deduction (in addition to the contributions to such trust during the taxable year to cover 3) Professional Regulation Commission ID
the pension liability accruing during the year, allowed as a deduction under Subsection 4) Integrated Bar of the Philippines ID
(A)(1) of this Section) a reasonable amount transferred or paid into such trust during 5) Unified Multi-Purpose ID (UMID)
the taxable year in excess of such contributions, but only if such amount 6) Driver's License
(1) has not heretofore been allowed as a deduction, and Rev. Regs No. 07-2010, as amended by Rev. Regs. No. 08-2010 and Rev. Regs. No. 11-
(2) is apportioned in equal parts over a period of 10 consecutive years beginning
15
with the year in which the transfer or payment is made.

Sales Discount for PWD

● Reasonable amounts paid to a pension trust to cover pension benefits of retiring ● Also deductible from gross income under virtually the same rules as the senior
employees. citizen discount.
● However, contributions to cover pension liability applicable to prior years (“past
service liability contributions”) must be amortized over a 10-year period. Persons with Disability (PWD) Disability

are those who have long-term physical, shall mean a physical or mental
Past service liability contributions mental, intellectual or sensory impairment that substantially limits one
● Cannot be deducted outright, must be amortized in a 10 year period impairments which in interaction with or more psychological, physiological or
● So you must distinguish:
various barriers may hinder their full and anatomical function of an individual or
○ Current contribututions - deductible in the current year
effective participation in society on an activities of such individual
○ Contributions from past service liability that have accrued - must be
amortized in 10 years, not deductible in lump sum equal basis with others.
Rev. Regs. No. 1-09, as amended by Rev. Regs. No. 05-17 and Rev. Regs. No. 9-19
Senior Citizen’s Discount
Premium Payments on Health and/or Hospitalization Insurance
Sec. 34(M), NIRC

[As amended by Sec. 11 of the TRAIN. Subsection (M) (Premium Payments on Health
and/or Hospitalization Insurance of an Individual Taxpayer) was repealed/removed.]

● The amount of sales to be reported for tax purposes is the undiscounted selling
Substantiation of Deductions
price (P100) and not the amount of sales net of the discount. Rev. Regs. No. 07-
10, as amended Sec. 34(A)(1)(b), NIRC
● The business establishment must keep a separate and accurate record of sales,
which shall include the name of the senior citizen, identification document, gross SEC. 34. Deductions from Gross Income. [45 - Except for taxpayers earning
sales/receipts, sales discount granted, dates of transactions, and invoice compensation income arising from personal services rendered under an employer-
employee relationship where no deductions shall be allowed under this Section, in
numbers for every sale transaction to senior citizen.” Ibid, as amended by Rev.
computing taxable income subject to income tax under Sections 24(A); 25(A); 26;
Regs. No. 11-15
27(A), (B), and (C); and 28(A)(1), there shall be allowed the following deductions from
gross income:
Acceptable IDs
● Senior Citizen’s ID Card issued by the Office of Senior Citizens Affairs (OSCA) in (A) Expenses. -
the city or municipality where the elderly resides; Philippine passport of the
senior citizen concerned; Government-issued ID which reflects on its face the (1) Ordinary and Necessary Trade, Business or Professional Expenses.-
name, picture, date of birth and nationality of the senior citizen which includes
(b) Substantiation Requirements. - No deduction from gross income shall be allowed
any of the following:
Ordinary and Necessary Business Expense
under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient
evidence, such as official receipts or other adequate records: (i) the amount of the
expense being deducted, and (ii) the direct connection or relation of the expense being
deducted to the development, management, operation and/or conduct of the trade,
business or profession of the taxpayer.

Optional Standard Deduction

Sec. 34(L), NIRC

(L) Optional Standard Deduction (OSD). - In lieu of the deductions allowed under the
preceding Subsections, an individual subject to tax under Section 24, other than a
nonresident alien, may elect a standard deduction in an amount not exceeding forty
percent (40%) of his gross sales or gross receipts, as the case maybe. In the case of a
corporation subject to tax under Sections 27(A) and 28 (A)(1), it may elect a standard
deduction in an amount not exceeding forty percent (40%) of its gross income as
defined in Section 32 of this Code. Unless the taxpayer signifies in his return his
intention to elect the optional standard deduction, he shall be considered as having
availed himself of the deductions allowed in the preceding Subsections. Such election
when made in the return shall be irrevocable for the taxable year for which the return
is made: Provided, That an individual who is entitled to and claimed for the optional
standard deduction shall not be required to submit with his tax return such financial
statements otherwise required under this Code: Provided, further, That a general
professional partnership and the partners comprising such partnership may avail of the
optional standard deduction only once, either by the general professional partnership
or the partners comprising the partnership: [50] Provided, finally, That except when the
Commissioner otherwise permits, the said individual shall keep such records pertaining
to his gross sales or gross receipts, or the said corporation shall keep such records
pertaining to his gross income as defined in Section 32 of this Code during the taxable
year, as may be required by the rules and regulations promulgated by the Secretary of
Finance, upon, recommendation of the Commissioner.

Notwithstanding the provision of the preceding Subsections, The Secretary of Finance,

upon recommendation of the Commissioner, after a public hearing shall have been held
for this purpose, may prescribe by rules and regulations, limitations or ceilings for any
of the itemized deductions under Subsections (A) to (J) of this Section: Provided, That
for purposes of determining such ceilings or limitations, the Secretary of Finance shall
consider the following factors: (1) adequacy of the prescribed limits on the actual
expenditure requirements of each particular industry; and (2)effects of inflation on
expenditure levels: Provided, further, That no ceilings shall further be imposed on items
of expense already subject to ceilings under present law.
Reallocation of Income and Deductions
Reallocation of Income and Deductions
● Otherwise referred to Transfer Pricing
BIR: TRANSFER PRICING REGULATIONS
Sec 50 NIRC
SEC. 50. Allocation of Income and Deductions. - In the case of two or more
organizations, trades or businesses (whether or not incorporated and whether
or not organized in the Philippines) owned or controlled directly or indirectly by
the same interests, the Commissioner is authorized to distribute, apportion or
allocate gross income or deductions between or among such organization,
trade or business, if he determined that such distribution, apportionment or
allocation is necessary in order to prevent evasion of taxes or clearly to reflect
the income of any such organization, trade or business.
● Section 50 empowers the Commissioner to inquire into related party
transactions and determine whether or not the parties are taking
advantage of their relationship to shift income or deductions between
one or more members of the controlled group, or otherwise avoid, evade
or unduly reduce taxes that they would otherwise pay if they had dealt
with one another in an arm’s-length transaction.
● Sec. 50, however, does not empower the CIR to impute “theoretical
interest” income to a related taxpayer absent proof of any actual or, at
the very least, probable receipt or realization by the latter of any such
interest income.
● See Filinvest, where the latter obtained interest-bearing loans from
banks while, in turn, extending interest-free advances to its subsidiaries
and affiliates to help fund the latter’s operational and capital
requirements.
● Legal basis for BIR in issuing Transfer Pricing
● Very powerful method to inquire into related party transactions
whether or not related parties are using their relationship in order to
evade tax or reduce tax that they are otherwise supposed to pay
● Tool used by businessmen to pass the business expenses to other
companies
● At the end of the day what matters is the NET BENEFIT of the group
(one pocket to another)
● Commissioner is authorized to scrutinized in order to prevent abuse
by related parties in order to reduce or
● This does not mean that the Commissioner may impute income when
there was none realized
● See also TCCEC, where TCCEC imported concentrates from its parent
company, TCC, at $1.634/kilo and then turned around and sold the
same concentrates to San Miguel Brewery at $7.70/kilo, paying the then
advance sales tax [now VAT] based on its import price of $1.634.
○ BIR assessed TCCEC deficiency advance sales tax based on the
$7.70, less an allowance of $1.00 for expenses forming part of
the landed cost and for profit of TCCEC, or net price of
$6.70/kilo.
○ TCCEC paid the assessment under protest and filed a refund
claim later. SC denied the refund claim due to the great disparity
between the import price and the selling price to an
uncontrolled taxpayer.
○ In short, transfer price between TCCC and TCCEC was not at
arm’s length. While the TCCEC case involved business or
percentage tax, the principle of transfer pricing involved therein
applies to income tax as well.
● Examples of transfer pricing in cross border transactions involving tax
haven jurisdictions.
○ Suppose you are a manufacturer with a supplier in Ireland. that
the tax in Ireland is 10% on net income, while the tax in the Ph
is 25%. If you are members of the same controlled group, you
will be inclined to book a bigger profit in ireland, because that
profit will be booked only by 10%.
○ What will happen: over state/over price ng Irish supplier yung
imports supplies at the point of shipment, para mas malaki
yung kikitain ng profit sa ireland. Si PH corporation magiging
kawawa kasi magiging overpriced mataas yung cost of sales
niya, and magiging lower rin yung gross income here in the
Philippines. So maliit na lang yung net income na ma-tax sa Ph.
○ Suppose the tax of the affiliate company in the US is 40% while
the tax in Ph is 25%.
Reallocation of Income and Deductions
○ What will happen: i-underprice ng US supplier yung raw have partially performed their obligations to an equal extent (recognized
materials para mas maliit yung cost of goods sold sa Ph, in and unrecognized); and
effect mas malaki yung profit dito sa Pilipinas. (j) settlement of liabilities on behalf of the entity or by the entity on behalf
of that related party. Rev. Regs No. 19-20, July 8, 2020
● Sec 50 concerns transactions between related parties; related parties
Meaning of Related Parties under Sections 3 and 4 of Rev. Regs. No. 19-20
are always a suspect to “sham transactions”
● In determining whether a person or entity is a related party, the following
● There is no imputed income here because there is no realized actual
rules shall be considered:
or indirect realization of income
a. A person or a close member of that person's family is related to
● Sec 50 is the statutory basis of the issuance of the BIR of transfer
a reporting entity if that person:
pricing regulations
i. has control or joint control of the reporting entity;
● NOTE: This is between related parties
ii. has significant influence over the reporting entity; or
● They are always a suspect that they will enter into sham transactions
iii. is a member of the key management personnel of the
in order to generate expenses that would generate income
reporting entity or of a parent of the reporting entity.
● BIR will not allow related parties to shift income in order to evade or
● The list of family members in Section 3(2) hereof is not exhaustive and
reduce taxes
does not preclude other family members from being considered as close
○ UNLESS the means used are not illegal or unlawful
members of the family of a person.
○ Ex. tax payable may be reduced by doing non-recognition
● Consequently, other family members, including parents or grandparents,
transactions or tax-free exchanges; sale of real property
could qualify as close members of the family depending on the
classified as capital asset is sold into an ordinary asset (tax is
assessment of specific facts and circumstances.
no longer 6% CGT on gross selling price but income tax rate
b. An entity is related to a reporting entity if any of the following
based on the gain realized on the sale)
conditions applies:
● Transfer-Pricing applies to sale of goods and commodities, services,
i. The entity and the reporting entity are members of the
and licensing of intangibles
same group (which means that each parent, subsidiary
and fellow subsidiary is related to the others).
Examples of Related Party Transactions (not exclusive) ii. One entity is an associate or joint venture of the other
(a) purchases or sales of goods (finished or unfinished) entity (or an associate or joint venture of a member of
(b) purchases or sales of property and other assets; a group of which the other entity is a member).
(c) rendering or receiving of services; iii. Both entities are joint ventures of the same third party.
(d) Leases; iv. One entity is a joint venture of a third entity and the
(e) transfers of research and development; other entity is an associate of the third entity.
(f) transfers under license agreements; v. The entity is a post-employment benefit plan for the
(g) transfers under finance arrangements (including loans and equity benefit of employees of either the reporting entity or an
contributions in cash or in kind); entity related to the reporting entity. If the reporting
(h) provision of guarantees or collateral; entity is itself such a plan, the sponsoring employers
(i) commitments to do something if a particular event occurs or does not are also related to the reporting entity.
occur in the future, including executory contracts, i.e., contracts under vi. The entity is controlled or jointly controlled by a person
which neither party has performed any of its obligations or both parties identified in (a).
Reallocation of Income and Deductions
vii. A person identified in (a) (i) has significant influence
over the entity or is a member of the key management
personnel of the entity (or of a parent of the entity).
viii. The entity, or any member of a group of which it is a
part, provides key management personnel services to
the reporting entity or to the parent of the reporting
entity.
● In all cases, the substance of relationships between entities shall be
taken into account and not merely the legal form.
Re: Corporations
● parent subsidiary or members of the same controlled group
○ As long as there is common ownership, substantial cross
ownership
Re: Individuals
● tax payer’s children, spouse, dependents, grandparents etc.
● Those listed mus file a report of disclosure form to the BIR
Requirement to File BIR Form No. 1709
● Intended to curb abuse by taxpayers with intent to evade taxes by
concluding transactions between them at unreasonable prices, thus
eroding the tax base. Significant risks arise when RPTs are not
conducted at arm's length and are used as a conduit to channel funds
out of the company into another related party, such as the risk of
material misstatement in the financial statements as a result of
inappropriate accounting, and non-identification or non-disclosure.”
● “Therefore, in order to ensure that proper disclosures of related party
transactions are made and that these transactions have been conducted
at arm's length so as to protect the tax base, there should be an effective
implementation of Philippine Accounting Standards (PAS) 24, Related
Party Disclosures, for tax purposes.
○ Under this PAS, an entity's financial statements shall contain
the disclosures necessary to draw attention to the possibility
that its financial position and profit or loss may have been
affected by the existence of related parties and by transactions
and outstanding balances, including commitments, with such
parties.”
● Hence, the requirement to submit BIR Form No. 1709 and its supporting
documents following the guidelines prescribed by the related revenue
issuances for the submission of the required attachments to the Annual
Income Tax Returns.
● Revenue examiners are enjoined to conduct thorough examination of
related party transactions to ensure that revenues are not understated
and expenses are not overstated in the financial statements as a result
of these transactions.
Taxpayers Required to File BIR Form No. 1709
● The following are required to file and submit the RPT Form, together with
the Annual Income Tax Return (AITR):
a. Large Taxpayers;
b. Taxpayers enjoying tax incentives,
i. i.e., Board of Investments (BOI)-registered and
economic zone enterprises, those enjoying Income Tax
Holiday (ITH) or subject to preferential income tax rate;
c. Taxpayers reporting net operating losses for the current taxable
year and the immediately preceding 2 consecutive taxable
years; and
d. A related party, as defined under Section 3 of Revenue
Regulations (RR) No. 19-2020, which has transactions with (a),
(b) or (c). For this purpose, key management personnel (KMP),
as defined under Section 3 (7) of RR No. 19- 2020, shall
no longer be required:
i. to file and submit the RPT Form,
ii. to report any transaction between KMP and the
reporting entity/parent company of the latter in the
RPT Form. Rev. Regs. No. 34-20, Dec. 18, 2020
● If not falling under any of the foregoing, the taxpayer must disclose in
the Notes to the Financial Statements that it is not covered by the
requirements and procedures for related party transactions and,
therefore, not required to file Form No. 1709. Id.
● “A-C” are those who are regularly required to fill out the RPT however
there may be other parties transacting with them found in “D”
Instructions for Accomplishing Form No. 1709
Reallocation of Income and Deductions
1. BIR Form No. 1709 shall be completely and truthfully accomplished and
shall be attached to the ITRs for the current taxable year and subsequent
years, making it an integral part of the latter.
2. The nature of the transaction and the accounts affected shall be
described in detail.
3. The "business overview of the ultimate parent company" referred to in
Part IV (A) of BIR Form No. 1709 shall include the profile of the
multinational group to which the taxpayer belongs, along with the name,
address, legal status and country of tax residence of each of the related
parties with whom intra-group transactions have been entered into by
the taxpayer, and ownership linkages among them.
4. On the other hand, the "functional profile" referred to in Part IV (B) of BIR
Form No. 1709 shall include a broad description of the business of the
taxpayer and the industry in which it operates, and of the business of the
related parties with whom the taxpayer has transacted;
5. The following are required to be attached to BIR Form No. 1709:
a. certified true copy of the relevant contracts or proof of
transaction;
b. withholding tax returns and the corresponding proof of payment
of taxes withheld and remitted to the BIR;
c. proof of payment of foreign taxes or ruling duly issued by the
foreign tax authority where the other party is a resident;
d. certified true copy of Advance Pricing Agreement, if any; and
e. any transfer pricing documentation.
6. No spaces shall be left unanswered. If one or some portions are not
applicable, such fact shall be so stated. Ibid.
Requirement to prepare Transfer Pricing Documentation (TPD)
● TPD is mandatory for taxpayers enumerated in Section 2 of Rev. Regs.
No. 34-20, Dec. 18, 2020 who meet the following materiality thresholds:
a. Annual gross sales/revenue for the subject taxable period exceeding
P150,000,000 (P150M) and the total amount of related party
transactions with foreign and domestic related parties exceeds
P90,000,000 (P90M).
● In computing the above threshold, the following items shall be
included:
i. Amounts received and/or receivable from related
parties or paid and/or payable to related parties during
the taxable year but excluding compensation paid to
key management personnel, dividends and branch
profit remittances; and
ii. Outstanding balances of loans and non-trade amounts
due from/to all related parties.
Related party transactions covered by an Advance
Pricing Agreement (APA) need not be disclosed in the
RPT Form but shall nonetheless be included in the
computation of the amount of related party
transactions following the prescribed formula; or
● Note: if you meet this requirement you need to have it prepared
i.e. on hand
b. Related party transactions meeting the following materiality threshold:
i. If involving sale of tangible goods in the aggregate amount
exceeding P60,000,000 (P60M) within the taxable year;
ii. If involving service transaction, payment of interest, utilization
of intangible goods or other related party transaction in the
aggregate amount exceeding P15,000,000.00 (P15M) within
the taxable year; or
iii. If TPD was required to be prepared during the immediately
preceding taxable period for exceeding either (a) or (b) above.
The TPDs and other supporting documents as set out in Section
6 of RR No. 19-2020 shall no longer be attached to the RPT
Form but shall be submitted within 30 calendar days upon
receipt of request by the Commissioner or his/her duly
authorized representatives, pursuant to a duly issued Letter of
Authority covering All Internal Revenue Taxes (AITR), subject to
non-extendible period of 30 calendar days based on meritorious
grounds.
● TPD doesn’t have to be attached to the RPT form.
● You need to submit this to the BIR upon request upon 30 days in case
of an audit. You don’t voluntarily submit this.
● You need to prepare the TPD only if the materiality thresholds are met.
● Two forms to bear in mind:
1. RPT form 1709 - required to be attached to the annual
income of tax return
Reallocation of Income and Deductions
2. TPD - made available upon BIR upon within 30 days
a. But if you meet the aforementioned requisites in the
materiality threshold, the TPD must be made
available
Transfer Pricing Regulations (Rev. Regs. No. 2-2013)
● Adopts the use of “arm's length principle” as the most appropriate
standard to determine transfer prices of related parties.
● “Arm’s length”
○ involves the identification of comparable situation(s) or
transaction(s) undertaken by independent parties against which
the related party transaction or margin is to be benchmarked
(“comparability analysis”).
● It analyzes the similarities and differences in the conditions and
characteristics found in the related party transaction with those in an
independent party transaction benchmarked against an individual
transaction
● Once the impact of such similarities or differences on the transfer price
has been determined, the arm's length price/margin (or a range) can
then be established using an appropriate transfer pricing method.
● Basis of comparison: How would you have transacted or concluded
this transaction with an independent party rather than a related party?
● Your transaction with a related party will be benchmarked against an
independent party transaction
● How do you prove if the transaction is arms length?
○ There are transfer pricing methods acceptable to the BIR
which could help you say that the transaction is at arms
length
Transfer Pricing Methods (“TPM”):
1. Comparable Uncontrolled Price (CUP) Method
● Must compare products which are similar or most comparable
if not, then the BIR’s assessment will not prosper. There must
be a basis for comparison and intensive research
● Ex. One product was manufactured by Pfizer, and the other by
Cianamede. BIR said that Cianamede’s imported raw materials
are overpriced, by comparing the cost of raw materials of
Cianamede with Pfizer. Sir argued that the products were not
incomparable because one of the products of Cianamede
required more processes than Pfizer’s.
● CPU requires that apples should be compared with apples or the
same kind
2. Resale Price Method
● You have to support the reasonableness of the price at which
you sold the goods obtained from the related party.
● Ex. Mura nabili ni B from A yung products. Tapos B sold it to C
for an amount with great disparity. B should be able to support
and explain the price for C. B could say that may process pa
siyang pinagdaanan bago magbenta kay C (or may value added)
● Ex. If di mo na-prove yung “value added process” or di mo
naeexplain the acquisition cost v resale price, BIR will say you
failed the arm’s length standard.
3. Cost Plus Method
● Ordinary applicable to sale of services
● Ex. Parent company may be providing support services to a
subsidiary. Parent company incurred 10M in providing services
to an affiliate. Papatungan lang niya ng profit margin ng 10%
para yun yung magiging profit niya from the services.
● Cost plus method means that the actual cost incurred in prov
services plus profit margin to justify the transfer price
● When you do this, we research on comparables—market rates
for cost plus for such types of services
4. Profit Split Method
● Ordinarily relevant in transactions when you have joint venture
partners with affiliates as the personalities involved
● You should be able to support the profits being allocated to a
particular affiliate as they are contributing the most
5. Transactional Net Margin Method
● Similar to resale price and cost plus method but here you look
at net margin rather than the gross profit margin
○ Net profit margin (expenses deducted)
○ Gross profit margin (expenses not deducted)
● BIR has no specific preference for any one method.
Reallocation of Income and Deductions
○ Instead, the TPM that produces the most reliable results, taking
into account the quality of available data and the degree of
accuracy of adjustments, should be utilized.
● In all cases, taxpayers should be able to explain why a specific TPM is
selected or used in recording controlled transactions through proper
documentation. Ibid.
Tax Avoidance vs. Tax Evasion
● Well-settled that a taxpayer has the legal right to reduce the amount of
what otherwise would be his taxes or altogether avoid them by means
which the law permits.
● However, the Supreme Court warned that “while tax avoidance schemes
and arrangements are not prohibited, tax laws cannot be circumvented
in order to evade the payment of just taxes.”
● CIR v. Lincoln Philippine Life Insurance Company, Inc., involving payment
of additional DST (Document Stamp Tax) on the increase in the amount
insured by virtue of an automatic increase clause incorporated into the
insurance policy at the time of its issuance,
○ Suppose there is a policy of 1M. If that policy is increased by
virtue of this automatic increase clause incorporated in the
insurance policy.
○ According to Lincoln, hindi na kailangan mag-issue ng new
policy to issue a new amount. No need to pay DST.
○ SC: This is tax evasion. Niloloko nila yung government. Whether
automatic or not, there should be an additional DST.
● International Exchange Bank v. Commissioner of Internal Revenue,
involving DST on Savings Account-Fixed Savings Deposit (FSD) evidenced
by a passbook which provides for a higher interest rate when the deposit
is not withdrawn within the required fixed period, thus, similar to a time
deposit which is subject to DST.
○ Bank: Savings account fixed savings is a regular deposit
account, not a time deposit account, so a lower interest rate
must be paid.
○ SC: This is tax evasion. This is not different from a time deposit
account. Thus, a higher interest must be paid.
● See also Estate of B. Toda, involving a scheme to reduce the tax payable
by CIC first selling the property to Altonaga at the lower price of P100
Million, with CIC paying 35% [now 20%-25%%] corporate income tax on
the gain, and for Altonaga to sell to RMI at the higher price of P200
Million and pay only 5% [now 6%] capital gains tax based on the selling
price, instead of CIC paying 35% [now 20%-25%] corporate income tax
on the additional gain of P100 Million.
○ Baniqued: SC missed the classification of property; tax evasion
tong case na to in his opinion
Prima Facie Case of “Substantial Underdeclaration”
Sec. 248(B) NIRC
(B) “[i]n case of willful neglect to file the return within the period prescribed by
this Code or by rules and regulations, or in case a false or fraudulent return is
willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax
or of the deficiency tax, in case, any payment has been made on the basis of
such return before the discovery of the falsity or fraud:
Provided, That a substantial under-declaration of taxable sales, receipts or
income, or a substantial overstatement of deductions, as determined by the
Commissioner pursuant to the rules and regulations to be promulgated by the
Secretary of Finance, shall constitute prima facie evidence of a false or
fraudulent return:
Provided, further, That failure to report sales, receipts or income in an amount
exceeding thirty percent (30%) of that declared per return, and a claim of
deductions in an amount exceeding (30%) of actual deductions, shall render
the taxpayer liable for substantial under-declaration of sales, receipts or
income or for overstatement of deductions, as mentioned herein.
● This is indicative of Fraud.
Consequence of Substantial Underdeclaration
● The determination by the BIR of “substantial underdeclaration” may
result in the following:
○ Imposition of 50% fraud surcharge/penalty
○ Prescriptive period to assess becomes 10 years from discovery,
instead of the regular 3-year period;
○ Possible criminal prosecution under Secs. 254-257.
Reallocation of Income and Deductions
● If a taxpayer under declares for more than 30% of the actual or
overstates deductions or expenses by more than 30%, that is a clear
badge of fraud which may expose the taxpayer to:
○ Case for tax evasion
○ 50% surcharge on the deficiency tax to be assessed imposed
by the BIR
Minimum Corporate Income Tax
Sec 27(E) NIRC
(E) Minimum Corporate Income Tax on Domestic Corporations. –
(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%)
of the gross income as of the end of the taxable year, as defined herein,
is hereby imposed on a corporation taxable under this Title, beginning on
the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under Subsection (A)
[Regular Corporate Income Tax] of this Section for the taxable year:
Provided, That effective July 1, 2020 until June 30, 2023, the rate shall
be one percent (1%). [21]
(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum
corporate income tax over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and credited
against the normal income tax for the three (3) immediately succeeding
taxable years.
Minimum Corporate Income Tax
(3) Relief from the Minimum Corporate Income Tax Under Certain
Conditions. - The Secretary of Finance is hereby authorized to suspend
the imposition of the minimum corporate income tax on any corporation
which suffers losses on account of prolonged labor dispute, or because
of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and
regulation that shall define the terms and conditions under which he may
suspend the imposition of the minimum corporate income tax in a
meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate
income tax provided under Subsection (E) hereof, the term 'gross income'
shall mean gross sales less sales returns, discounts and allowances and
cost of goods sold. ‘Cost of goods sold' shall include all business expenses
directly incurred to produce the merchandise to bring them to their
present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the goods
to the place where the goods are actually sold including insurance while the goods
are in transit.
For a manufacturing concern, ‘cost of goods manufactured and sold' shall include
all costs of production of finished goods, such as raw materials used, direct labor
and manufacturing overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means
gross receipts less sales returns, allowances, discounts and cost of services.
'Cost of services' shall mean all direct costs and expenses necessarily incurred to
provide the services required by the customers and clients including-
(a) salaries and employee benefits of personnel, consultants and specialists
directly rendering the service and
(b) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies:
Provided, however, That in the case of banks, 'cost of services' shall include
interest expense.
Rationale: A business cannot be a losing proposition forever.
MCIT: 2% of the gross income of a corporation as of the end of the
taxable year (whether calendar or fiscal year) beginning on the fourth
(4th) taxable year immediately following the year in which such
corporation commenced its business operations, when such minimum
income tax is greater than the regular corporate tax computed under
Section 27(A).
MCIT is 1% from July 1, 2020 to June 30, 2023 pursuant to CREATE.
Thus, if the taxpayer commenced business operation in the year 2021,
the MCIT shall apply beginning the taxable year 2025.
4th taxable year remember
Gross income = Gross sales and Gross profits, before Ordinary and Necessary
Expenses (Sec. 34 )
MCIT is always compared to regular income tax (Sec. 27(A))
25% except if corp net income is not in excess of 5M and total assets
does not exceed 1M the tax rate is 20%
Suppose net income is more than 5M, total gross assets in excess of 100M is
taxed at 20%
Minimum Corporate Income Tax
If higher than income tax, the corporation pays the MCIT
The 2% is based on the gross income of the corporation
The regular corporate income tax rate is based on NET INCOME
Start with gross sales - cost of sales = gross profit income - ordinary
and necessary business expenses in Sec 34 = net income
Basis of 20% or 25% of RCIT
If MCIT is higher than regular corporate income tax then you pay the MCIT
Net Income or Taxable Income
Net income is higher than regular income tax
Corporation pays MCIT 2% but under CREATE law it is now 1%
MCIT
If new corporation, you have a grace period of 3 years due to losses, you pay
MCIT on the 4th year.
Sec 27 NIRC
SEC. 27. Rates of Income tax on Domestic Corporations. –
(A) In General. - Except as otherwise provided in this Code, an income tax rate of
twenty-five percent (25%) effective July 1, 2020, is hereby imposed upon the
taxable income derived during each taxable year from all sources within and
without the Philippines by every corporation, as defined in Section 22(B) of this
Code and taxable under this Title as a corporation, organized in, or existing under
the laws of the Philippines.
Provided, That corporations with net taxable income not exceeding Five million
pesos (P5,000,000.00) and with total assets not exceeding One hundred million
pesos (P100,000,000.00), excluding land on which the particular business entity's
office, plant, and equipment are situated during the taxable year for which the tax
is imposed, shall be taxed at twenty percent (20%).
In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when specific sales,
purchases and other transactions occur. Their income and expenses for the fiscal
year shall be deemed to have been earned and spent equally for each month of the
period.
The corporate income tax rate shall be applied on the amount computed by
multiplying the number of months covered by the new rate within the fiscal year by
the taxable income of the corporation for the period, divided by twelve.
Date of commencement of operations = date of registration with the BIR.
However, in Manila Banking Corporation v. Commissioner of Internal
Revenue,
Manila Bank was declared insolvent in 1987
The Supreme Court held that the date of commencement of
operations of a thrift bank is the date it was registered with the
SEC or the date when the Certificate of Authority to Operate was
issued to it by the Monetary Board of the BSP, whichever comes
later.
In said case, petitioner bank registered with the BIR in 1961.
Technically this is not a new corporation.
However, in 1987, it ceased operations after it was found
insolvent by the Monetary Board of the BSP and was placed
under receivership. After twelve (12) years, or on June 23, 1999,
the BSP issued to it a Certificate of Authority to Operate as a
thrift bank. The following year, it filed with the BIR its annual
corporate income tax return and paid MCIT of P33,816,164.00
for taxable year 1999.
Minimum Corporate Income Tax
It thereafter filed a claim for refund of the said MCIT after it
obtained a favorable ruling from the BIR confirming that it was
entitled to the 3-year grace period before MCIT applies.
For purposes of computing the 2% MCIT, the tax shall be based on the
“gross income” of the subject corporation as of the end of the taxable
year. The term “gross income” for purposes of the MCIT is defined as:
“Gross sales less sales returns, discounts and allowances and
cost of goods sold” and it includes all items of gross income
mentioned in Section 32(A) of the NIRC
With the exception of:
Items of income exempt from income tax, such as
intercompany dividends, and
Income subject to final withholding tax, such as interest
on bank deposits, capital gains from sale of shares of
stock or real property classified as capital asset, or
royalties.
The term “cost of goods sold”, in turn, is defined as “all business
expenses directly incurred to produce the merchandise to bring them to
their present location and use.”
However, “direct costs” may vary in meaning depending on the nature of
business of the taxpayer.
For a manufacturer, the cost of goods includes “all costs of
production of finished goods, such as raw materials used, direct
labor and manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw materials to
the factory or warehouse.”
For a trader or wholesaler, the cost of goods includes “the
invoice cost of the goods, plus import duties, freight in
transporting the goods to the place where the goods are actually
sold including insurance while the goods are in transit.”
Sellers of services do not have cost of goods sold but, in lieu thereof, they
are entitled to deduct from gross sales or receipts, for purposes of
computing the MCIT, “cost of services” in addition to sales returns,
allowances, and discounts.
“Cost of services” for those engaged in the sale of service, is
defined as “all direct costs and expenses necessarily incurred to
provide the services required by the customers and clients
including (a) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service, and
(b) cost of facilities directly utilized in providing the service such
as depreciation or rental of equipment used and cost of
supplies,” except that for banks “cost of services” shall include
interest expense.
The “direct costs and expenses” as it relates to “cost of services”
thus comprises only such costs as are indispensable in earning
revenue without which no revenue can be generated.
In Manila Bankers' Life Insurance Corp. v. Commissioner of Internal
Revenue
the SC held that premium taxes paid by a life insurance
company as well as the documentary taxes paid on insurance
policies issued by it do not fall under the category of “cost of
services” that may be deducted from gross sales or receipts for
purposes of computing the MCIT.
The SC explained that a cost or expense is "direct" only when it
is readily attributable to the production of the goods or the
rendition of the service. Measured against this standard, the
Court held that premium taxes, though payable by MBLIC, are
not direct costs within the contemplation of the phrase "cost of
services," since they are incurred after the sale of service had
already transpired, unlike raw materials, direct labor, and
manufacturing cost which form part of "cost of sales" in the sale
of goods. Moreover, as regards the DST, the life insurance
company passed it on to its clients and, therefore, did not incur
that expense.
For business enterprises whose operations are covered partly by the
regular corporate income tax and partly under some special tax regime,
like BOI-registered or PEZA-registered enterprises and firms operating in
such other economic zones as Subic Bay Freeport Zone, Clark or John
Hay Poro Point, the MCIT shall apply only to the gross income derived
from the operations subject to the regular corporate income tax.
GR: MCIT does not apply to them as they are not subject to
regular corporate income tax
GR: Resident foreign corporations, with the exception of some, are also
subject to the MCIT in the same manner as domestic corporations but
only with respect to their gross income from sources within the
Philippines.
EXPN: However, international carriers, offshore banking units
(“OBUs”), and other resident foreign corporations that may be
Minimum Corporate Income Tax
subject to some special tax rate under the NIRC or a special law
are not covered by MCIT.
Others exempt from MCIT: (subject to 10% special income tax).
non-stock non-profit educational institutions (exempt from
income tax),
proprietary educational institutions and
non-profit hospitals

GR: resident foreign corporation subject to MCIT

EXP: resident foreign corporation not subject to regular income tax but will
be subject to Philippine billing stocks etc offshore income tax

If the corporation is not subject to regular income tax rate either exempt or
subject to special tax rate then MCIT does not apply to them.

MCIT will apply if higher than corporate tax rate

Carry Forward of Excess MCIT
The law allows the corporation to carry forward and credit any excess of
the MCIT over the normal corporate income tax against the normal
corporate income tax payable by the corporation in the next three (3)
immediately succeeding taxable years.
Any amount of excess MCIT that has not been credited against
the normal corporate income taxes due in the reglementary
three-year period succeeding shall deemed forfeited.
The carry-forward mitigates the impact to the taxpayer of having been
made to pay the arbitrary 2% MCIT in prior years (not exceeding three
years) when it should not have paid any income tax at all then since it
had zero or negative taxable income, or should have paid a lower amount
in normal income tax corresponding to the taxable income it earned.
The tax lawyers would ordinarily recommend merger with excess MCIT that
would be in a position to use the excess MCIT.
Tax attributes, all assets and liabilities will be able to transfer to the
surviving corporation.
BIR allows everything except NOLCO
If in the computation of the annual income tax due, the corporation is
subject to MCIT because the computed annual MCIT is larger than the
annual normal corporate income tax, what may be credited to the annual
MCIT are only the following:
1. quarterly MCIT payments for the quarters of the current taxable
year, [Baniqued: shall be applied against MCIT]
2. quarterly normal a corporate income tax payments in the
quarters of the current taxable year,
3. expanded withholding taxes in the current year, and
4. excess expanded withholding taxes in the prior year. (Ex.
withheld by tenants etc.)
Excess MCIT from prior years can only be applied against corporate
income tax cannot be applied to the MCIT itself
Taxpayers have three years to claim this
Minimum Corporate Income Tax
Excess MCIT from the previous taxable year/s may not be credited
against the annual MCIT itself as the same can only be applied against
the normal corporate income tax.
The Secretary of Finance may suspend the imposition of the MCIT on
corporations that suffer “losses” on account of:
a. Prolonged labor dispute, or
b. Because of force majeure, or
c. Because of legitimate business reverses. (Ex. Pandemic)
Notwithstanding that under the plain language of the statute (Sec.
27(E)(3), NIRC) it seems sufficient that the taxpayer suffer “losses”
under the scenarios mentioned above, the BIR in Rev. Regs. No. 9-98
requires that the losses be “substantial” in order for the imposition of
the MCIT on such taxpayer to be suspended upon application by the
latter.
INCOME TAXATION OF FOREIGN PERSONS
Provisions:
Income Taxation of Foreign Persons
NIRC
Sec. 24(A)(1)(c) Alien Individuals
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the
Philippines.-
(1) An income tax is hereby imposed
(c) On the taxable income defined in Section 31 of this Code, other than income
subject to tax under Subsections (B), (C) and (D) of this Section, derived for each
taxable year from all sources within the Philippines by an individual alien who is a
resident of the Philippines.
Sec. 25(A)(1)
(A) Nonresident Alien Engaged in trade or Business Within the Philippines.–
(1) In General. - A nonresident alien individual engaged in trade or business in the
Philippines shall be subject to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all sources
within the Philippines. [NET INCOME = GROSS - EXPENSES; Graduated rates in Sec.
24]
A nonresident alien individual who shall come to the Philippines and stay therein for
an aggregate period of more than one hundred eighty (180) days during any
calendar year shall be deemed a 'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code notwithstanding. [prima facie]
Sec. 25(B)
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines.- There shall be levied, collected and paid for each taxable year upon the
entire income received from all sources within the Philippines by every nonresident
alien individual not engaged in trade or business within the Philippines as interest,
cash and/or property dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or determinable annual or
periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-
five percent (25%) of such income [GROSS INCOME NO DEDUCTION OF EXPENSES].
Capital gains realized by a nonresident alien individual not engaged in trade or
business in the Philippines from the sale of shares of stock in any domestic
corporation and real property shall be subject to the income tax prescribed under
Subsections (C) and (D) of Section 24.
Sec. 28(A)(1) Rates of Income Tax on Foreign Corporations
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized,
authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an income tax equivalent to
twenty-five percent (25%) of the taxable income derived in the preceding taxable
year from all sources within the Philippines effective July 1, 2020.
In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when sales, purchases
and other transactions occur. Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each month of the period.
The corporate income tax rate shall be applied on the amount computed by
multiplying the number of months covered by the new rate within the fiscal year by
the taxable income of the corporation for the period, divided by twelve.
Sec. 28(B)(1) Rates of Income Tax on Foreign Corporations
(B) Tax on Nonresident Foreign Corporation. -
(1) In General. - Except as otherwise provided in this Code, a foreign corporation not
engaged in trade or business in the Philippines, effective January 1, 2021, shall pay
a tax equal to twenty-five percent (25%)of the gross income received during each
taxable year from all sources within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except reinsurance premiums), annuities,
emoluments or other fixed or determinable annual, periodic or casual gains, profits
and income, and capital gains, except capital gains subject to tax under
subparagraph 5(c).
FOREIGN INDIVIDUALS
Meaning of Foreign Persons
1. Resident Aliens (RA)
INCOME TAXATION OF FOREIGN PERSONS
2. Non-Resident Aliens (NRA)
a. 2.1 Non-Resident Aliens Engaged in Trade or Business (NRA-
ETB)
b. 2.2 Non-Resident Aliens Not Engaged in Trade or Business (NRA-
nonETB) 25% instead of of graduated rate
3. Resident Foreign Corporations (RFC)
4. Non-Resident Foreign Corporations (NRFC)
Note : ALL OF THE ABOVE ARE TAXABLE ONLY ON INCOME DERIVED FROM
SOURCES WITHIN THE PHILS.
Definitions Sec. 22, NIRC
(D) The term 'foreign’, when applied to a corporation, means a corporation which is
not domestic
(E) The term 'nonresident citizen' means;
(1) A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite
intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable
year to reside abroad, either as an immigrant or for employment on a
permanent basis.
(3) A citizen of the Philippines who works and derives income from abroad and
whose employment thereat requires him to be physically present abroad
most of the time during the taxable year.
(4) A citizen who has been previously considered as nonresident citizen and
who arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a nonresident
citizen for the taxable year in which he arrives in the Philippines with respect
to his income derived from sources abroad until the date of his arrival in the
Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his intention
of leaving the Philippines to reside permanently abroad or to return to and
reside in the Philippines as the case may be for purpose of this Section.
(F) The term 'resident alien' means an individual whose residence is within the
Philippines and who is not a citizen thereof.
(G) The term 'nonresident alien' means an individual whose residence is not within
the Philippines and who is not a citizen thereof.
(H) The term 'resident foreign corporation' applies to a foreign corporation engaged
in trade or business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign corporation not
engaged in trade or business within the Philippines.
Conversely, if you are a transient or a sojourner, you are NOT a PH
resident
If an alien came to the PH for health reasons, not a resident
Aliens
What kind of alien individual
Non resident alien
Resident alien
Non- resident alien further classified to:
Non Resident Alien Doing Business in the Ph
Non Resident Alien Not Doing Business in the Ph NRA-ETB
Resident alien
Suppose Norman Black married to Filipina, residing in Philippines. If
may rental income si Norman in US, not part of taxable income in
Philippines.
Non-resident alien
taxable only for those derived in Ph
look at Sec 25 ; taxable whether engaged or not engaged
if engaged 25(A)(1); “an individual citizen and a resident alien
individual, on taxable income received from all sources within the
Philippines.”; parang parehas lang sa resident alien except taxable
lang in Philippine source income
Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines 25%
Meaning of Resident or Non-Resident Alien [See Revenue Regulation 2]
An alien actually present in the Phils. who is not a mere transient or
sojourner is a resident of the Phils.
Whether a transient or not is determined by the alien’s intentions with
regard to the length and nature of his stay.
Mere floating intention, indefinite as to time, to return to
another country is not enough to constitute him a transient.
INCOME TAXATION OF FOREIGN PERSONS
However, one who comes here for a definite purpose that by its
nature can be promptly accomplished is a transient.
But if the alien’s purpose in coming here is of such a nature that an
extended stay may be necessary for its accomplishment, and to that end
he makes his home temporarily in the Phils, he becomes a resident even
if it is his intention at all times to return to his domicile abroad as soon
as the purpose for which he came is consummated or abandoned.
Does not apply to alien employment nor an alien student or an
alien who is availing of medical services in the Philippines
Suppose an alien here as student or for medical purposes
Not considered a resident!
But purpose that there’s this extended stay and Ph is temporary
home[those not student, working or medical may be considered
resident
Meaning of NRA-ETB
A NRA who is present in the Phils. for an aggregate period of more than
180 days during any calendar year shall be deemed ETB.
This presumption, however, is merely prima facie. Can be negated by
clear evidence to the contrary.
E.g., medical, educational, humanitarian, training, research,
cultural, etc.
On the other hand, an NRA may claim to be nonETB when, in fact, he
actually is ETB in the Philippines.
If a non-resident alien is here for more than 180 days, he is prima
facie deemed to be engaged in the trade or business
If a non-resident alien is here for less than 180, but it is clear that he
is engaged in trade or business in the PH, then he is deemed
engaged in the trade or business in the PH
Chinese individual who sets shop in divisoria
Tax Treatment of Alien Individuals (Sec. 25)
Resident Aliens (RAs) are taxable like resident Filipinos on:
compensation income (withholding tax on compensation),
net income, i.e., after deductions, (self-employed and
professionals), and
final/withholding tax on items of passive income (e.g.,
dividends, interest, royalties, capital gains).
Non- Resident Alien Engaged in Trade or Business (NRA-ETB) are
generally also taxed in the same manner as resident Filipinos and
resident aliens,
except that dividends received by a NRA-ETB are subject to FWT
(Final Withholding Tax) of 20%
while resident Filipinos and resident aliens are subject to FWT
of only 10%.
Non Resident Alien Not Engaged in Trade or Business (NRA-non ETB),
however, are subject to income tax generally at 25% of gross income,
i.e., without the benefit of any deduction.
Capital gains derived from sale of shares of stock (unlisted) and
real property (classified as capital asset) are taxed in the same
manner as resident Filipinos and resident aliens, namely, 15%
and 6%, respectively.
Interest income received by an NRA [including even non-resident
Filipinos] from a depository bank under the expanded foreign currency
deposit system (FX account) shall be exempt from income tax.
Suppose you have a foreign corporation organized under the laws of
US. If it wants to have a subsidiary in the PH, the subsidiary will be a
Philippine corporation. The PH corporation may own 100%/90%/60%
of the parent foreign corporation.
The subsidiary files articles of incorporation to the SEC
because this is a domestic corporation
SEC then issues a certificate of articles of incorporation and
by-laws
Foreign corporation is called the parent corporation, while the
domestic corporation is called the subsidiary
This is a separate corporation with a separate personality
BUT the foreign corporation may put up a branch instead of a
subsidiary in the PH. In such a case, the foreign corporation shall
obtain a license from the SEC. Here, the branch office has no separate
personality distinct from the foreign corporation. They are one and the
same. There is no such thing as 100%/90% ownership.
The branch applies for a license from the SEC
SEC then issues a certificate of license to do business in the
INCOME TAXATION OF FOREIGN PERSONS
Philippines
Foreign corporation is called the head office, while the
philippine branch is called the branch office
Branch can be called a regional headquarters office
(RHQ), representative office
RHQ or ROHQ - will state in SEC papers that it is
precisely an RHQ; this has no separate personality
Representative Office - a branch as well; has no
personality separate and distinct from the head
office
May just appoint a distributor etc.
So when one sues the branch, it is actually suing the foreign
company
FOREIGN CORPORATIONS
Common Ways By Which a Foreign Corporation Establishes a Business Presence
in the Philippines
1. Branch
2. Subsidiary
3. Regional Operating Headquarters (ROHQ)
4. Regional Headquarters (RHQ)
5. Representative Office
6. Distributor, Subcontractor, Independent Agent
Subsidiary
If subsidiary, there is articles of incorporation
NOTE: A subsidiary is always a Filipino corporation
It has a separate and distinct personality from the Parent
Corporation
First layer:
When a subsidiary has a net income subject to tax, then it is
subject to the 20/25% corporate income tax
Not exceed 5M, gross assets not exceed 100M,
applicable tax rate is 20%
Otherwise, 25%
Second layer: shareholders
When the subsidiary remits its profits by way of dividends to
its parent corporation, the foreign corporation, generally,
there is a withholding tax rate of 25%.
Except if the tax pairing provision applies, then the 25% tax
rate is reduced to 15%.
Branch
Not organized as a Filipino corporation and it has no personality
separate and distinct from the parent corporation
A license to do business in the philippines to put up a Philippine
branch
This branch no separate or distinct personality; thus, no articles of
incorporation
When suing, the foreign corporation mismo
You refer to it as foreign corporation “head office”
First layer
Treated just like a domestic corporation, except it is imposed
with a flat rate of 25%
20% does not apply
Because if resident foreign corporation, you will only see 25%
under Sec. 28
Second layer:
Branch profits remittance tax is applied, where the tax
remitted to its parent corporation is 15%
Regional Operating Quarters
Would perform services for the benefit of its subsidiaries, branches, or
affiliates of the head office, hindi puwede third parties
Actually a branch also
But the license with SEC clearly states as ROHQ
Same process register the branch in the PH it will be licensed as RHOQ
Regional Head Quarters
Merely a branch licensed to do business in the Philippines
Cannot derive any income
Unlike ROHQ who can charge a profit margin to any of its
affiliates
If a ROHQ incurs $100 in its activity, pwede niya patungan ng
$10
BUT RHQ can only charge on a cost-reimbursement basis
INCOME TAXATION OF FOREIGN PERSONS
So no filing of income tax returns and other transactions occur. Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each month of the period.
Representative Office
Licensed to do business as a Representative Office The corporate income tax rate shall be applied on the amount computed by
Limited to buying, quality control, or research multiplying the number of months covered by the new rate within the fiscal year by
Cannot also derive any income, cannot engage in business the taxable income of the corporation for the period, divided by twelve.
So no filing of income tax returns
(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum
The branches above have no separate and distinct personality from the head corporate income tax of two percent (2%) of gross income, as prescribed under
office. Section 27(E) of this Code, shall be imposed, under the same conditions, on a
resident foreign corporation taxable under paragraph (1) of this Subsection:
If incurs profits, Create Law: Regular corporate income tax rate of 25% Provided, That effective July 1, 2020 until June 30, 2023, the rate shall be one
percent (1%).
When branch office is profitable 15% branch profits remittance tax Sec
28(A)(4) Sec. 28(B)(1) Rates of Income Tax on Foreign Corporations
(B) Tax on Nonresident Foreign Corporation. -

Tax Treatment of a Branch: Resident Foreign Corporation

(1) In General. - Except as otherwise provided in this Code, a foreign corporation not
As a RFC, it is taxed generally in the same manner as a domestic engaged in trade or business in the Philippines, effective January 1, 2021, shall pay
corporation, i.e., 25% of net income (after deductions) and preferential
a tax equal to twenty-five percent (25%)of the gross income received during each
tax rate on some items of passive income, e.g., interest, royalties, capital taxable year from all sources within the Philippines, such as:
gains, etc.
a. interests,
NOTE: May not claim the 20% income tax for domestic b. dividends,
corporations when gross income thus is not exactly taxed in the
c. rents,
same manner as a domestic corporation.
d. royalties,
e. salaries,
NIRC f. premiums
i. (except reinsurance premiums),
Sec. 28 (A)(1) Rates of Income Tax on Foreign Corporations g. annuities,
(A) Tax on Resident Foreign Corporations. - h. emoluments or other fixed or determinable annual, periodic or casual gains,
profits and income, and
(1) In General. - Except as otherwise provided in this Code, a corporation organized, i. capital gains,
authorized, or existing under the laws of any foreign country, engaged in trade or i. except capital gains subject to tax under subparagraph 5(c).
business within the Philippines, shall be subject to an income tax equivalent to
twenty-five percent (25%) [31] of the taxable income derived in the preceding taxable Sec 28(A)(5) NIRC
year from all sources within the Philippines effective July 1, 2020. [31]
(5) Regional or Area Headquarters and Regional Operating Headquarters of
In the case of corporations adopting the fiscal-year accounting period, the taxable Multinational Companies. –
income shall be computed without regard to the specific date when sales, purchases (a) Regional or area headquarters as defined in Section 22(DD) shall not be
INCOME TAXATION OF FOREIGN PERSONS
subject to income tax.
(b) Regional operating headquarters as defined in Section 22(EE) shall pay a
tax of ten percent (10%) of their taxable income: Provided, That effective
January 1, 2022, regional operating headquarters shall be subject to the
regular corporate income tax
Sec. 28(A)(4), NIRC
(4) Tax on Branch Profits Remittances. -
Any profit remitted by a branch to its head office shall be subject to a tax of fifteen
(15%) which shall be based on the total profits applied or earmarked for remittance
without any deduction for the tax component thereof (except those activities which
are registered with the Philippine Economic Zone Authority).
The tax shall be collected and paid in the same manner as provided in Sections 57
and 58 of this Code:
Provided, that interests, dividends, rents, royalties, including remuneration for
technical services, salaries, wages premiums, annuities, emoluments or other fixed
or determinable annual, periodic or casual gains, profits, income and capital gains
received by a foreign corporation during each taxable year from all sources within
the Philippines shall not be treated as branch profits unless the same are effectively
connected with the conduct of its trade or business in the Philippines.
Tax Treatment of a Branch (Resident Foreign Corporation)
Subject to 15% BPRT
No tax on dividends received from a domestic corporation, in like
manner as intercompany dividends.
Subject to MCIT.
Some RFCs (Resident Foreign Corporation) are, however, subject to
special or preferential tax regime.
E.g., International carriers – 2.5% on GPB, unless reduced or
exempted pursuant to a treaty or reciprocity. “GPB” refers to
revenues from carriage of persons, excess baggage, cargo and
mail originating from the Phils. in a continuous and
uninterrupted flight, regardless of place of sale or issue of ticket
or place of payment of ticket.
E.g., OBUs – offshore income (FX transactions with non-
residents, other OBUs, local commercial banks and branches of
foreign banks authorized to transact business with OBUs)
exempt from tax, while onshore income (FX loans granted to
residents, other than OBUs and local commercial banks and
branches of foreign banks mentioned above) is taxed at 10%.
Interest from FCDU (Foreign Currency Deposit Unit) Account and Capital Gains
Derived by Resident Foreign Corporations
Interest income derived by a resident foreign corporation from a
depository bank under the expanded foreign currency deposit system,
which used to be subject to 7.5% final withholding tax, is now subject to
a final withholding tax at the rate of fifteen percent (15%). Sec. 28(6)(a),
NIRC, as amended by TRAIN.
Net capital gains derived by a resident foreign corporation from the sale,
barter, exchange or other disposition of shares of stock in a domestic
corporation that are not listed or traded in the Philippine Stock Exchange
are subject to a final tax of 15%. Sec. 28(6)(c), NIRC, as amended by
CREATE.
This serves to cure the oversight under the TRAIN Law that failed
to provide for a counterpart provision for foreign corporations.
Branch Profits Remittance Tax (BPRT)
15% tax is based on the total profits applied or earmarked for remittance
to head office, w/o any deduction for the BPRT. (Sec. 28)
Applies to any form of remittance whether:
direct or indirect
actual or constructive
E.g., conversion of branch into a subsidiary.
This will apply only to profits which are effectively connected with the
trade or business of the branch in the Philippines
Only profits that are “effectively connected” with the conduct of
trade or business of the branch in the Phils. are subject to the
BPRT. See Marubeni
PEZA-registered enterprises and locators in other Freeport Zones are
exempt from BPRT.
Sec 28(A)(4) Any profit remitted by a branch to its head office
shall be subject to a tax of fifteen (15%) xxx (except those
INCOME TAXATION OF FOREIGN PERSONS
activities which are registered with the Philippine Economic
Baniqued:
Zone Authority)
Anong gagawin mo kung magkaiba ang rulings?
Sir was the lawyer in the second question
Example:
X corporation (US company) has a branch in Philippines, a manufacturing
entity. Branch has profits of 100M remittable to X corporation. If not effectively connected then that is not BPRT
For as long as it’s not yet remitted, it’s not yet BPRT.
The branch office can retain all its profits in the PH without remitting Q : Is there any instance where BPRT will not apply even if effectively
any amount, any it will never be exposed to BPRT. connected?
However, if the branch remits the 100M to its head office in the US, X A : Yes, in PEZA-registered enterprises and locators in other Freeport Zones
corporation, the the BPRT will apply. are exempt from BPRT.
Baniqued :
Suppose the branch doesn’t actually remit to X but is instructed by X Anomalous for him
Corporation to become a subsidiary or a domestic corporation. In a domestic What about Subic, Clark, or even John Hay or other business
corporation, the shareholder must capitalize that. Gagawin ni X, yung assets enterprises
ng branch office will be contributed to the subsidiary in payment for
subscription. Subsidiary now will issue shares of stock to X. [sec 40(C)(2), a Old situation :
familiar situation] 100 remittable profits, 15% BPRT so ireremit mo lang sa head
In effect, the 100M remittable profits will be as if niremit sa US tapos office 85
si US binalik sa subsidiary in payment for its subscription of the stock Because 85 actual remittance, yung 15% BPRT dapat based on 85
of the PH corporation. lang daw
Were the branch profits remitted to the head office or not?
What do you call that? Constructive. Now law is amended:
Now, you know that the BPRT (15%) not only applies to branch profits The 15% on the total amount of branch profits applied for remittance
but also indirect or constructive remittance of profits. w/o deduction from the BPRT
Now if 100 u base 15% from there
Q: In one case, the issue was whether the BPRT apply if the branch converts
itself into a subsidiary and the subsidiary will be owned by the US parent Marubeni Case:
corporation?
A: BIR: Yes. Indirect or constructive remittance of profits.

Q: In another case, the company asked the BIR what the tax consequences are
when the branch office has 100M remittable profits and the branch will be
converted into subsidiary Ph subsidiary, owned by US parent.
A: BIR: Could qualify as tax-free exchange, however since shares of stock will
be issued to the parent company, then there will be a documentary stamp tax.
Walang binanggit ang BIR tungkol sa BPRT.
INCOME TAXATION OF FOREIGN PERSONS
BPRT because the branch was not in the transaction. The
dividends were not effectively connected with the trade or
business of the branch.
On 10% FWT on dividends
Recipient of the dividends is non-res alien corp. Thus,
Marubeni should not have been subjected to the said FWT.
On refunding what has been paid by Marubeni
BIR: no refund. Marubeni, as a non-resident alien, has to pay
35% on the dividends (rate at the time)
CTA: Tax treaty with Japan says 25% ang liability ng Marubeni.
Since 25% na rin naman nabayaran (10% and 15%), offset na
lang
SC: Tax treaty says that the dividends should be subject to a
rate not in excess of 25%. It is not a fixed rate. It is a
maximum rate.
SC in arriving at a rate lower than 25%:
Applied Tax Sparing or 15%.
Marubeni is liable only for 15% tax on the dividends paid by
AG&P. But the BPRT does not apply to Marubeni.
Thus, if 15% ang liability, at 25% ang nabayaran ni Marubeni,
SC allowed the refund of the 10%.
Baniqued:
Marubeni asked for the refund of 15% BPRT. Since SC said
that BPRT should not apply, Marubeni should have been
granted the refund of 15% BPRT, not only 10%.
BIR should not be allowed to automatically offset

Tax Treatment of Non-Resident Foreign Corporations (NRFC)

Generally taxable at 25% of gross income (i.e., without the benefit of
deductions) derived from Phil. sources.
Some items of income are, however, subject to special/preferential
rates.
Marubeni E.g.,
Marubeni is a Japanese corp who has a branch in the PH. Marubeni invested capital gains from sale of shares (15%),
in AG&P, a PH Corporation. When Marubeni received dividends from AG&P, it cinematographic films (25%),
was subjected to 10% FWT and a 15% BPRT. charter of vessels (4.5%),
On 15% BPRT on dividends charter of aircraft (7.5%),
BIR said Marubeni should not have been subjected to 15% lease of machineries and equipment (7.5%),
interest on foreign loans (20%),
INCOME TAXATION OF FOREIGN PERSONS
dividend (15% with tax sparing), subject to reduced rate or
Withholding Tax on Dividend on the The branch pays 25%
exemption pursuant to an applicable tax treaty, while interest
foreign parent
income received by an NRFC from a depository bank under the
(GR 1st layer tax 25%, When the branch remits profits
expanded foreign currency deposit system (FX account) shall be
EXP 15% Tax Sparing 2nd layer tax) Withhold BPRT 15% (except if PEZA-
exempt from income tax.
registered, or Reduced Under a
Note: There’s this 20% assuming it Treaty)
Tax Treatment of Subsidiary: Philippine Corporation
meets certain requisites:
Treated and taxed as a domestic corporation. 25% tax on net income
Net income exceeds 5M and
[unless gross income and gross assets (excluding land where the
gross assets exceed 100M
taxpayer’s office, plant and equipment are situated) do not exceed P5M
and P100M, respectively, in which case the rate shall be 20%]. Risk of IAET BPRT (Only When There is
Special or preferential tax rate on some items of passive income (e.g., Remittance). CREATE has repealed
intercompany dividends (exempt), interest (20%) except interest income the IAET.
received from a depository bank under the expanded foreign currency
deposit system (FX account) which shall be subject to income tax at the Both are subject to MCIT, though. (1% due to CREATE)
rate of 15%, capital gains from sale of shares of stock (15%), and capital
gains tax on sale of land and/or buildings classified as capital assets
(6%).
RHQ; ROHQ Sec. 22, NIRC
Taxable on income derived from sources both within and without the
Philippines, unlike a branch of a foreign corporation. Taxed on worldwide
(DD) The term 'regional or area headquarters' shall mean a branch established in
income the Philippines by multinational companies and which headquarters do not earn or
derive income from the Philippines and which act as supervisory, communications
Subsidiary vs. Branch
and coordinating center for their affiliates, subsidiaries, or branches in the Asia-
Subsidiary Branch Pacific Region and other foreign markets.
(always a domestic corporation (Example of Resident Foreign
organized under RCC) Corporation) (EE) The term 'regional operating headquarters' shall mean a branch established in
the Philippines by multinational companies which are engaged in any of the
Separate and distinct personality No separate legal personality from following services: general administration and planning; business planning and
from its parent corporation the foreign corporation head office coordination; sourcing and procurement of raw materials and components;
Note : you are suing the foreign corporate finance advisory services; marketing control and sales promotion; training
corporation itself and personnel management; logistic services; research and development services
and product development; technical support and maintenance; data processing and
Limited liability of Parent Company Unlimited Liability of the Corporation communications; and business development.
(the Foreign Corporation that owns it) Since is the same as the foregin corp
itself
Tax Treatment of Regional Operating Head Quarters (ROHQ)
Taxed on Worldwide Income both Ph Phil-Sourced Income Only Taxed at 10% of net income (i.e., after deductions), but shall be taxed as
and Outside Ph sourced income RCIT effective January 1, 2022.
RCIT – Regular Corporate Income Tax of 25%
INCOME TAXATION OF FOREIGN PERSONS
Organized as a branch of a multinational corporation, hence, subject to
25% corporate income tax.
Provides any of the following limited services and they cannot provide
service to non-affiliated third parties
general administration and planning;
business planning and coordination;
sourcing and procurement of raw materials and components;
corporate finance;
advisory services;
marketing control and sales promotion;
training and personnel management;
logistic services;
research and development services and product development;
technical support and maintenance;
data processing and communication; and
business development.
Preferential Tax Treatment of Qualified Employees of RHQs, ROHQs, OBUs, etc.
Repealed
The preferential tax treatment extended to qualified employees of
regional headquarters (RHQs), regional operating headquarters
(ROHQs), offshore banking units (OBUs) or petroleum service contractors
and subcontractors in Subsections (C), (D), and (E) of Section 25 of the
NIRC shall not be applicable to regional headquarters (RHQs), regional
operating headquarters (ROHQs), offshore banking units (OBUs) or
petroleum service contractors and subcontractors registering with the
SEC after January 1, 2018:
Provided, however, That existing RHQs/ROHQs, OBUs or
petroleum service contractors and subcontractors presently
availing of preferential tax rates for qualified employees shall
continue to be entitled to avail of the preferential tax rate for
present and future qualified employees.
Sec. 25(C), (D) and (E), NIRC, as amended by TRAIN, Republic
Act No. 10963, [December 19, 2017] [Highlighted portion
above was vetoed by the President on the ground of equal
protection, equitable and uniform application of the burden of
taxation.
Consequently, all employees (whether Filipino or alien) of RHQs,
ROHQs, OBUs, petroleum contractors and subcontractors are
now subject to the graduated income tax rates under Section
24(A)]
Tax Treatment of RHQ
Acts merely as supervisory, communications and coordinating center for
affiliates, subsidiaries, or branches of MNCs in the Asia Pacific Region
and other foreign markets.
Does not, and may not, earn or derive income from the Phils. BIR Rul.
No. 011-84, Jan. 24, 1984.
Hence, exempt from income tax.
Baniqued:
Survives only in the capital and remittances that the Head Office
will provide
Cannot derive any income or business, hence no need to file
Tax Treatment of Representative Office
Not authorized to engage in business in the Philippines. It does not, and
may not, derive income from the Philippines. BIR Rul. Nos. 081-87,
March 19, 1987, and 175-85.
Hence, exempt from income tax.
Undertakes information dissemination and promotion of the parent
company’s products as well as quality control.
Also acts as a buying office of non-resident foreign corporations.
Baniqued:
Limited activities only just like the RHQ
Cannot derive any income or business, hence no need to file
Tax Treatment of Distributor, Subcontractor or Independent Agent
Generally taxable separately and for their own account, without posing
risk of taxability on the part of the principal or non-resident foreign
person.
However, under certain circumstances, their existence and/or activities
may result in the principal being treated as engaged in trade or business
in the Philippines, see BOAC, Burmeister, etc., or having a PE in the
Philippines.
Source Rules for Various Items of Income
Sec. 42, NIRC
INCOME TAXATION OF FOREIGN PERSONS
SEC. 42. Income from Sources Within the Philippines. -
(A) Gross Income from Sources Within the Philippines. - The following items of gross
income shall be treated as gross income from sources within the Philippines:
(1) Interests. - Interests derived from sources within the Philippines, and interests on
bonds, notes or other interest-bearing obligation of residents, corporate or otherwise;
(2) Dividends. - The amount received as dividends:
(a) From a domestic corporation; and
(b) From a foreign corporation, unless less than fifty percent (50%) of the gross
income of such foreign corporation for the three-year period ending with the
close of its taxable year preceding the declaration of such dividends or for
such part of such period as the corporation has been in existence) was
derived from sources within the Philippines as determined under the
provisions of this Section; but only in an amount which bears the same ratio
to such dividends as the gross income of the corporation for such period
derived from sources within the Philippines bears to its gross income from
all sources;
(3) Services. - Compensation for labor or personal services performed in the
Philippines;
(4) Rentals and Royalties. - Rentals and royalties from property located in the
Philippines or from any interest in such property, including rentals or royalties for:
(a) The use of or the right or privilege to use in the Philippines any copyright,
patent, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;
(b) The use of, or the right to use in the Philippines any industrial, commercial
or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial knowledge or
information;
(d) The supply of any assistance that is ancillary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment of, any such
property or right as is mentioned in paragraph (a), any such equipment as
is mentioned in paragraph (b) or any such knowledge or information as is
mentioned in paragraph (c);
(e) The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the installation
or operation of any brand, machinery or other apparatus purchased from
such nonresident person;
(f) Technical advice, assistance or services rendered in connection with
technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme; and
(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.
(5) Sale of Real Property. - Gains, profits and income from the sale of real property
located in the Philippines; and
(6) Sale of Personal Property. - Gains; profits and income from the sale of personal
property, as determined in Subsection (E) of this Section.
(B) Taxable Income From Sources Within the Philippines. –
(1) General Rule. - From the items of gross income specified in Subsection (A)
of this Section, there shall be deducted the expenses, losses and other
deductions properly allocated thereto and a ratable part of expenses,
interests, losses and other deductions effectively connected with the
business or trade conducted exclusively within the Philippines which cannot
definitely be allocated to some items or class of gross income: Provided,
That such items of deductions shall be allowed only if fully substantiated by
all the information necessary for its calculation. The remainder, if any, shall
be treated in full as taxable income from sources within the Philippines.
(2) Exception. - No deductions for interest paid or incurred abroad shall be
allowed from the item of gross income specified in subsection (A) unless
indebtedness was actually incurred to provide funds for use in connection
with the conduct or operation of trade or business in the Philippines.
(C) Gross Income From Sources Without the Philippines. - The following items of
gross income shall be treated as income from sources without the Philippines:
INCOME TAXATION OF FOREIGN PERSONS
(1) Interests other than those derived from sources within the Philippines as
provided in paragraph (1) of Subsection (A) of this Section;
(2) Dividends other than those derived from sources within the Philippines as
provided in paragraph (2) of Subsection (A) of this Section;
(3) Compensation for labor or personal services performed without the
Philippines;
(4) Rentals or royalties from property located without the Philippines or from
any interest in such property including rentals or royalties for the use of or
for the privilege of using without the Philippines, patents, copyrights, secret
processes and formulas, goodwill, trademarks, trade brands, franchises and
other like properties; and
(5) Gains, profits and income from the sale of real property located without the
Philippines.
(D) Taxable Income From Sources Without the Philippines. - From the items of gross
income specified in Subsection (C) of this Section, there shall be deducted the
expenses, losses, and other deductions properly apportioned or allocated thereto
and a ratable part of any expense, loss or other deduction which cannot definitely
be allocated to some items or classes of gross income. The remainder, if any, shall
be treated in full as taxable income from sources without the Philippines.
(E) Income From Sources Partly Within and Partly Without the Philippines.- Items of
gross income, expenses, losses and deductions, other than those specified in
Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources
within or without the Philippines, under the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner.
Where items of gross income are separately allocated to sources within the
Philippines, there shall be deducted (for the purpose of computing the taxable
income therefrom) the expenses, losses and other deductions properly apportioned
or allocated thereto and a ratable part of other expenses, losses or other deductions
which cannot definitely be allocated to some items or classes of gross income. The
remainder, if any, shall be included in full as taxable income from sources within the
Philippines. In the case of gross income derived from sources partly within and partly
without the Philippines, the taxable income may first be computed by deducting the
expenses, losses or other deductions apportioned or allocated thereto and a ratable
part of any expense, loss or other deduction which cannot definitely be allocated to
some items or classes of gross income; and the portion of such taxable income
attributable to sources within the Philippines may be determined by processes or
formulas of general apportionment prescribed by the Secretary of Finance.
Gains, profits and income from the sale of personal property produced (in whole or
in part) by the taxpayer within and sold without the Philippines, or produced (in whole
or in part) by the taxpayer without and sold within the Philippines, shall be treated
as derived partly from sources within and partly from sources without the
Philippines.
Gains, profits and income derived from the purchase of personal property within and
its sale without the Philippines, or from the purchase of personal property without
and its sale within the Philippines shall be treated as derived entirely form sources
within the country in which sold:
Provided, however, That gain from the sale of shares of stock in a domestic
corporation shall be treated as derived entirely from sources within the Philippines
regardless of where the said shares are sold.
The transfer by a nonresident alien or a foreign corporation to anyone of any share
of stock issued by a domestic corporation shall not be effected or made in its book
unless:
(1) the transferor has filed with the Commissioner a bond conditioned upon the
future payment by him of any income tax that may be due on the gains
derived from such transfer, or
(2) the Commissioner has certified that the taxes, if any, imposed in this Title
and due on the gain realized from such sale or transfer have been paid. It
shall be the duty of the transferor and the corporation the shares of which
are sold or transferred, to advise the transferee of this requirement.
(F) Definitions. - As used in this Section the words 'sale' or 'sold' include 'exchange'
or 'exchanged'; and the word 'produced' includes 'created', 'fabricated,'
'manufactured', 'extracted,' 'processed', 'cured' or 'aged.'
(1) Interest – Residence of the obligor
Trump Corporation. Either Donald or the Corporation. Manny obtained a loan
from Trump, 5% per annum.
INCOME TAXATION OF FOREIGN PERSONS
Q: Will the interest income be taxed?
A: Yes, Sec 42 (A)(1) xxx other interest bearing obligations of residents, xxx. As
long as the obligor or the debtor is a resident of the PH, interest income is
taxable.
Q: Suppose Manny has some dollars abroad. The money is not from the
Philippines. Manny called a bank in HK, please pay Donald 500K dollars as
payment of interest. Will the one that came from HK be taxed?
A: Yes, still taxed since it is the residence of the obligor even if it was a dollar
account
Q: Suppose a loan agreement was signed in America, Manny executed a
promissory note in the US. Will the interest income be sourced from Manny’s
HK account? Will the interest income be taxed?
A: Yes because Sec 42 (A)(1) xxx other interest bearing obligations of
residents, xxx this means the residence of the debtor
Any transaction he entered into regardless where payment is made or
where payment came from or loan agreement is entered into.
Other factors are irrelevant, only the residence of the obligor/ debtor
(2) Dividend
If paid by a domestic corp, Phil-source;
if paid by a foreign corp, Phil-source if 50% or more of gross income for
the 3-year period preceding the dividend declaration was derived from
Phil. sources but only pro rata only (i.e., Ph gross income/worldwide
income)
Compensation for Services – place of performance.
Dividends paid by domestic corporation
Ex. Dr. Donny invested in United laboratories. Dividends paid by
UNILAB to Dr. Donny is considered a Ph Source
Dividends paid by a domestic corporation is always considered from
the Ph Source
Dividends paid by foreign corporation
GR: Is generally considered a foreign source
EXP: Considered Phil Source if 50% or more of gross income of the
Foreign Corporation for the 3-year period preceding the dividend
declaration was derived from Phil. sources but only pro rata only
Example: Suppose X corporation was organized under Panama. That
X corporation is licensed to do business in Ph through a branch office
in Ph. X corporation is owned by A, a US national. A owns 100% of
Panamanian corporation and remitted profits. X declares dividends to
A, US national not engaged in business in Ph. Will the dividends
declared to A a US national be considered a Phil. Source?
A: Generally not a Phil. Source, this is US source since the
general rule is if it came from a foreign corporation then it is
a foreign source
Example: X corporation only operates in the Philippines. X is solely
organized to engage business in Ph. X has a branch in Ph. Will the
dividends of X be taxed in the Philippines?
A: Yes since 100% income of X corporation is derived from Ph
sources.
The exception now applies as 100% of its income is Phil.
Source income, dividend paid to A will now be taxed.
This is not considered a Philippine source as 100% of the
income came from the Philippines and not even 50% or more
as it does not do any business elsewhere.
Example: X corporation is organized to engage in business in Ph
through a branch; it also has established a business branch office in
Cape Town, where it derived 40% of its gross income year after year
and the remaining 60% is derived from Ph Sources. Is it still Phil
Source?
A: Dividend paid by X corporation to sole shareholder A will be
taxable only pro rata, only 60% is the taxable part
Pro- ration applies since the gross income in the last 3 years
is not wholly from Philippine sources only 60%
The exception applies in this case
Baniqued’s case: Pfizer Panama owns Pfizer Philippines and Pfizer USA owns
Pfizer Panama
Panama was declaring dividends to USA
No part of the dividends by Pfizer Panama to Pfizer USA should be
taxed because less than 50% of gross income of Pfizer Panama year
after year was derived from sources within the Philippines
BIR asked to show copies of the financial statements and provide a
INCOME TAXATION OF FOREIGN PERSONS
breakdown of sources of income of Pfizer Panama and he was able to SC refused to overturn. He does not agree with the ruling in British
prove that the dividends that Pfizer Panama declared to Pfizer USA is Overseas. They did not apply the source rules of service.
not derived from sources within the Philippines and therefore not British Overseas remains to be the subsisting rule.
subject to tax here. Source rule for Services is the place of performance will control the
source of the income.
The SC had many instances to reverse itself, they did not.
(3) Services. - Compensation for labor or personal services performed in the
Philippines
Cases
Scenario: Suppose Bill Clinton spent months here in Ph, on account of talks
CIR v. British Overseas Airways Corporation, 149 SCRA 395 (1987)
delivered here in Ph, BIll earned $500K giving talks in the Philippines. Will Bill
South African Airways v. CIR, 612 SCRA 665 (2010)
be subjected to tax?
CIR v. Baier-Nickel, 500 SCRA 87, 100-102 (2006)
A: Yes since he earned in the Philippines and the services were performed here
in the Philippines. Since in this case the services were rendered in the
(4) Rentals and Royalties – Place of utilization/exploitation
Philippines then Bill’s income from his talks are taxed in the Ph.
Royalties
Q: Does it matter that the payment was made through offshore accounts? All you need to remember is that the source of Royalty income is the
A: No it does not matter place of exploitation or utilization.
Ex. Suppose a trademark used in Ph, then the source of this royalty
Q: Is there an exception? income is Phil Source. Or if the secret formula is exploited here then
A: Yes when it comes to airline companies. They will only be taxed if it conducts it is taxed here.
business in the Philippines i.e. tickets Regardless of where the licensing agreement is entered into or where
payment is made.
See CIR v. British Overseas Airways Corporation, 149 SCRA 395 (1987)
“Offline carrier” does touch Philippine Soil does not fly into or out of Rental
the Philippines it does not have license to land in the Ph Where these machineries are used or situated then the rental will be
Ex. PAL to HK then take British Airways to London thus it transports taxed here in the Philippines
Filipinos to London
Classification: Income from Trade and Business
(5) Sale of Real Property – Location of property
The sale of tickets would consider “doing business” it will be taxed only
from sources in the Philippines. W/N they derive income from the
(6) Sale of Personal Property – Passage of title test, except sale of shares of Phil.
Philippines
company.
Firstly, classify what kind of income. Compensation from
services or compensation from sale of ticket?
A: Because the ticket was sold here it was a Ph Suppose A has a China Company selling children’s toys manufactured in China.
sourced income These toys title to the goods passing in China, but goods are transported to
Evidence of ticket (Contract of Carriage and this is a contract Toys R Us owned by Robinson’s Philippines. The risk of loss while in transit is
of service) on Toys R Us Philippines. Will this Chinese company be subject to income tax
A: Sec 42 (A)(3); Note: SC did not consider this in the Philippines? Where did titles of the goods pass?
Baniqued: A: No since title to the goods were passed to Toys R Us, title already passed in
INCOME TAXATION OF FOREIGN PERSONS
China. Since title passed in China, the income from the sale of these goods
should not be subject to Ph Tax.
Suppose out of good will, risk of loss should be on account of the Chinese
company. When goods arrive in Ph Port, that’s the only time the title passes to
Toys R Us. Would the Chinese manufacturer be subject to tax?
A : Yes this is a Ph Source now, since the title passed in Ph Ports. However this
is not a good business judgment since they will be exposed to Ph tax
Suppose JFCP Philippines tells Chinese Food Corp, JFC is unloading its
investment because we want to go out of the Ph, JFC sold 40% of their current
shareholdings to the Chinese Company. Owners of JFC, signing and payment
in Shanghai, assume some owners of JFC are foreigners and former Filipinos.
Will it still be taxed?
A : Yes, Sec 42(E) xxxProvided, however, That gain from the sale of shares of
stock in a domestic corporation shall be treated as derived entirely form
sources within the Philippines regardless of where the said shares are sold xxx
GR: Where title of the personal property passes to the buyer, that’s the
source of the income
EXCEPTION: Sales of Shares of a Philippine Company shall always be
considered Phil. Source regardless where sale happens
Partly Within and Partly Foreign Source
Goods are manufactured in one jurisdiction and sold in another
Ex: goods manufactured in China, but title to the goods passed in the
Ph
Will give rise to partly PH source and partly foreign source
Sec. 42-C-E
But if goods are purchased in one country and sold in another country
The passage of title test will govern.
The operative fact is where the title of the buyer passed.
Where goods are sold, it will determine the source of income
“Gains, profits and income from the sale of personal property
produced (in whole or in part) by the taxpayer within and sold without
the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived
partly from sources within and partly from sources without the
Philippines.”
Variation to the source rules
Suppose there is a subway project:
The goods or machines to be used in subway project manufactured
outside the Philippines
Why would you even cause a title here in Ph?
Some services in Ph and some outside
Architectural plans outside the Philippines is considered
foreign source income
As many contracts as much
Supply contract of goods = Pass title in Ph
Service contract = Pass title in Ph
Plans = Incorporate in another contract outside the
Philippines
Cases
Taligaman Lumber Co., Inc. v. Collector of Internal Revenue
Special Treatment of Certain Foreign Persons or Some Items of Income
Sec. 25(C) to (E), NIRC
(C) Alien Individual Employed by Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies. -
There shall be levied, collected and paid for each taxable year upon the gross income
received by every alien individual employed by regional or area headquarters and
regional operating headquarters established in the Philippines by multinational
companies as salaries, wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, from such regional or area
headquarters and regional operating headquarters, a tax equal to fifteen percent
(15%) of such gross income:
Provided, however, That the same tax treatment shall apply to Filipinos employed
and occupying the same position as those of aliens employed by these multinational
companies. For purposes of this Chapter, the term 'multinational company' means a
foreign firm or entity engaged in international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. -
There shall be levied, collected and paid for each taxable year upon the gross income
INCOME TAXATION OF FOREIGN PERSONS
received by every alien individual employed by offshore banking units established in
the Philippines as salaries, wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, from such off-shore banking units,
a tax equal to fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment shall apply to Filipinos employed
and occupying the same positions as those of aliens employed by these offshore
banking units.
(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. -
An Alien individual who is a permanent resident of a foreign country but who is
employed and assigned in the Philippines by a foreign service contractor or by a
foreign service subcontractor engaged in petroleum operations in the Philippines
shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and
allowances, received from such contractor or subcontractor: Provided, however, That
the same tax treatment shall apply to a Filipino employed and occupying the same
position as an alien employed by petroleum service contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien
employees referred to under Subsections (C), (D) and (E) hereof shall be subject to
the pertinent income tax, as the case may be, imposed under this Code.
Sec. 28(A)(3) to (4), NIRC
(3) International Carrier. — An international carrier doing business in the Philippines
shall pay a tax of two and one-half percent (21/2 %) on its ‘Gross Philippine Billings’
as defined hereunder:
(a) International Air Carrier. — ‘Gross Philippine Billings’ refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo, and
mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of
the ticket or passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline form part of the
Gross Philippine Billings if the passenger boards a plane in a port or point in
the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any part outside
the Philippines on another airline, only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine Billings.
(b) International Shipping. — ‘Gross Philippine Billings’ means gross revenue
whether for passenger, cargo or mail originating from the Philippines up to
final destination, regardless of the place of sale or payments of the passage
or freight documents.
Provided, That international carriers doing business in the Philippines may
avail of a preferential rate or exemption from the tax herein imposed on
their gross revenue derived from the carriage of persons and their excess
baggage on the basis of an applicable tax treaty or international agreement
to which the Philippines is a signatory or on the basis of reciprocity such that
an international carrier, whose home country grants income tax exemption
to Philippine carriers, shall likewise be exempt from the tax imposed under
this provision. [32]
(4) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head
office shall be subject to a tax of fifteen (15%) which shall be based on the total
profits applied or earmarked for remittance without any deduction for the tax
component thereof (except those activities which are registered with the Philippine
Economic Zone Authority). The tax shall be collected and paid in the same manner
as provided in Sections 57 and 58 of this Code: Provided, that interests, dividends,
rents, royalties, including remuneration for technical services, salaries, wages
premiums, annuities, emoluments or other fixed or determinable annual, periodic or
casual gains, profits, income and capital gains received by a foreign corporation
during each taxable year from all sources within the Philippines shall not be treated
as branch profits unless the same are effectively connected with the conduct of its
trade or business in the Philippines.
Sec. 28(A)(6) to (7), NIRC
(6) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest
from any currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements and
royalties derived from sources within the Philippines shall be subject to a
final income tax at the rate of twenty percent (20%) of such interest:
Provided, however, That interest income derived by a resident foreign
corporation from a depository bank under the expanded foreign currency
INCOME TAXATION OF FOREIGN PERSONS
deposit system shall be subject to a final income tax at the rate of fifteen
percent (15%) [34] of such interest income.
(b) Income Derived under the Expanded Foreign Currency Deposit System. -
Income derived by a depository bank under the expanded foreign currency
deposit system from foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local commercial banks including
branches of foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign currency deposit system
units, and other depository banks under the expanded foreign currency
deposit system shall be exempt from all taxes, except net income from such
transactions as may be specified by the Secretary of Finance, upon
recommendation by the Monetary Board to be subject to the regular income
tax payable by banks: Provided, however, That interest income from foreign
currency loans granted by such depository banks under said expanded
system to residents other than offshore banking units in the Philippines or
other depository banks under the expanded system shall be subject to a final
tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or corporations, from
transactions with depository banks under the expanded system shall be
exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock
Exchange. - AA final tax at the rate of fifteen percent (15%) is hereby
imposed upon the 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.
(d) Intercorporate Dividends. - Dividends received by a resident foreign
corporation from a domestic corporation liable to tax under this Code shall
not be subject to tax under this Title.
(7) Offshore Gaming Licensees. – The provisions of existing special or general laws
to the contrary notwithstanding, the non-gaming revenues derived within the
Philippines of foreign-based offshore gaming licensees as defined and duly licensed
by the Philippine Amusement and Gaming Corporation or any special economic zone
authority or tourism zone authority or freeport authority shall be subject to an income
tax equivalent to twenty-five percent (25%) of the taxable income derived during
each taxable year. [20]
Sec. 28(B)(2) to (4), NIRC
(B) Tax on Nonresident Foreign Corporation -
(1) In General. - Except as otherwise provided in this Code, a foreign corporation
not engaged in trade or business in the Philippines, effective January 1,
2021, shall pay a tax equal to twenty-five percent (25%) of the gross income
received during each taxable year from all sources within the Philippines,
such as interests, dividends, rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and income, and
capital gains, except capital gains subject to tax under subparagraph 5(c).
(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A
cinematographic film owner, lessor, or distributor shall pay a tax of twenty-
five percent (25%) of its gross income from all sources within the
Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals.
– A nonresident owner or lessor of vessels shall be subject to a tax of four
and one-half percent (4 1/2%) of gross rentals, lease or charter fees from
leases or charters to Filipino citizens or corporations, as approved by the
Maritime Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment.
- Rentals, charters and other fees derived by a nonresident lessor of aircraft,
machineries and other equipment shall be subject to a tax of seven and one-
half percent (7 1/2%) of gross rentals or fees.
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -
(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty
percent (20%) is hereby imposed on the amount of interest on foreign loans
contracted on or after August 1, 1986;
(b) [TAX SPARING PROVISION] Intercorporate Dividends. - A final withholding
tax at the rate of fifteen percent (15%) is hereby imposed on the amount of
cash and/or property dividends received from a domestic corporation, which
shall be collected and paid as provided in Section 57(A) of this Code, subject
to the condition that the country in which the nonresident foreign
INCOME TAXATION OF FOREIGN PERSONS
Suppose country of domicile nagbigay ng 15% credit, satisfied
corporation is domiciled, shall allow a credit against the tax due from the
na. How much more kung yung domicile country walang tax.
nonresident foreign corporation taxes deemed to have been paid in the
Philippines equivalent to fifteen percent (15%), [38] which represents the
Commissioner of Internal Revenue v. Procter & Gamble Philippines
difference between the regular income tax and the fifteen percent (15%) tax
Manufacturing Corp.
on dividends as provided in this subparagraph: Provided, That effective July
While the Supreme Court found no showing in Commissioner of
1, 2020,[38] the credit against the tax due shall be equivalent to the
Internal Revenue v. Procter & Gamble Philippines
difference between the regular income tax rate provided in Section 28(B)(1)
Manufacturing Corp. that the U.S. tax laws allowed a foreign tax
of this Code [38] and the fifteen percent (15%) tax on dividends;
credit against the U.S. federal taxes payable by PMC-USA on the
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock
dividends received from PMC-Phil. taxes deemed paid in the
Exchange. - A final tax at the rate of fifteen percent (15%) [35] is hereby
Philippines in an amount equivalent to at least 20% of such
imposed upon the net capital gains realized during the taxable year from the
dividends, the Supreme Court found exactly the contrary in
sale, barter, exchange or other disposition of shares of stock in a domestic
Commissioner of Internal Revenue v. Interpublic Group of
corporation, except shares sold, or disposed of through the stock exchange.
Companies, Inc., [tax sparing provision applies here 15%] and,
thereupon, held that there is basis under the U.S. Internal
Tax Sparing Provision Revenue Code for the application of the tax sparing provision in
1. The recipient of dividend income is a non-resident foreign corporation the NIRC.
(NFRC). Does not apply to alien individuals.
2. If the foreign country where the NRFC is domiciled grants a credit against
Proctor & Gamble Case
the tax due in its country of domicile + the amount should be at least
SC did not rule that the tax sparing provision applied because there
15% of the dividends paid in the Philippines.
was no evidence presented that under the US federal tax laws Proctor
Ex. US corporation. Credit equivalent to 15% is a credit against
was granted a foreing tax credit equivalent to at least 20% of the
the US federal tax. It’s a credit against the tax due in that foreign
dividend received from the Ph. Had Proctor been able to prove that
country. Not in the PH.
there was a credit granted under US tax laws on the dividends received
15% galing dati sa corp tax rate was 30%. Dahil deduct mo yung
from proctor PH, it would have been entitled to the tax sparing.
15% tax credit sa corp tax rate 30%, 15% . Now, the corp tax
However, SC found that there is basis of the US revenue code for the
rate is 25%, if you grant a credit equiv to 15%, then the tax credit
applic of the tax sparing prov under the NIRC. SC discussed the US
should now be adjusted to 10% because reg corp intax tax rate
federal tax laws na whatever taxes the PH corp pays in the PH, those
25-15 tax sparing rate = 10%.
taxes will be avail aws a credit against the US taxes payable by the US
Conditioned on the foreign country where NRFC is domiciled
corp. What SC did not find as substantiated in Proctor, the SC found it
granting a credit against the tax due from the NRFC taxes
satisfied that the taxes of the subsidy paying in the PH is allowed as a
deemed to have been paid in the Phils. equivalent to 15%.[15%
credit to the US taxes equiv to 15%. THus, the tax sparing provision
to be adjusted pursuant to CREATE. Could be 10%]
applies. The dividends will be subject only to 15%.
3. If the country of domicile of NRFC does not impose tax at all on the
Current US law:
dividends received from the Ph domestic corp, then the requirement of
Dividends received of a US corporation from a foreing corp like PH
tax sparing is fully satisfied
corporation, shall no longer be tax in the US so excluded siya from
Above condition is also satisfied if the foreign country does not
gross income nasa US.
impose any tax at all on income derived by the NRFC from
foreign sources.
E.g., BVI, Cayman Is., HK, Gibraltar, Jersey Channel Is. etc.
INCOME TAXATION OF FOREIGN PERSONS
So if walang iimpose na tax yung US sa dividends received from the
PH corp, then similar sa HK na no tax on those dividends.
More reason that the tax sparing provision is applicable.
Commissioner of Internal Revenue v. Wander Philippines, Inc. and the
Court of Tax Appeals illustrates the application of the “tax
sparing” provision in Section 28(B)(5) of the NIRC where the
country of domicile of the non-resident foreign corporation that
is a recipient of dividend income from the Philippines imposes
no income tax at all on such dividends.
No tax imposed by the Switz on dividends from the PH. The tax sparing
provision therefore applies.
Proper Party to File a Claim for Refund/Credit
● See Marubeni (Japan), Procter & Gamble (US), where the SC held that
the payee, not the withholding agent, is the real party in interest to file
the refund claim) versus Wander Phils. (Switzerland, where the SC held
that the withholding agent is the real party in interest to file the refund
claim).
Conflict resolved when the SC En Banc reconsidered the P&G decision of
its Second Division that the withholding agent (P&G Phil.) has no
capacity to bring suit on behalf of its principal (P&G USA) which is the
proper party in interest to claim for refund. CIR vs. Procter & Gamble
Philippine Manufacturing Corporation, G.R. No. 66838 (Resolution),
December 2, 1991, 204 SCRA 377
Proctor Case:
Ex. Nag-remit is Proctor ng dividends to Proctor USA. What was
withheld was 25% when it should be 15% under the tax sparing
provision.
Q: Who has the authority to claim for a refund of the excess 10% as
amended by the NIRC when the corp tax is 25? Who has the authority
to file the claim for excess?
A: Proctor Case the Payee or Proctor USA.
This decision was rendered by SC on April 15 1988.
Wander PH:
SC held that it’s not the payee or income recipient but the withholding
agent.
3 years after Proctor Case
CURRENT RULE:
It’s either the withholding agent or the income recipient may be the
proper party to claim for refund.
Procter & Gamble Wander Phils
Payee – Proctor & Gamble USA withholding agent is the real party in
(1988) pronouncement interest to file the refund claim).
Now: Either withholding agent or income recipient
Items of Passive Income
Sec 28
Foreign Corporation 28(A)(3)
(3) International Carrier. — An international carrier doing business in the
Philippines shall pay a tax of two and one-half percent (21/2 %) on its ‘Gross
Philippine Billings’ as defined hereunder:
(a) International Air Carrier. — ‘Gross Philippine Billings’ refers to the
amount of gross revenue derived from carriage of persons, excess
baggage, cargo, and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale
or issue and the place of payment of the ticket or passage document:
Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings
if the passenger boards a plane in a port or point in the Philippines:
Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any part
outside the Philippines on another airline, only the aliquot portion of
the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross
Philippine Billings.
INCOME TAXATION OF FOREIGN PERSONS
(b) International Shipping. — ‘Gross Philippine Billings’ means gross
revenue whether for passenger, cargo or mail originating from the
Philippines up to final destination, regardless of the place of sale or
payments of the passage or freight documents.
Provided, That international carriers doing business in the Philippines may
avail of a preferential rate or exemption from the tax herein imposed on their
gross revenue derived from the carriage of persons and their excess baggage
on the basis of an applicable tax treaty or international agreement to which
the Philippines is a signatory or on the basis of reciprocity such that an
international carrier, whose home country grants income tax exemption to
Philippine carriers, shall likewise be exempt from the tax imposed under this
provision. [32]
Gross Philippine BIllings Tax 24(A)(3) they may avail tax exempt rate
1. Tax treaty of that Int carrier and Ph
a. 1 ½ usually tax na nakalagay sa tax treaty
2. Preferential treatment on the ground of reciprocity
28(A)(6) Items of Passive Income
(6) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from
Deposit Substitutes, Trust Funds and Similar Arrangements and
Royalties. - Interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds
and similar arrangements and royalties derived from sources within
the Philippines shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided, however, That
interest income derived by a resident foreign corporation from a
depository bank under the expanded foreign currency deposit system
shall be subject to a final income tax at the rate of fifteen percent
(15%) [34] of such interest income.
(b) Income Derived under the Expanded Foreign Currency Deposit
System. - Income derived by a depository bank under the expanded
foreign currency deposit system from foreign currency transactions
with nonresidents, offshore banking units in the Philippines, local
commercial banks including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system units, and other
depository banks under the expanded foreign currency deposit system
shall be exempt from all taxes, except net income from such
transactions as may be specified by the Secretary of Finance, upon
recommendation by the Monetary Board to be subject to the regular
income tax payable by banks: Provided, however, That interest income
from foreign currency loans granted by such depository banks under
said expanded system to residents other than offshore banking units
in the Philippines or other depository banks under the expanded
system shall be subject to a final tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or corporations, from
transactions with depository banks under the expanded system shall
be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock
Exchange. - AA final tax at the rate of fifteen percent (15%) is hereby
imposed upon the 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.
(d) Intercorporate Dividends. - Dividends received by a resident foreign
corporation from a domestic corporation liable to tax under this Code
shall not be subject to tax under this Title.
Subject to Final Withholding Taxes
Take note that there are items of passive income that are subject to
Final Withholding Tax. Go to Sec. 28.
When you’re talking of a RFC (Resident Foreign Corporation), the tax
is like a domestic corp. 20% of the net income.
But there are some foreign corp subject to diff tax rates
INCOME TAXATION OF FOREIGN PERSONS
28-A-3 - international carriers and shipping companies corporation, then the withholding tax is not 25% but 20%. And
(Cathay Pacific, Japan Airlines) 2.5% on gross ph billings tax sparing is in 28-B-5.
(gross ph billings tax. Not subject to 20% rate anymore.) When NRFC sells shares of stock in a PH corp, the gain
34-A-3 - such international carriers may avail of exemption or derived from the sale shall be subject to a final capital gains
preferential rate on the basis of tax treaty or international tax of 15% just like domestic corporations
agreement or reciprocity. The preferential treatment may be
grounded on tax treaty bet ph and country of dom of that int
carrier or reciprocity entered into the Ph and the country of
domicile.
Kung 2.5% tax rate under NIRC, under treaties, it’s 1.5% or reciprocity
na walang imposition of income tax on international carriers

SEC. 28(A)(6)
Take note of 28-A-6, these are the items of passive income which are
subject to FWT at special rates
Int on deposits and yield from deposit substitutes 20%.
Pareho sa domestic corporations
Expanded foreign current deposit system; offshore income -
exempt; onshore income - 10%
Gain derived from sale of shares not traded in stock exchange
- same with domestic corporations, 15%
Intercorporate dividends - pareho with domestic corporations,
not subject to tax
NRFC - look at 28B. We learned that the tax is 25%, but this
time it’s gross income without the benefit of deduction. So
yung buong income na nakuha ng is 25%
Resident foreign - taxed on net income
Pay attention to certain passive income that are given preferential
rates
28-B - Warner, Disney - 25% on gross income derived from
such films.
28-B-3 - may-ari ng mga aircrafts or machineries and equip
Ex. Boing lets its airplane equipment be leased by PH
Airlines. PH Airlines, before it remits rentals to Boing, will
withhold 7.5% (not 25% bec there’s a special rate)
28-B-5 - interest on foreign loans.
Ex. If a foreign corp extends loans or advances to a subsidiary
in the PH and the subsidiary pays interest to that foreing
Taxation of Estates and Trusts
Taxation of Trusts and Estates
Why would an estate or trust be taxable?
Q: A dies on Jan 1, 2022. A has properties which produce rental income. Under
the law, when A dies, the heirs have 1 year to file an income estate tax return
(Jan 1, 2023) and pay the tax of 6%. What happens now?
A: Dahil wala na si A, ang papalit sa kanya ay his estate.
His estate will now file an income tax return and VAT in relation to the
rental tax income which A used to derive.
So for the period of 1 year na hindi pa settled estate niya, the estate
becomes a separate taxable person.
Q: June 30, 2022, the heirs are in a hurry to settle the estate. Let’s say 3 yung
anak niya and parehas lahat ng value ng tatlong properties and this all
happened on June 30, 2022. Those properties which produced rental income
ay napunta na sa heirs. By June 30, 2022, who will report the income tax?
A: The children because they own the properties already.
As soon as the estate is settled, either judicially or extrajudicially, the
heir who receives the property with the rental income will be taxed.
The estate ceases to become a separate taxable person.
Q: Anong tax rate of the income of the estate?
A: Graduated tax rate of Sec. 24A will apply.
Q: What’s your basis?
A: Sec. 60 first paragraph.
Estate being a sep taxable person like an individual may also have
COGS or cost of sales or deduct business or necessary expenses or
subjected to the same withholding tax on passive income
If dividend is paid, it will pay 10%
If there is a capital on sales of shares, 15%
If real prop is sold classified as capital, 6% CGT
“The tax imposed by this Title upon individuals shall apply to the
income of estates or of any kind of property held in trust.”
Q: Suppose hindi pa nasettle yung estate as of June 30, 2022 until the very
last day of Dec. 31, 2022. Tsaka lang sila nag file ng Dec. 30. Tuloy tuloy ba
na magbabayad yung estate ng income tax return?
A: Yes. As long as the estate has not been settled, it shall still pay taxes.
ESTATES AND TRUSTS
Secs. 60-66, NIRC
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent interests, and
income accumulated or held for future distribution under the terms of
the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the
beneficiaries, and income collected by a guardian of an infant which
is to be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the period of
administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated.
(B) Exception. - The tax imposed by this Title shall not apply to employee's trust
which forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees
(1) if contributions are made to the trust by such employer, or employees,
or both for the purpose of distributing to such employees the earnings
and principal of the fund accumulated by the trust in accordance with
such plan, and
(2) if under the trust instrument it is impossible, at any time prior to the
satisfaction of all liabilities with respect to employees under the trust,
for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the
exclusive benefit of his employees:
Provided, That any amount actually distributed to any employee or distributee
shall be taxable to him in the year in which so distributed to the extent that it
exceeds the amount contributed by such employee or distributee.
(C) Computation and Payment. -
(1) In General. - The tax shall be computed upon the taxable income of
the estate or trust and shall be paid by the fiduciary, except as
provided in Section 63 (relating to revocable trusts) and Section 64
(relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the case of
two or more trusts, the creator of the trust in each instance is the same
person, and the beneficiary in each instance is the same, the taxable
income of all the trusts shall be consolidated and the tax provided in
this Section computed on such consolidated income, and such
Taxation of Estates and Trusts
proportion of said tax shall be assessed and collected from each
trustee which the taxable income of the trust administered by him
bears to the consolidated income of the several trusts.
SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be
computed in the same manner and on the same basis as in the case of an
individual, except that:
(A) There shall be allowed as a deduction in computing the taxable income of
the estate or trust the amount of the income of the estate or trust for the
taxable year which is to be distributed currently by the fiduciary to the
beneficiaries, and the amount of the income collected by a guardian of an
infant which is to be held or distributed as the court may direct, but the amount
so allowed as a deduction shall be included in computing the taxable income
of the beneficiaries, whether distributed to them or not.
Any amount allowed as a deduction under this Subsection shall not be allowed
as a deduction under Subsection (B) of this Section in the same or any
succeeding taxable year.
(B) In the case of income received by estates of deceased persons during the
period of administration or settlement of the estate, and in the case of income
which, in the discretion of the fiduciary, may be either distributed to the
beneficiary or accumulated, there shall be allowed as an additional deduction
in computing the taxable income of the estate or trust the amount of the
income of the estate or trust for its taxable year, which is properly paid or
credited during such year to any legatee, heir or beneficiary but the amount so
allowed as a deduction shall be included in computing the taxable income of
the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions
mentioned in Subsections (A) and (B) of this Section shall not be allowed:
Provided, That the amount of any income included in the return of said trust
shall not be included in computing the income of the beneficiaries.
SEC. 62. REPEALED
SEC. 63. Revocable trusts. - Where at any time the power to revest in the
grantor title to any part of the corpus of the trust is vested
(1) in the grantor either alone or in conjunction with any person not having
a substantial adverse interest in the disposition of such part of the
corpus or the income therefrom, or
(2) in any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom, the
income of such part of the trust shall be included in computing the
taxable income of the grantor.
SEC. 64. Income for Benefit of Grantor.-
(A) Where any part of the income of a trust
(1) is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income may be held or accumulated for future distribution to the
grantor, or
(2) may, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income, be distributed to the grantor, or
(3) is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income may be applied to the payment of premiums upon policies of
insurance on the life of the grantor, such part of the income of the trust
shall be included in computing the taxable income of the grantor. `
(B) As used in this Section, the term 'in the discretion of the grantor' means in
the discretion of the grantor, either alone or in conjunction with any person not
having a substantial adverse interest in the disposition of the part of the
income in question.
SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators,
receivers, conservators and all persons or corporations, acting in any fiduciary
capacity, shall render, in duplicate, a return of the income of the person, trust
or estate for whom or which they act, and be subject to all the provisions of this
Title, which apply to individuals in case such person, estate or trust has a gross
income of Twenty thousand pesos (P20,000) [64] or over during the taxable
year.
Such fiduciary or person filing the return for him or it, shall take oath that he
has sufficient knowledge of the affairs of such person, trust or estate to enable
him to make such return and that the same is, to the best of his knowledge
and belief, true and correct, and be subject to all the provisions of this Title
which apply to individuals:
Provided, That a return made by or for one or two or more joint fiduciaries filed
in the province where such fiduciaries reside; under such rules and regulations
as the Secretary of Finance, upon recommendation of the Commissioner, shall
prescribe, shall be a sufficient compliance with the requirements of this
Section.
Taxation of Estates and Trusts
SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees,
executors, administrators and other fiduciaries are indemnified against the
claims or demands of every beneficiary for all payments of taxes which they
shall be required to make under the provisions of this Title, and they shall have
credit for the amount of such payments against the beneficiary or principal in
any accounting which they make as such trustees or other fiduciaries.
Secs. 207-213, NIRC
SEC. 207. Summary Remedies. –
(A) Distraint of Personal Property. - Upon the failure of the person owing any
delinquent tax or delinquent revenue to pay the same at the time required, the
Commissioner or his duly authorized representative, if the amount involved is
in excess of One million pesos (P1,000,000), or the Revenue District Officer, if
the amount involved is One million pesos (P1,000,000) or less, shall seize and
distraint any goods, chattels or effects, and the personal property, including
stocks and other securities, debts, credits, bank accounts, and interests in and
rights to personal property of such persons in sufficient quantity to satisfy the
tax, or charge, together with any increment thereto incident to delinquency,
and the expenses of the distraint and the cost of the subsequent sale.
A report on the distraint shall, within ten (10) days from receipt of the warrant,
be submitted by the distraining officer to the Revenue District Officer, and to
the Revenue Regional Director: Provided, That the Commissioner or his duly
authorized representative shall, subject to rules and regulations promulgated
by the Secretary of Finance, upon recommendation of the Commissioner, have
the power to lift such order of distraint: Provided, further, That a consolidated
report by the Revenue Regional Director may be required by the Commissioner
as often as necessary.
(B) Levy on Real Property. - After the expiration of the time required to pay the
delinquent tax or delinquent revenue as prescribed in this Section, real property
may be levied upon, before simultaneously or after the distraint of personal
property belonging to the delinquent. To this end, any internal revenue officer
designated by the Commissioner or his duly authorized representative shall
prepare a duly authenticated certificate showing the name of the taxpayer and
the amounts of the tax and penalty due from him. Said certificate shall operate
with the force of a legal execution throughout the Philippines.
Levy shall be affected by writing upon said certificate a description of the
property upon which levy is made. At the same time, written notice of the levy
shall be mailed to or served upon the Register of Deeds for the province or city
where the property is located and upon the delinquent taxpayer, or if he be
absent from the Philippines, to his agent or the manager of the business in
respect to which the liability arose, or if there be none, to the occupant of the
property in question.
In case the warrant of levy on real property is not issued before or
simultaneously with the warrant of distraint on personal property, and the
personal property of the taxpayer is not sufficient to satisfy his tax delinquency,
the Commissioner or his duly authorized representative shall, within thirty (30)
days after execution of the distraint, proceed with the levy on the taxpayer's
real property.
Within ten (10) days after receipt of the warrant, a report on any levy shall be
submitted by the levying officer to the Commissioner or his duly authorized
representative: Provided, however, That a consolidated report by the Revenue
Regional Director may be required by the Commissioner as often as necessary:
Provided, further, That the Commissioner or his duly authorized representative,
subject to rules and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, shall have the authority to lift warrants
of levy issued in accordance with the provisions hereof.
SEC. 208. Procedure for Distraint and Garnishment. - The officer serving the
warrant of distraint shall make or cause to be made an account of the goods,
chattels, effects or other personal property distrained, a copy of which, signed
by himself, shall be left either with the owner or person from whose possession
such goods, chattels, or effects or other personal property were taken, or at the
dwelling or place of business of such person and with someone of suitable age
and discretion, to which list shall be added a statement of the sum demanded
and note of the time and place of sale.
Stocks and other securities shall be distrained by serving a copy of the warrant
of distraint upon the taxpayer and upon the president, manager, treasurer or
other responsible officer of the corporation, company or association, which
issued the said stocks or securities.
Debts and credits shall be distrained by leaving with the person owing the debts
or having in his possession or under his control such credits, or with his agent,
a copy of the warrant of distraint. The warrant of distraint shall be sufficient
authority to the person owning the debts or having in his possession or under
his control any credits belonging to the taxpayer to pay to the Commissioner
the amount of such debts or credits.
Bank accounts shall be garnished by serving a warrant of garnishment upon
the taxpayer and upon the president, manager, treasurer or other responsible
officer of the bank. Upon receipt of the warrant of garnishment, the bank shall
Taxation of Estates and Trusts
turn over to the Commissioner so much of the bank accounts as may be
sufficient to satisfy the claim of the Government.
SEC. 209. Sale of Property Distrained and Disposition of Proceeds. - The
Revenue District Officer or his duly authorized representative, other than the
officer referred to in Section 208 of this Code shall, according to rules and
regulations prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, forthwith cause a notification to be exhibited in not less
than two (2) public places in the municipality or city where the distraint is
made, specifying; the time and place of sale and the articles distrained. The
time of sale shall not be less than twenty (20) days after notice to the owner or
possessor of the property as above specified and the publication or posting of
such notice. One place for the posting of such notice shall be at the Office of
the Mayor of the city or municipality in which the property is distrained.
At the time and place fixed in such notice, the said revenue officer shall sell
the goods, chattels, or effects, or other personal property, including stocks and
other securities so distrained, at public auction, to the highest bidder for cash,
or with the approval of the Commissioner, through duly licensed commodity or
stock exchanges.
In the case of Stocks and other securities, the officer making the sale shall
execute a bill of sale which he shall deliver to the buyer, and a copy thereof
furnished the corporation, company or association which issued the stocks or
other securities. Upon receipt of the copy of the bill of sale, the corporation,
company or association shall make the corresponding entry in its books,
transfer the stocks or other securities sold in the name of the buyer, and issue,
if required to do so, the corresponding certificates of stock or other securities.
Any residue over and above what is required to pay the entire claim, including
expenses, shall be returned to the owner of the property sold. The expenses
chargeable upon each seizure and sale shall embrace only the actual expenses
of seizure and preservation of the property pending the sale, and no charge
shall be imposed for the services of the local internal revenue officer or his
deputy.
SEC. 210. Release of Distrained Property Upon Payment Prior to Sale. - If at
any time prior to the consummation of the sale all proper charges are paid to
the officer conducting the sale, the goods or effects distrained shall be restored
to the owner.
SEC. 211. Report of Sale to Bureau of Internal Revenue. - Within two (2) days
after the sale, the officer making the same shall make a report of his
proceedings in writing to the Commissioner and shall himself preserve a copy
of such report as an official record.
SEC. 212. Purchase by Government at Sale Upon Distraint.- When the amount
bid for the property under distraint is not equal to the amount of the tax or is
very much less than the actual market value of the articles offered for sale, the
Commissioner or his deputy may purchase the same in behalf of the national
Government for the amount of taxes, penalties and costs due thereon.
Property so purchased may be resold by the Commissioner or his deputy,
subject to the rules and regulations prescribed by the Secretary of Finance, the
net proceeds therefrom shall be remitted to the National Treasury and
accounted for as internal revenue.
SEC. 213. Advertisement and Sale. - Within twenty (20) days after levy, the
officer conducting the proceedings shall proceed to advertise the property or a
usable portion thereof as may be necessary to satisfy the claim and cost of
sale; and such advertisement shall cover a period of a least thirty (30) days. It
shall be effectuated by posting a notice at the main entrance of the municipal
building or city hall and in public and conspicuous place in the barrio or district
in which the real estate lies and by publication once a week for three (3) weeks
in a newspaper of general circulation in the municipality or city where the
property is located. The advertisement shall contain a statement of the amount
of taxes and penalties so due and the time and place of sale, the name of the
taxpayer against whom taxes are levied, and a short description of the property
to be sold. At any time before the day fixed for the sale, the taxpayer may
discontinue all proceedings by paying the taxes, penalties and interest. If he
does not do so, the sale shall proceed and shall be held either at the main
entrance of the municipal building or city hall, or on the premises to be sold,
as the officer conducting the proceedings shall determine and as the notice of
sale shall specify.
Within five (5) days after the sale, a return by the distraining or levying officer
of the proceedings shall be entered upon the records of the Revenue Collection
Officer, the Revenue District officer and the Revenue Regional Director. The
Revenue Collection Officer, in consultation with the Revenue district Officer,
shall then make out and deliver to the purchaser a certificate from his records,
showing the proceedings of the sale, describing the property sold stating the
name of the purchaser and setting out the exact amount of all taxes, penalties
and interest: Provided, however, That in case the proceeds of the sale exceeds
the claim and cost of sale, the excess shall be turned over to the owner of the
property.
The Revenue Collection Officer, upon approval by the Revenue District Officer
may, out of his collection, advance an amount sufficient to defray the costs of
Taxation of Estates and Trusts
collection by means of the summary remedies provided for in this Code,
including the preservation or transportation in case of personal property, and
the advertisement and subsequent sale, both in cases of personal and real
property including improvements found on the latter. In his monthly collection
reports, such advances shall be reflected and supported by receipts.
Trusts
Irrevocable trust
Itself a taxable person — treated like an individual.
Has its own TIN and files its own income tax and VAT or
percentage tax returns.
Acts through the trustee. Beneficiaries are persons (natural and
juridical) other than the grantor.
Revocable trust
Not separately taxable from the grantor or trustor.
Income of such trust is reported by, and taxable to, to the
grantor.
Operative document:
Deed of Trust; or
Trust Agreement
Parties:
1. Grantor,
2. Trustee/Fiduciary and
3. Beneficiary/ies
Transfer of cash or property to an irrevocable trust is subject to donor’s
tax since the grantor relinquishes ownership and the right to revoke or
recover title to the property transferred.
Trustee may:
1. accumulate income for future distribution,
2. distribute income currently, or
3. in his discretion, accumulate or distribute income, in any such
case for the benefit of the beneficiaries.
Ex. Clause in Trust Agreement where the trustee is given the discretion whether
to accumulate income or distribute to the heirs
1. Pag nagkasakit (for hospitalization expenses)
2. Pag mag-college na tapos walang panggastos; Pang-masters
3. Other emergency needs
Being a separately taxable person, an irrevocable trust may also claim
deductions (i.e., ordinary and necessary business expenses) from gross
income derived from the conduct of trade or business or dealings in
property. Subject to final tax, too, on items of passive income.
The same rates will apply to estate and trust
Furthermore, any part of trust income that is distributed, or required to
be distributed currently, to the beneficiaries during the taxable year is
deductible from the gross income of the trust.
The beneficiaries, however, shall report in their income tax
return such income distributed or required to be distributed to
them (whether distributed or not) and pay income tax thereon.
Ex. the amount that is required to be distributed currently will have to be
reported by the beneficiary in their income tax return, the same be deducted
from the gross income of the estate
In fact, distributions of trust income to such beneficiaries are
subject to a creditable withholding tax of 15%.
2 or more trusts established by same grantor with same beneficiaries:
Income is to be consolidated for tax purposes.
Tax is to be shared pro rata by the trusts in proportion to taxable
income.
Suppose 800K each, combining 1.6M baka mataas income bracket
mo.
If hahatiin mo, babagsak ka sa lower tax bracket.
The reason why it is combined so the law may not be circumvented to
reduce income tax.
2 or more trusts established by the same grantor but with different
beneficiaries = Separate filing.
2 or more trusts with same beneficiaries but established by different
grantors = Separate filing.
Employees’ Pension Trust
Income tax, as well as final tax on passive income, not applicable to
employees’ pension trust, provided:
1. Employer or employees, or both, contribute to the trust; and
Taxation of Estates and Trusts
2. Non-diversion of trust fund (corpus or income) other than for
exclusive benefit of employees.
Thus, pension trust is exempt from:
20% final tax on interest income, CIR v. CA,
15% CGT on sale of shares,
6% CGT on sale of real property classified as capital assets
Q: Does the exemption include the 6/10 of 1% STT?
Note: Are insured (not trusteed) pension plans also exempt?
If the employer establishes an employees’ pensions trust for the benefit of his
employee. Both the employer and employee contribute to the trust fund.
No income shall be diverted for any purpose other than the benefit of
the employees, then this shall not be subjected to income tax.
Ex. Pension is established with the bank as trustee.
Should not be subject to interest tax on interest income.
Ex. Let’s say the employee sells shares in a publicly listed company, it is not
subject to capital gains tax on sale of shares.
Ex. Let’s say the employee owns real property because the employer
contributed real property to the pension trust. The retirement fund is organized
as a trust and wants to cash in on the property. It is not subject to income tax
Sec. 40(C)(2)
Q: Does the exemption include the 6/10 of 1% STT (Stock Transaction Tax)?
Let’s say the pension trust holds shares of PLDT, publicly listed companies.
Trust sells said shares. Is the sale taxable?
A: BIR: it is exempt only from income tax imposed under Title 2, but Stock
Estates
Transaction Tax is only Title 5. However, it was formerly in Title 5. However, it
was formerly in Title 2, but moved by Congress because it was based on gross
selling price rather than income. With this, BIR took advantage and said that
employee pension trust is no longer exempt.
Q: Do you agree?
A: Baniqued does not agree. This is a social welfare provision wherein the
pension trust should be exempted from any tax.
Real Estate Investment Trust (REIT) (Rep. Act No. 9856)
Established as a stock corporation
Transfer of real property to a REIT is subject to Income Tax/Capital Gains
Tax and VAT, unless done pursuant to Sec. 40(C)(2).
Sec. 40 (C)(2) No gain or loss shall be recognized on a
corporation or on its stock or securities if such corporation is a
party to a reorganization and exchanges property in pursuance
of a plan of reorganization solely for stock or securities in
another corporation that is a party to the reorganization. A
reorganization is defined as:
(a) 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;
DST on transfer of real property to a REIT is 50% of the normal rate
(1.5%), or .75%.
Required to list in the PSE within 2 years.
Proceeds to be used in redevelopment and/or infrastructure
projects.
Required to distribute 90% of its distributable income as dividends.
Exempt from MCIT
Note: Generally, Dividends paid are deductible from gross
income, in addition to ordinary and necessary business
expenses under Sec. 34, in computing taxable income subject
to 20%-25% corporate income tax.
Transfer of real property in exchange for shares of stock
No income tax, CGT, and VAT
Also treated as a separate taxable person
Treated like an individual.
Has its own TIN and files its own income tax and VAT or
percentage tax returns.
Acts through the executor, administrator or any of the heirs duly
authorized.
Being a separately taxable person, an estate may also claim
deductions (i.e., ordinary and necessary business expenses)
from gross income derived from the conduct of trade or
business or dealings in property. Subject to final tax, too, on
items of passive income.
Taxation of Estates and Trusts
Furthermore, any part of estate income that is paid, or required to be
paid currently, to any of the heirs during the taxable year is deductible
from the gross income of the estate.
The heirs, however, shall report in their income tax return such income
paid or required to be paid to them (whether paid or not) and pay income
tax thereon.
Normally comes into being when there’s a delay in the settlement of a
decedent’s estate that comprises, among others, properties that earn
income, whether from the active conduct of trade or business (e.g.,
proprietorship) or passive income (e.g., rental, interest, royalties, etc.)
Properties owned by the decedent at the time of his death are subject to
the Estate Tax, while any income earned or derived from such properties
is subject to Income Tax and/or Value-Added Tax or Percentage Tax. The
latter is the subject discussed here.
Delivery by the executor or administrator of any sum of money or
property to an heir, legatee or devisee, after the settlement of the estate,
does not give rise to any taxable income on the part of the recipient, even
if the property may have appreciated in value from the time the
decedent acquired it.
If, after the settlement of the estate, an heir, legatee, or devisee sells an
inherited property for a price greater than the appraised value placed
upon it at the time he inherited the property from the decedent, he shall
be taxable individually on any such profit derived since, by then, he is
already the owner of the property and, therefore, he is required to report
as part of his gross income any gain realized from the sale. Sec. 32(B)(3),
NIRC; see also Sec. 211, Income Tax Regulations
Example of estate as a separate taxable person
If the decedent left income producing properties like houses for rent, and those
houses earn rental income, during the period that the estate is not distributed
yet to the heirs; who shoulders the income?
In the meantime the estate shoulders the income.
Tax rates in 24(A) will apply
If the estate has other income such a passive income or
dividends then the dividends will be taxable like the individual
at 10%
If the Estate earns capital gains tax at 6% then the estate will
be taxed at the same rate
If the estate derives royalties then the estate would be subject
to withholding tax at 20%
Estate is a separate taxable person Ex. Estate will be declared as
“Estate of Juan dela Cruz” filing for tax
Q: If the estate is a separate taxable entity how much will he pay?
A: Sec 60(A)
Ex. If the estate of Juan dela Cruz is earning rental income and he distributes
it to his heirs
GR: The estate will be taxable on the whole 1.5 million and the rentals
will be subject to value added tax. The entire income will be taxable to
the estate
EXPN: Estate distributes or pays part of the income it gets
currently to the heirs
Ex. The estate gets 500K rental income. The executor with prior court approval
pays the heirs' rentals of 200K to each heirs who will be liable for declaring or
reporting the tax? Is it still the estate or is it now the heirs?
The heirs would be liable for the income tax and the estate gets to
claim this as a deduction
If the estate pays or distributes any amount to the heirs
Continuing Example about Juan Dela Cruz’s estate
Ex. Juan dela Cruz died leaving 5 valuable properties, let’s assume wala na
siyang ibang naiwang assets. The current estate tax of 6% will be based on
what comprises the estate at the time of death. If he dies at Jan 1, 2022, the
estate tax is based on the FMV (fair market value) of the properties comprising
the estate at the said date of death.
Any accrued or accumulated at Jan. 1, 2022 forms part of the estate,
subject to estate tax.
Rental income after Jan 1, 2022 does not form part of the estate.
Ex. Let’s assume that Feb. 1, 2022, the heirs have already partitioned the
property. Extrajudicial partition was executed.
From the moment that the heirs have finally settled the estate, kung
kaninong heir napunta yung estate producing rental income, siya yung
magdedeclare ng rental income na yun.
Before Feb. 1, 2022, or when it is not yet settled, it will be taxable to
the estate. It will be subject to estate tax.
If the estate remains unsettled for 25 or 30 years, the estate should
have been filing an income tax return for the aforementioned years.
Whatever the income tax rate at that time should be applied.
Estate can also claim deductions, COGS, as any individual may
compute his taxable income in the conduct of trade or business.
Taxation of Estates and Trusts
Suppose Juan De la cruz brought property 1M; at the time of his death worth
50M na yung property, 50M will be subject to estate tax of 6%. Suppose nag-
away heirs for a period of 10 years, may income yung estate. As we said the
estate will be the one to report on that income. If after 10 years heirs settled,
then the value became 100M– nag appreciate yung value.
By the time that the property is delivered to heirs, wala na babayaran
yung heirs, because property was subjected to tax at the time of death.
So if the heirs accept the property, no need to pay any tax anymore.
If the trust is an irrevocable trust, then the transfer of 10M to the
irrevocable tax is considered as a gift. Then donors' tax will be paid.
Trust is also a separate taxable person. Since the trust is irrevocable, the trustor has transferred ownership to
the beneficiaries
When the trust is concluded, no more tax. It is already considered as
a donation to the beneficiary.
For donor’s tax to apply, the tax should be irrevocable.
If revocable, the trustor still has rights and interests over the property.
No transfer of ownership.
No donor’s tax.
But the trustor has to pay income tax.

Ex. Juan dela Cruz has 10 children. He set up a trust for the benefit of his
illegitimate children involving income-producing properties. The
trustor/grantor (Juan de la Cruz) will transfer properties under an irrevocable
trust with the bank as the trustee, with the obligation of the trustee to
administer those properties and the income will be accumulated with the trust
or paid directly to the trustees.

Terms of the trustor:

1. Trustee will pay 50% of the monthly rental income to the beneficiaries
Who reports the rental income? Trustee or beneficiaries?
Like in an estate, if the beneficiaries receives part of the
rental income, then the beneficiaries will pay income tax and
VAT (if exceeds the threshold)
If no such payment or distribution, just like estate, the trustee
will be reporting the rental income
2. See below:
Exempt Entities
Exempt Entities
Sec. 30, NIRC
SEC. 30. Exemptions from Tax on Corporations. - The following organizations
shall not be taxed under this Title in respect to income received by them as
such:
(A) Labor, agricultural or horticultural organization not organized principally for
profit;
(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual
purposes and without profit;
(C) A beneficiary society, order or association, operating for the exclusive
benefit of the members such as a fraternal organization operating under the
lodge system, or mutual aid association or a nonstock corporation organized
by employees providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or association, or
nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its
members;
(E) Nonstock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized
for profit and no part of the net income of which inures to the benefit of any
private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch
or irrigation company, mutual or cooperative telephone company, or like
organization of a purely local character, the income of which consists solely of
assessments, dues, and fees collected from members for the sole purpose of
meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a
sales agent for the purpose of marketing the products of its members and
turning back to them the proceeds of sales, less the necessary selling expenses
on the basis of the quantity of produce finished by them;
[IMPT] Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income, shall
be subject to tax imposed under this Code.
Secs. 27(B), (C), NIRC
(B) Proprietary Educational Institutions and Hospitals.–
Proprietary educational institutions and hospitals which are nonprofit shall pay
a tax of ten percent (10%) on their taxable income except those covered by
Subsection (D) hereof:
Provided, That beginning July 1, 2020 until June 30, 2023, the tax rate herein
imposed shall be one percent (1%):
Provided, further, That if the gross income from 'unrelated trade, business or
other activity' exceeds fifty percent (50%) of the total gross income derived by
such educational institutions or hospitals from all sources, the tax prescribed
in Subsection (A) hereof shall be imposed on the entire taxable income.
For purposes of this Subsection, the term 'unrelated trade, business or other
activity' means any trade, business or other activity, the conduct of which is
not substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function. 'Proprietary' means a
private hospital or any private school maintained and administered by private
individuals or groups with an issued permit to operate from the Department of
Education (DepEd), or the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority (TESDA), as the case
may be, in accordance with existing laws and regulations.
(C) Government-owned or –Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special or general laws to the
contrary notwithstanding, all corporations, agencies, or instrumentalities
owned or controlled by the Government, except the Government Service
Insurance System (GSIS), the Social Security System (SSS), the Home
Exempt Entities
Development Mutual Fund (HDMF) [25], the Philippine Health Insurance
Corporation (PHIC), and the local water districts shall pay such rate of tax upon
their taxable income as are imposed by this Section upon corporations or
associations engaged in a similar business, industry, or activity.
Exempt Corporations
Notwithstanding the exemption of any entity or organization
enumerated in Section 30, the income of whatever kind and character
of any such organization from any of its properties, real or personal, or
from any of its activities conducted for profit, REGARDLESS OF THE
DISPOSITION MADE OF SUCH INCOME, shall be subject to income tax.
Sec. 30, last par.
Sec. 30, last paragraph:
Even if the income derived from the properties of the exempt entity or
from its activities conducted for profit are used exclusively for its non-
2. Mutual Savings and Cooperative Banks
profit/charitable activity, this income derived from property conducted
for profit shall be subject to income tax.
They may be exempt from income tax, but if the income is conducted
for profit, this such will be subject to income tax
Even if the proceeds would be used for non-profit activities
Unconsti Sec 30 with regard to non-stock non-profit educational
institution as held in the cases of DLSU and College of St. Benilde
RULES
GR: The income derived from the exempt entities will not be subject to tax.
EXC: If the income derived from the exempt entities was for profit, it will be
subject to tax.
EXC to EXC: Non-stock and Non-profit educational institutions
3. Fraternal Beneficiary Societies
1. Labor, Agricultural, and Horticultural Organizations
Not organized principally for profit.
In order to be exempt from income taxation:
no part of their net income should inure to the benefit of any
member,
they are intended to be educational or instructive, and
they seek to better the conditions of those engaged in such
pursuits, the improvement of the grade or quality of their
products, and the promotion of a higher efficiency in their
respective occupations. Sec. 30(A), NIRC; Sec. 25, Rev. Regs.
No. 2
Thus, gate receipts, entry fees, and donations received by agricultural or
horticultural associations during trade fairs and other activities designed
to encourage the development of better agricultural and horticultural
products through a system of awards, prizes, or premiums and which are
used exclusively to meet their operating expenses are exempt from
income tax. Id.
Not derived from income or profit
This is exactly what they are organized for
However, those engaged in growing agricultural or horticultural products
or raising livestock or similar products for profit or whose profits may
inure to the benefit of their members or shareholders are not exempt
from tax. Id.
Income derived from activities from profit
Mutual savings banks not having a capital stock represented by shares
(i.e., non-stock) and cooperative banks without capital stock (i.e., non-
stock) organized and operated for mutual purposes and without profit
are also exempt from income tax. Sec. 30(B), NIRC
In order to be entitled to the exemption, the aforementioned banks
should be:
1. non-stock and
2. their earnings (less operating expenses) are to be distributed
wholly to their depositors, to the exclusion of any other person.
Sec. 26, Rev. Regs. No. 2
A beneficiary society, order or association, operating for the exclusive
benefit of the members such as:
a fraternal organization operating under the lodge system, or
a mutual aid association or a non-stock corporation organized
by employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of such
society, order, or association, or
non-stock corporations or their dependents” is exempt from
income tax. Section 30(C)
Exempt Entities
Hence, it is essential that the fraternal beneficiary society be operated
under the “lodge system” or for the exclusive benefit of its members.
The phrase “operating under the lodge system” means “carrying
on its activities under a form of organization that comprises
local branches, chartered by a parent organization and largely
self-governing, called lodges, chapters, or the like.”
Furthermore, the society must have “an established system for
payment to its members or their dependents of life, sickness,
accident, or other benefits.” Sec. 27, Rev. Regs. No. 2
4. Cemetery Companies
A cemetery company owned and operated exclusively for the benefit of
its members is likewise exempt from income tax. Sec. 30(D)
In order to avail of the exemption, the cemetery company must:
1. be owned by and operated exclusively for the benefit of its lot
owners, and
2. not be operated for profit.
Thus, a cemetery company organized solely for burial purposes and
barred by its charter from engaging in any unrelated business is exempt
provided no part of its net income inures to the benefit of any private
individual or shareholder. Sec. 29, Rev. Regs. No. 2
Baniqued: old provisions daw, unaware of any cemetery
companies today for the benefit of members
A cemetery company which fulfills the other requirement of the statute
may be exempt, even though it issues preferred stock entitling the
holders to dividend at a fixed rate, provided that its articles of
incorporation require:
1. that the preferred stock shall be retired at par as soon as
sufficient funds are realized from sales, and
2. that all funds not required for the payment of dividends upon or
for the retirement of preferred stock shall be used by the
company for the care and improvement of the cemetery
company.” Id.
5. Non-Stock Religious, Charitable, Scientific, Athletic, and Cultural Organizations
and Those for Rehabilitation of Veterans
Section 30(E) provides that a nonstock corporation or association
organized and operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans is
exempt from income tax in respect of income received by it as such.
Section 30(E), however, requires that such organizations be:
1. non-stock,
2. organized and operated exclusively for one or more of the
specified purposes, and
3. no part of their net income or asset shall belong to or inure to
the benefit of any member, organizer, officer or any specific
person.
Meaning of “non-stock”
1. “no part of its income is distributable as dividends to its
members, trustees, or officers” and
2. any profit “obtained as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of
the purpose or purposes for which the corporation was
organized.”
Meaning of “non-profit”
“no net income or asset accrues to or benefits any member or
specific person, with all the net income or asset devoted to the
institution’s purposes and all its activities conducted not for
profit.” Rev. Mem. Cir. No. 51-2014, June 6, 2014, citing Sec.
87, Corp. Code
Prohibition against inurement
Not violated when private individuals, for whose benefit a
charity is organized (or intended beneficiaries), receive the
income of the corporation or association.
It applies to individuals having a personal and private interest in
the activities of the corporation, such as members, organizers,
officers, or some specific person or persons. Sec. 30, Rev. Regs.
No. 2
Violations of Non-Inurement Clause
1. Payment of salaries or honorarium to trustees
2. Exorbitant salaries to employees [especially those relatives]
3. Welfare aid or financial assistance to employees
4. Donation to any person or entity (except to those organized for similar
purposes)
5. Purchase of goods or services for amounts in excess of FMV from entities
that pose conflict of interest to trustees or officers
Exempt Entities
6. Distribution of assets to trustees, officers, or members in case of
dissolution. RMC No. 51-2014
Why is this a violation? It may not inure to the benefit of
trustees, officers, or members of a non-profit corp ang
liquidated assets after dissolution (unlike in corporations)
BIR can run after the the trustees or members
However, payment of honorarium to resource persons or guest speakers
in various conferences, training programs, research programs,
management of a wide variety of books, and publication of materials on
Filipino psychology sponsored by a non-stock, non-profit organization
does not violate the “inurement” restriction.
In DOF Opinion No. 013-20, the Secretary of Finance ruled that
“the payment of honorarium for guest speakers is a legitimate
expense related to an activity that promotes the objective and
benevolent purpose of the organization which is to enhance and
promote the field of psychology in different disciplines and
sectors of the Filipino society.”
Baniqued: You pay honorarium with guest speakers, by
way of exception.
Moreover, the Secretary, taking the foregoing into account and
the organization as a whole, ruled that the annual amount of
honorarium paid by the National Association for Sikolohiyang
Pilipino, Inc. (NASPI) to its guest speakers in 2014, 2015, and
2016 was neither exorbitant nor unreasonable as would fall
under the "inurement" prohibition under Section 30 (E) of the
NIRC.
Charitable
In Lung Center of the Philippines, the Supreme Court defined “charity”
as a “gift, to be applied consistently with existing laws, for the
benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or by
otherwise lessening the burden of government.”
In St. Luke’s Medical Center, Inc., the Supreme Court said:
”Charitable institutions provide for free goods and services to
the public which would otherwise fall on the shoulders of
government.
Thus, as a matter of efficiency, the government forgoes taxes
which should have been spent to address public needs, because
certain private entities already assume a part of the burden.
This is the rationale for the tax exemption of charitable
institutions.
The loss of taxes by the government is compensated by its relief
from doing public works which would have been funded by
appropriations from the Treasury.”
Religious
Exempt income derived by such religious organizations from the conduct
of strictly religious activities consists of, for example:
baptismal fee,
marriage solemnization fee,
burial fee,
donations for special intentions during a mass,
fees for office or house blessing,
fees for issuance of certified true copies of baptismal,
confirmation or marriage certificate, and the like. Sec. 30, Rev.
Regs. No. 2
How about extra fees charged for videographers, photographers, florists,
etc. during wedding ceremonies?
Baniqued: Wedding of Baniqued’s Daughter. Sir was shocked
with this Contract about the florist or videographer. Papatong ng
malaking fee yung Church.
Note if the profit is for business if it is, it is taxed.
How about fees or income derived from sale or use of crypts?
Baniqued: some churches would have a Contract of Sale
A: Free exercise of religion therefore it is still a religious activity
and this is still exempt;
Careful with labeling of documents, if “deed of sale” then taxed
as Sec. 30 states. If the document states donation then it's
safer.
Scientific
The likes of Philippine Astronomical Society, etc.
Scientific corporations include an association for the scientific study of
law with a view to improving its administration. Sec. 30, Rev. Regs. No.
2
Exempt Entities
Athletic
PATAFA, NGAP, etc.
While clubs organized and operated exclusively for pleasure, recreation
and other non-profit purposes, such as golf clubs, polo clubs and country
clubs, are no longer included in the enumeration of exempt entities
under Section 30, membership dues, assessment dues and other fees
of similar nature charged by such recreational clubs do not constitute
“income” subject to income tax.
Country clubs , golf clubs etc. which are not in the likes of
PATAFA , NGAP etc. are not exempted!
In Association of Non-Profit Clubs, Inc. (ANPC) the SC held that
Such membership fees, assessment dues and other fees of
similar nature “only constitute contributions to and/or
replenishment of the funds for the maintenance and operations
of the facilities offered by recreational clubs to their exclusive
members are not taxable income.
Because these represent funds “held in trust” by these clubs to
defray their operating and general costs and, hence, only
constitute infusion of capital.”
The SC distinguished the membership fees, assessment dues
and fees of similar nature from the “fees received by
recreational clubs coming from their income-generating
facilities, such as bars, restaurants, and food concessionaires,
or from income-generating activities, like the renting out of
sports equipment, services, and other accommodations.”
In the latter, the income tax exemption does not apply.
Suppose you go to Wack Wack.
If you play, you pay green fees and you’re not a member? Taxable.
If you eat in the restaurant? Taxable even if you’re a member.
If you rent a function room for a wedding? Taxable.
If income-generating activities, not covered by the exemption.
Exemption only applies to membership fees, association dues. Does not cover
extraneous activities like renting a golf cart, eating in the restaurant.
Cultural
Repertory Philippines, Ballet Philippines, etc.
Q: Does the exemption cover ticket sales?
A: Taxable. This activity is conducted for profit. BIR will definitely
try to impose tax. Definitely if they sell souvenirs.
Thus, regardless of whether the proceeds are only for payment
of the venue or instructors, it is still taxable. (Last paragraph of
Sec. 30)
Business Leagues
AMCHAM, ECCP, TMAP, PMAP, FINEX, MAP, MBC, ECOP, PCCI, etc.
A business league, chamber of commerce, or board of trade that is:
1. not organized for profit and
2. no part of the net income of which inures to the benefit of any
private stockholder or individual —is exempt from income tax.
Sec. 30(F)
Definition of “Business League”
“an association of persons having some common business
interest, which limits its activities to work for such common
interest and does not engage in a regular business of a kind
ordinarily carried on for profit.”
A business league, chamber of commerce and board of trade
need not engage in a similar work or undertaking.
A clearinghouse whose activities are limited to exchange of
checks and similar work for the common benefit of its members
is exempt.
So is an association of transportation contractors or common
carriers whose purpose is to promote the legitimate objects of
their business and whose only income consists of membership
dues used for the upkeep and operation of their office. Sec. 31,
Rev. Regs. No. 2
NOTE: “Regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.”
Civic Leagues or Organizations
Rotary Clubs, Jaycees, Lions, etc. – exempt
The civic leagues or organizations contemplated in Section 30(G) are
those “not organized for profit but operated exclusively for the promotion
of social welfare.”
Exempt Entities
Their activities and programs inure to the benefit of the community as a
whole and promote the welfare of mankind in general. Sec. 32, Rev.
Regs. No. 2
Ex. A foreign donee of a big parcel agreement. Because foreigners can no
longer own lands in the PH, this American donated land to a rotary club.
This rotary club leased the land to a manufacturing entity.
A big corporation leased the land to put up a plant. This is rental income, thus
taxable; regardless of where the rotary club uses the proceeds. Rotary’s
lawyers called the rental payment a charitable donation.
This is clearly taxable income.
In YMCA case:
the latter argued that the rentals it earned from leasing a
portion of its premises to small shop owners, like restaurants
and canteen operators, parking fees collected from members,
and earnings from the use of its lodging and other facilities are
exempt from income tax pursuant to Section 27(g) and (h) [now
Section 30(E) and (G)] of the NIRC because it is a non-stock non-
profit institution organized for religious, educational and
charitable purposes for the benefit of the public, especially the
young people. (SC rejected this contention and held that the
items were subject to income tax)
The SC, citing the last par. of Section 30, ruled in favor of the
Government.
The Court also rejected YMCA’s argument that it is a “non-stock,
non-profit educational institution whose revenues and assets
are used actually, directly and exclusively for educational
purposes”, thus, exempt from taxes on its properties and
income pursuant to Article XIV, Section 4, paragraph 3 of the
Constitution.
The SC said the term refers only to schools where formal
education is obtained, meaning “hierarchically structured and
chronologically graded learnings organized and provided by the
formal school system and for which certification is required in
order for the learner to progress through the grades or move to
the higher levels.”
Non-Stock, Non-Profit Educational Institutions
A non-stock, non-profit educational institution is exempt from income
tax by express provision of Section 30(H) of the NIRC.
Does not include proprietary ones:
NU, CEU , UE , FEU
Moreover, the Constitution states “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.” Art.
XIV, Sec. 3
The Constitution further states “all grants, endowments, donations, or
contributions used actually, directly, and exclusively for educational
purposes shall be exempt from tax,” subject to such conditions as may
be prescribed by law. Art. XIV, Sec. 4
The Constitution, however, requires that “upon the dissolution or
cessation of the corporate existence of such [educational] institutions,
their assets shall be disposed of in the manner provided by law.” Art. XIV,
Sec. 3
In CIR v. De La Salle University, Inc.
On the basis of the aforementioned statutory and constitutional
provisions, the SC held that DLSU, a non-stock, non-profit
educational institution, is exempt from income tax and value-
added tax on its rental income from restaurants, canteens and
bookstores operating within its campus to the extent that such
rental income is used actually, directly and exclusively for
educational purposes. CIR v. De La Salle University, Inc.
The SC, however, affirmed the finding of the CTA that not all of
the rental income was used actually, directly and exclusively for
educational purposes, hence, the remainder of the rental
income not so used is subject to income and value-added taxes.
The SC further explained that it does not matter where the
income was sourced, for as long it is used actually, directly and
exclusively for educational purposes, it is exempt under the
Constitution.
NOTE: The Supreme Court thus struck down the last paragraph
of Section 30 as null and void insofar as non-stock non-profit
educational institutions are concerned.
Exempt Entities
Baniqued: Does not matter where income is sourced or derived from. These
revenues must be used actually, directly , exclusively for educational purposes
to fall within the exemption.
See also Abra Valley College, Inc.
In La Sallian Educational Innovators Foundation, Inc.,
the CIR asserted that the petitioner, DLSU – College of St.
Benilde Foundation, did not qualify anymore as a non-profit
educational institution due to its alleged enormous profits, that
it operated contrary to the nature of a non-profit educational
institution by generating massive profits in the amount of
P643,000,000.00 from tuition fees, and having cash worth
P775,000,000 in its bank.
The CIR further contended that the school derived significant
revenues from concessionaires, from bookstores and sale of
school supplies, boarding houses and dormitories, parking fees,
mimeographing and xerox services, locker rentals, ICC
revenues, and the like. In short, the CIR argued that DLSU-
College of St. Benilde “engaged in disproportionate profit-
earning activities contrary to its educational purpose.”
In DLSU-College of St. Benilde,
The Supreme Court, however, ruled that the mere fact that the
school, DLSU-College of St. Benilde, derived enormous profits
from tuition fees and profit-seeking activities does not
jeopardize its tax-exempt character, provided its revenues are
used actually, directly and exclusively for educational purposes.
In Jacinto-Henares v. St. Paul College of Makati
the latter challenged before the RTC the constitutionality of
RMO No. 20-2013 which “imposes as a prerequisite to the
enjoyment by nonstock, nonprofit educational institutions of the
privilege of tax exemption under Sec. 4(3) of Article XIV of the
Constitution both a registration and approval requirement, i.e.,
that they submit an application for tax exemption to the BIR
subject to approval by the CIR in the form of a Tax Exemption
Ruling (TER) which is valid for a period of [three] years and
subject to renewal.”
St. Paul College further alleged that the said RMO No. 20-2013 “makes
failure to file an annual information return a ground for a nonstock,
nonprofit educational institution to “automatically lose its income tax-
exempt status.”
The RTC declared RMO No. 20-2013 unconstitutional. On appeal, the SC
declared the matter moot and academic since the new Commissioner
issued on July 25, 2016 RMO No. 44-2016 which excluded nonstock,
nonprofit educational institutions from the coverage of RMO No. 20-
2013.
A “proprietary educational institution”
While non-stock, non-profit educational institutions are exempt
from income tax as mentioned earlier, proprietary educational
institutions which are non-profit are subject to income tax,
generally, at the rate of ten (10%) percent of their taxable
income. Sec. 27(B), NIRC. From July 1, 2020 to June 30, 2023,
the tax is reduced to 1% under CREATE.
Defined as “any private school maintained and administered by
private individuals or groups with an issued permit to operate
from the DEP-ED, CHED, or TESDA, as the case may be, in
accordance with existing laws and regulations.”
If the gross income of a proprietary educational institution from
unrelated trade, business or other activity exceeds fifty (50%)
percent of its total gross income from all sources, it shall be
subject to the regular corporate income of 20%-25% on its
entire net income. That means that the regular income tax rate
of 20%-25% will apply not only to the unrelated (to education)
income but also to the income derived by the educational
institution from tuition fees and other assessments collected
from students.
“Unrelated trade, business or other activity” is defined as:
“any trade, business or other activity, the conduct of
which is not substantially related to the exercise or
performance by such educational institutions of its
primary purpose or function.”
Ex. McDo outlets inside campus and rental income
exceed 50% of total gross income of the school they run
the risk of losing the preferential tax treatment
Government Educational Institutions
Exempt Entities
This covers such schools and universities as the University of the
Philippines, Pamantasan ng Lungsod ng Maynila, Philippine Science
High School, and the like.
Mutual Insurance Companies and Like Organizations
Under Section 30(J), “farmers’ or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local character, the
income of which consists solely of assessments, dues, and fees collected
from members for the sole purpose of meeting its expenses” is exempt
from income tax.
[An organization of a purely local character is one whose business
activities are confined to a particular community, place, or district,
irrespective of political subdivisions.] Sec. 34, Rev. Regs. No. 2
Should any such company or organization mentioned above derive
income from other sources apart from assessments, dues and fees
charged to members, it is not exempt.
However, receipt of income that is merely incidental to the conduct of its
business, such as interest on a working bank balance, proceeds from the
sale of badges, office supplies, or equipment, interest on Government
bonds bought other than as a permanent investment, will not jeopardize
its exemption. Ibid.
The receipt by a mutual fire insurance company of what is, in substance,
an entrance fee as a condition of membership does not put its
exemption at risk even if the fee may seem akin to a premium.
But if it issues policies for stipulated cash premiums, or if it
requires advance deposits to cover the cost of the insurance and
maintains investments from which income is derived, the
company may not claim exemption. Ibid.
Advance assessments to meet future losses and expenses of an
organization do not render the latter taxable provided the balance of
such assessments remaining on hand at the end of the year is retained
to cover losses and expenses or is returned to members. Ibid.
Farmers’ Cooperative Marketing Associations
The law also exempts from tax “farmers’, fruit growers’, or like
associations organized and operated as a sales agent for the purpose of
marketing the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the basis of
the quantity of produce finished by them.” Sec. 30(K), NIRC
The above associations must establish that for their own account they
have no net income since they are merely acting as sales agents for the
farmers, growers and like persons. Sec. 35, Rev. Regs. No. 2
Thus, a cooperative dairy company deputized to collect milk and market
it, distributing the proceeds from the sale, less necessary operating
expenses, among the members on the basis of the quantity of milk
furnished by each of them is exempt from income tax.
A distribution of the proceeds other than in proportion to the quantity of
milk supplied by each member may expose the company to income tax.
Ibid. (not exempt)
Some GOCCs
Such as GSIS, SSS, HDMF, PHIC, and local water districts. Sec. 27(C)
This exempt GOCC list is exclusive
PCSO and PAGCOR, which used to be exempt, are now taxable, except
that PAGCOR is subject to a 5% franchise tax on income from its
“gaming operations”, in lieu of any and all other taxes, while its income
from “non-gaming operations” is subject to the corporate income tax of
20%-25%, but not both 5% and 20%-25%. PAGCOR cases
The income from the casino subject to 5%
Income from establishment within the premises of the Casino
like the movie theaters are classified as non-gaming operating
subject to 20% to 25%
Above tax treatment of PAGCOR extends to its licensees and contracts.
Bloomberry
Effect of Assumption by Government of Tax Liability of a Private Person
The Japanese Gov’t, through the OECF, extended a loan to the Phil. Gov’t
for the Calaca II Thermal Power Plant. Under the Exchange of Notes, the
Phil. Gov’t, through its executing agency, NPC, assumed all fiscal levies
or taxes imposed in the Phils. on Japanese firms and nationals operating
as suppliers, contractors or consultants on and/or in connection with
any income that may accrue from the supply of products of Japan and
services of Japanese nationals to be provided under the Loan.
NPC contracted Mitsubishi for the engineering, supply, construction,
installation, testing, and commissioning of a steam generator,
auxiliaries, and associated civil works for the coal project. Mitsubishi,
Exempt Entities
despite the assumption by Phil. Gov’t, of all taxes due on income derived
from the said coal project, paid income tax and BPRT in 1998. Mitsubishi
then filed a refund claim.
BIR argued that Mitsubishi is not entitled to a refund because
this is in the form of granting a tax exemption which requires
legislative approval. (BIR is wrong here)
The SC ruled that since the Phil. Gov’t, through NPC, assumed all taxes
due and payable under the contract with petitioner, it is the Phil. Gov’t,
through NPC, that should shoulder the payment of the same. The SC
distinguished “tax assumption” from “tax exemption” that requires
legislative approval. It declared the petitioner entitled to the refund of
the erroneously paid income tax and BPRT. Mitsubishi Corp. – Manila
Branch
Baniqued:
Tax Exemption Tax Assumption
Requires legislative approval Does not require legislative approval
because the government itself
assumes the tax
Other Exempt Entities
1. Cooperatives
2. RHQs – Regional Headquarters
3. Representative Offices
Entities Taxed at Special or Preferential Rates
Proprietary (Non-Profit) Hospitals
A proprietary hospital that is non-profit is taxable at 10% [1% beginning
July 1, 2020 to June 30, 2023, pursuant to CREATE] of its taxable income
provided it derives 50% or more of its gross income from operation of
the hospital. If the hospital derives more than 50% of its gross income
from unrelated trade, business or other activity, it is taxable at the
regular corporate income tax rate of 20%-25%% on its entire taxable
income. Sec. 27(B)
Section 27(B) defines “unrelated trade, business or other activity” as
“any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such hospital of
its primary purpose or function.”
If the hospital is not only non-profit but also non-stock, organized and
operated exclusively for charitable purposes, and no part of its net
income or asset belongs to or inures to the benefit of any member,
organizer, officer, or any specific person, such hospital is exempt from
income tax. Sec. 30(E)
In the St. Luke’s Medical Center cases, the SC clarified that while St.
Luke’s is organized as a non-stock non-profit charitable institution, this
does not automatically exempt it from income tax. The SC explained
that to be exempt from income tax under Sec. 30(E), the charitable
institution must be “organized and operated exclusively” for charitable
purposes. Likewise, to be exempt from income tax under Section 30(G),
the organization must be “operated exclusively for the promotion of
social welfare.”
The then noted that in 1998, the taxable year in question, St. Luke’s
earned P1.73 billion from services provided to paying patients.
Consequently, St. Luke’s cannot be considered as an institution
“operated exclusively” for charitable purposes. The SC also considered
St. Luke’s revenues from paying patients as income derived from
“activities conducted for profit”, thus triggering the application of the last
paragraph of Section 30 which provides that the income of whatever
kind and character of any organization mentioned in Section 30(A) to
(K), such as a charitable institution under Section 30(E) or 30(G), from
any its properties, real or personal, or from any of its activities conducted
for profit, regardless of the disposition made of such income, shall be
subject to tax.
The SC, however, then clarified that the tax rate on such income from
for-profit activities would have been the ordinary corporate rate under
Section 27(A), but with the amendment introduced by Section 27(B), the
tax rate would now be 10% instead of the regular corporate income tax
rate of 30% [now 20%-25%].”
Proprietary (Non-Profit) Educational Institutions
While non-stock, non-profit educational institutions are exempt from
income tax as mentioned earlier, proprietary educational institutions
which are non-profit are subject to income tax, generally, at the rate of
ten (10%) percent of their taxable income [1% beginning July 1, 2020 to
June 30, 2023, pursuant to CREATE]. Sec. 27(B), NIRC.
Exempt Entities
A “proprietary educational institution” is defined as:
“any private school maintained and administered by private
individuals or groups with an issued permit to operate from the
DEP-ED, CHED, or TESDA, as the case may be, in accordance
with existing laws and regulations.”
If the gross income of a proprietary educational institution from
unrelated trade, business or other activity exceeds fifty (50%) percent of
its total gross income from all sources, it shall be subject to the regular
corporate income of 20%-25%% on its entire net income.
That means that the regular income tax rate of 20%-25%% will apply not
only to the unrelated (to education) income but also to the income
derived by the educational institution from tuition fees and other
assessments collected from students.
“Unrelated trade, business or other activity” is defined as:
“any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such
educational institution of its primary purpose or function.”
PEZA-Registered Enterprises [NOTE: Already modified by CREATE law]
Taxable at 5% based on their “gross income earned (GIE)”, such tax to
be allocated 3% to the National Government, 1% to the city or
municipality where the enterprise is located, and 1% to the barangay
where the enterprise is located.
The term "gross income earned" refers to gross sales or gross revenues
derived from business activity within the ECOZONE, net of sales
discounts, sales returns and allowances and minus costs of sales or
direct costs but before any deduction is made for administrative,
marketing, selling and/or operating expenses or incidental losses during
a given taxable period. Rev. Regs. No. 11-05, April 25, 2005
Contentious issues include the ff: (a) whether income is derived from the
enterprise’s registered activity, and (b) whether an item of expense is a
“direct cost” allowable as a deduction from GIE.
Rev. Regs. No. 11-05, April 25, 2005
The following direct costs are included in the allowable deductions to arrive at gross income
earned for specific types of enterprises:
1. ECOZONE Export Enterprises, Free Trade Enterprises and Domestic Market Enterprises:
— Direct salaries, wages or labor expenses
— Production supervision salaries [factory]
— Raw materials used in the manufacture of products
— Decrease in Goods in Process Account (Intermediate goods)
— Decrease in Finished Goods Account
— Supplies and fuels used in production
— Depreciation of machinery and equipment used in production, and of that
portion of the building owned or constructed that is used exclusively in the
production of goods
— Rent and utility charges associated with building, equipment and warehouses
used in production
— Financing charges associated with fixed assets used in production the amount
of which were not previously capitalized.
2. ECOZONE Developer/Operator, Facilities, Utilities and Tourism Enterprises:
— Direct salaries, wages or labor expense
— Service supervision salaries
— Direct materials, supplies used
— Depreciation of machineries and equipment used in the rendition of registered
services, and of that portion of the building owned or constructed that
is used exclusively in the rendition of registered service
— Rent and utility charges for buildings and capital equipment used in the
rendition of registered services
— Financing charges associated with fixed assets used in the registered service
business the amount of which were not previously capitalized."
Sale of fixed assets used in PEZA-registered activities is subject to the
regular corporate income tax. BIR Rul. No. 291-2012, April 25, 2012
Royalties paid by a match manufacturer to a Swedish company under
their Trademark License Agreement are not deductible from gross
revenues for purposes of computing the 5% gross income tax. BIR Rul.
No. 014-2012, Jan. 4, 2012
BOI-Registered Enterprises [NOTE: Already modified by CREATE LAW Title XIII of
NIRC]
Entitled to an ITH for 6 years from commercial operation (pioneer) and
4 years (non-pioneer). E.O. 226
In Sutherland Global Services Philippines, Inc., CTA Case No. 8558, 1st
Division, July 21, 2016 :
the Tax court recognized the 4-year ITH incentive of PEZA-
registered enterprise pursuant to the Omnibus Investments
Code, upon the expiration of which the enterprise then becomes
entitled to claim the 5% gross income tax incentive under the
PEZA law. While acknowledging that the two sets of incentives
under the Omnibus Investments Code and the PEZA law are in
Exempt Entities
the alternative and cannot be availed of at the same time by a
Non-resident lessor of aircraft, 7.5% of gross rental
PEZA-registered enterprise, the Tax Court held that the PEZA- machineries and other equipment
registered enterprise may initially claim the ITH incentive for
four (4) years and, thereafter, the 5% gross income tax incentive Non-resident lessor or distributor 25% of gross income
provided that it complies with the conditions of its PEZA of cinematographic films
registration.
NRFC receiving interest income on 20% of gross amount of interest
In Aegis PeopleSupport, Inc. v. Commissioner of Internal Revenue, :
foreign loans
the Supreme Court held that the forex fluctuation "gains" of the
petitioner under the hedging contract it entered into with
Citibank is covered by the income tax holiday enjoyed by NRFC (Non- Resident Foreign exempt from income tax on interest
petitioner, a BOI and PEZA-registered enterprise. The Supreme Corporations) income from FX transactions with
Court explained that petitioner may validly enter into a hedging depository banks under the
contract to manage its foreign currencies on-hand earned as expanded foreign currency deposit
system
gross revenues. Thus, petitioner may enter into a hedging
contract with a broker, such as Citibank, in order to protect its
foreign currency revenues or earnings from being severely Philippine Airlines (PAL)
devalued in terms of local currency. Consequently, the hedging Under its franchise, P.D. No. 1590, PAL pays the lower of the regular
that petitioner entered into could be considered very much corporate income tax on annual net taxable income or a franchise tax of
related to its registered activities and, therefore, still subject to two (2%) percent of its gross revenues.
a preferential tax treatment under Republic Act No. 7916 and The tax so paid by PAL under either alternative above is in lieu of all other
Executive Order No. 226. taxes, duties, royalties, registration, license, and other fees and charges
of any kind, nature, or description.
Others Subject to Special Rates PAL’s charter may only be amended or repealed by a special law enacted
for that purpose. (In order to change PAL income tax rate)
International Carriers 2.5% on GPB, unless exempt due to
treaty or reciprocity, or reduced, say
to 1.5%, pursuant to a tax treaty or Baniqued:
reciprocity. The provisions discussed above are exceptions or modifications to the
general rule which is that these corporations are generally taxed at
Offshore Banking Units (OBUs) 10% on “onshore income” and
exempt on “offshore income”. 20% or 25% as regular corporate income tax.
Take note of these provisions which have special tax rates or
ROHQ 10% of taxable income from Phil. preferential treatment by way of exemption or special rates.
Sources, but starting Jan. 1, 2022, it You have to know with these various provisions Sec. 25, Sec. 28
shall be subject to the regular because those are exceptions to the general rule.
corporate income tax of 20%-25%
[pursuant to CREATE].
TAX INCENTIVES UNDER NEW TITLE XIII OF THE NIRC
Secs. 297-311
Non-resident lessor of vessels 4.5% of gross rental or charter fees
Exempt Entities
THE FISCAL INCENTIVES REVIEW BOARD
SEC. 297. Expanded Functions of the Fiscal Incentives Review Board. - The
functions and powers of the Fiscal Incentives Review Board created under
Presidential Decree No. 776, as amended, shall be expanded as follows:
(A) To exercise policy making and oversight functions on the administration and
grant of tax incentives by the Investment Promotion Agencies and other
government agencies administering tax incentives. In particular, the Fiscal
Incentives Review Board shall:
(1) Determine the target performance metrics as conditions to avail of tax
incentives;
(2) Review and audit the compliance of other government agencies
administering tax incentives, with respect to the administration and grant
of tax incentives and impose sanctions such as, but not limited to,
withdrawal, suspension, or cancellation of their power to grant tax
incentives;
(3) Determine the minimum contiguous land area that vertical economic
zones should comply with;
(4) Conduct regular monitoring and evaluation of investment and non-
investment tax incentives, such as using cost-benefit analysis (CBA) to
determine their impact on the economy and whether agreed performance
targets are met; and
(5) Check and verify, as necessary, the compliance of registered business
enterprises with the terms and conditions of their availment, in particular
the agreed target performance metrics, rules and regulations of this Act,
and other relevant laws or issuances;
(B) To approve or disapprove, the grant of tax incentives to the extent of the
registered project or activity upon the recommendation of the Investment
Promotion Agency: Provided, That the application for tax incentives shall be duly
accompanied by a cost-benefit analysis: Provided, further, That the Fiscal
Incentives Review Board shall prescribe the data requirements for the application
of incentives to allow for the calculation of costs and benefits upon application:
Provided, further, That the grant of tax incentives to registered projects or activities
with investment capital of One billion pesos (P1,000,000,000.00) and below shall
be delegated by the Fiscal Incentives Review Board to the concerned Investment
Promotion Agency to the extent of the registered project or activity: Provided,
furthermore, That the Fiscal Incentives Review Board may increase the threshold
amount of One billion pesos (P1,000,000,000.00).[251]
(C) To approve applications for tax subsidies to government-owned or -controlled
corporations, government instrumentalities, government commissaries, and state
universities and colleges.
For this purpose, the other government agencies shall ensure complete
submission of applications, documents, records, books, or other relevant data or
material;
(D) To formulate place-specific strategic investment plans during periods of
recovery from calamities and post-conflict situations and where the Fiscal
Incentives Review Board determines that there is a need to attract many classes,
firms, that would accelerate the growth of a region's flagship industries, in
accordance with the Medium-Term Development Plan. The Fiscal Incentives
Review Board may formulate and approve place-specific strategic investment
plans and recommend incentives to the President, following the same procedure
in Section 297;
(E) To cancel, suspend, or withdraw the enjoyment of fiscal incentives of concerned
registered business enterprises on its own initiative or upon the recommendation
of the Investment Promotion Agency for material violations of any of the
conditions imposed in the grant of fiscal incentives, including, but not limited to,
the non-compliance of the agreed performance commitments and endorse
registered business enterprises whose incentives are cancelled, suspended, or
withdrawn to the concerned revenue agencies for the assessment and collection
of taxes and duties due commencing from the first year of availment;
(F) To cancel, suspend, or withdraw the enjoyment of tax subsidy of concerned
government-owned or -controlled corporations, government instrumentalities,
government commissaries, and state universities and colleges, and when
necessary, endorse the same to the concerned revenue agencies for assessment
and collection of taxes and duties due, including fines or penalties, if warranted,
for violations of any of the conditions imposed in the grant of tax subsidy, or
provisions of this Act, or applicable rules;
(G) To require Investment Promotion Agencies and other government agencies
administering tax incentives to submit, regularly or when requested, summaries
of approved investment and incentives granted, and firm- or entity-level tax
incentives and benefits data as input to the Fiscal Incentives Review Board's
review and audit function, and evaluation of performance of recipients of tax
incentives. For this purpose, the Fiscal Incentives Review Board shall maintain a
masterlist of registered products and services for export or domestic consumption
that are entitled to incentives: Provided, That, to facilitate compliance with the
Exempt Entities
foregoing, the Department of Trade and Industry, in coordination with relevant
regulatory bodies, shall cause the registration and reporting by registered business
enterprises of the types of services rendered whether domestically or to foreign
clients; types of products manufactured domestically, products imported and sold
locally, and products exported;
(H) To publish regularly, per firm, the data pertaining to the amount of tax
incentives, tax payments, and other related information, including benefits data;
(N) To adopt policies for the development and expansion of the domestic supply
chain in order to reduce dependence on imports; promote diversification and
sophistication of products produced and services offered, whether exported or
consumed locally; and cater to local market demand; and
(O) To exercise all other powers necessary or incidental to attain the purposes of
this Act and other laws vesting additional functions on the Fiscal Incentives Review
Board.[252]

(I) To obtain information, summon, examine, inquire and receive from other Notwithstanding the provisions in the preceding paragraphs, tax and duty
government agencies administering tax incentives, government-owned or - incentives granted through legislative franchises shall be excepted from the
controlled corporations, government instrumentalities, government foregoing expanded powers of the Fiscal Incentives Review Board to review,
commissaries, state universities and colleges, and local government units, withdraw, suspend, or cancel tax incentives and subsidies.
documents, records, books, or other data relevant or material to the resolution of
issues arising from the approval, disapproval, cancellation, suspension,
withdrawal or forfeiture of tax subsidy, or in imposing penalties for violations of
the terms and conditions on the availment of tax subsidy, or any of the provisions
of this Act;

(J) To submit annual reports to the Office of the President, as part of the budget
process, covering its policy and activities in the administration of this Act, including
recommendations on tax incentive policies and approval of tax incentives;

(K) To decide on issues, on its own initiative or upon the recommendation of the
Investment Promotion Agency, after due hearing, concerning the approval,
disapproval, cancellation, suspension, withdrawal, or forfeiture of tax incentives or
tax subsidy in accordance with this Act. The Fiscal Incentives Review Board shall
decide on the matter within ninety (90) days from the date when the Fiscal
Incentives Review Board declares the issues submitted for resolution. A business
enterprise adversely affected by the decision of the Fiscal Incentives Review Board
may, within thirty (30) days from receipt of the adverse decision, appeal the same
to the Court of Tax Appeals;

(L) To promulgate such rules and regulations as may be necessary to implement

the intent and provisions of this Section;

(M) To recommend to the President the grant of appropriate non-fiscal incentives
in accordance with the Strategic Investment Priority Plan for highly desirable
projects or very specific industrial activities and based on: (a) benefit-cost analysis
approved by the Fiscal Incentives Review Board; and (b) containing a schedule of
budgets of expenditures and sources of financing with magnitudes provisionally
approved via resolution for inclusion in the upcoming National Expenditure Plans
by the Development Budget Coordination Committee;
SEC. 299. Structure and Staffing Pattern. - To support the expanded functions of
the Fiscal Incentives Review Board, the National Tax Research Center, as
secretariat thereof, shall create three (3) additional groups, namely, Fiscal
Incentives Management Group, Monitoring and Evaluation Group, and Legal
Group. Each group shall be composed of at least two (2) divisions, which will be
headed by a deputy executive director. The existing administrative and financial
branch of the National Tax Research Center shall be converted into a group to be
headed by a deputy executive director and will be composed of four (4) divisions,
namely, finance, human resource management and development, general
Exempt Entities
services, and management and information system.
Provided, That the Fiscal Incentives Review Board secretariat is authorized to
determine its organizational structure and staffing pattern, and create such
services, divisions, and units, as it may require or deem necessary in the future,
subject to the approval by the Department of Budget and Management: Provided,
finally, That nothing herein modifies the existing organizational structure and
staffing pattern of the Investment Promotion Agencies or affects their power to
maintain or determine their respective organizational structure and staffing
pattern.
CHAPTER IV
QUALIFIED PROJECTS OR ACTIVITIES FOR TAX INCENTIVES
SEC. 300. Strategic Investment Priority Plan. - The Board of Investments, in
coordination with the Fiscal Incentives Review Board, Investment Promotion
Agencies, other government agencies administering tax incentives, and the
private sector, shall formulate the Strategic Investment Priority Plan to be
submitted to the President for approval, which may contain recommendations for
types of non-fiscal support needed to create high-skilled jobs to grow a local pool
of enterprises, particularly micro, small and medium enterprises (MSMEs), that
can supply to domestic and global value chains, to increase the sophistication of
products and services that are produced and/or sourced domestically, to expand
domestic supply and reduce dependence on imports, and to attract significant
foreign capital or investment. The Strategic Investment Priority Plan shall be valid
for a period of three (3) years, subject to review and amendment every three (3)
years thereafter unless there would be a supervening event that would necessitate
its review.
The Strategic Investment Priority Plan shall contain the following:
(A) Priority projects or activities that are included in the Philippine Development
Plan or its equivalent, or other government programs, taking into account any of
the following:
(1) Substantial amount of investments;
(2) Considerable generation of employment, especially towards less
developed areas;
(3) Considerable amount of net exports;
(4) Use of modern, advance, or new technology;
(5) Processes and innovations that will lead towards the attainment of the
sustainable development goals, shall include, but not be limited to,
adoption of adequate environmental protection systems and
sustainability strategies;
(6) Addressing missing links and other gaps in the supply or value chain or
otherwise moving up the value chain or product ladder;
(7) Promotion of market competitiveness;
(8) Enhancement of the capabilities of Filipino enterprises and professionals
to produce and offer increasingly sophisticated products and services;
(9) Contribution to Philippine food security and increase incomes in the
agriculture and fisheries sector; or
(10) Services and activities that can promote regional and global operations
in the country.
(B) Scope and coverage of location and industry tiers in Section 296; and
(C) Terms and conditions on the grant of enhanced deductions under Section
294(C).
All sectors or industries that may be included in the Strategic Investment Priority
Plan shall undergo an evaluation process to determine the suitability and potential
of the industry or the sector in promoting long-term growth and sustainable
development, and the national interest. In no case shall a sector or industry be
included in the Strategic Investment Priority Plan unless it is supported by a formal
evaluation process or report.
The projects or activities must comply with the specific qualification requirements
or conditions for a particular sector or industry and other limitations as set and
determined by the Board of Investments, and in coordination with the Fiscal
Incentives Review Board.
In no case shall the Investment Promotion Agencies accept applications unless
the project or activity is listed in the Strategic Investment Priority Plan. Projects or
activities not listed in the Strategic Investment Priority Plan shall be automatically
disapproved.”
SEC. 301. Power of the President to Grant Incentives. - Notwithstanding the
provisions of Sections 295 and 296, the President may, in the interest of national
economic development and upon the recommendation of the Fiscal Incentives
Review Board, modify the mix, period or manner of availment of incentives
provided under this Code or craft the appropriate financial support package for a
highly desirable project or a specific industrial activity based on defined
development strategies for creating high-value jobs, building new industries to
diversify economic activities, and attracting significant foreign and domestic
capital or investment, and the fiscal requirements of the activity or project, subject
to maximum incentive levels recommended by the Fiscal Incentives Review Board:
Provided, That the grant of income tax holiday shall not exceed eight (8) years and
thereafter, a special corporate income tax rate of five percent (5%) may be
granted: Provided, further, That the total period of incentive availment shall not
Exempt Entities
exceed forty (40) years.
The Fiscal Incentives Review Board shall determine whether the benefits that the
Government may derive from such investment are clear and convincing and far
outweigh the cost of incentives that will be granted in determining whether a
project or activity is highly desirable.
The exercise by the President of his powers under this Section shall be based on a
positive recommendation from the Fiscal Incentives Review Board upon its
determination that the following conditions are satisfied:
(1) The project has a comprehensive sustainable development plan with
clear inclusive business approaches, and high level of sophistication and
innovation; and
(2) Minimum investment capital of Fifty billion pesos (P50,000,000,000.00)
or its equivalent in US dollars, or a minimum direct local employment
generation of at least ten thousand (10,000) within three (3) years from
the issuance of the certificate of entitlement.
Provided, That the threshold shall be subject to a periodic review by the Fiscal
Incentives Review Board every three (3) years, taking into consideration
international standards or other economic indicators: Provided, further, That if the
project fails to substantially meet the projected impact on the economy and
agreed performance targets, the Fiscal Incentives Review Board shall recommend
to the President the cancellation of the tax incentive or financial support package
or the modified period or manner of availment of incentives, after due hearing and
an adequate opportunity to substantially comply with the agreed performance
targets and outputs.
For this purpose, financial support includes utilization of government resources
such as land use, water appropriation, power provision, and budgetary support
provision under the annual General Appropriations Act.
This power of the President, in as far as it commands additional public sector
expenditures in support of investors, is suspended during fiscal years when, an
unimaginable fiscal deficit is declared by the President on the advice of the
Development Budget Coordination Committee with a consequence that even core
budgetary obligations, such as, but not limited to, mandatory revenue allotments
for local government units and budget for the National Economic and
Development Authority's core public investments program, cannot be fully
financed.[253]
Notwithstanding the provisions in the preceding paragraphs, tax and duty
incentives granted through legislative franchises shall be excepted from the
foregoing powers of the President to review, withdraw, suspend, or cancel tax
incentives and subsidies.
SEC. 302. Amendments to the Strategic Investment Priority Plan. - Subject to
publication requirements and the criteria for investment priority determination,
the Board of Investments may include additional areas in the Strategic Investment
Priority Plan, alter any of the terms of the declaration of an investment area, and
temporarily suspend projects or activities on the Strategic Investment Priority Plan
if it considers that such project or activity is no longer a priority within the
effectivity of the Strategic Investment Priority Plan.
SEC. 303. Publication. - Upon approval of the Strategic Investment Priority Plan, in
whole or in part, or upon approval of an amendment thereof, the Plan or the
amendment, specifying and declaring the areas of investments shall be published
in at least one (1) newspaper of general circulation or in the Official Gazette:
Provided, That all such areas in the existing Strategic Investment Priority Plan shall
be open for application until publication of an amendment or deletion thereof.
SEC. 304. Qualifications of a Registered Business Enterprise for Tax Incentives. -
In the review and grant of tax incentives, the registered business enterprise must:
(A) Be engaged in a project or activity included in the Strategic Investment Priority
Plan;
(B) Meet the target performance metrics after the agreed time period;
(C) Install an adequate accounting system that shall identify the investments,
revenues, costs and profits or losses of each registered project or activity
undertaken by the enterprise separately from the aggregate investments,
revenues, costs and profits or losses of the whole enterprise; or establish a
separate corporation for each registered project or activity if the Investment
Promotion Agency should so require;
(D) Comply with the e-receipting and e-sales requirement in accordance with
Sections 237 and 237(a) of this Code; and
(E) Submit annual reports of beneficial ownership of the organization and related
parties.
CHAPTER V
TAX INCENTIVES MANAGEMENT AND TRANSPARENCY
Exempt Entities
SEC. 305. Filing of Tax Returns and Submission of Tax Incentives Reports. - All
registered business enterprises and other registered entities whether taxable or
exempt, are required to file their tax returns and pay their tax liabilities, on or
before the deadline as provided under the National Internal Revenue Code of
1997, as amended, using the electronic system for filing and payment of taxes
with the Bureau of Internal Revenue: Provided, That for purposes of complying
with their tax obligations, cooperatives and other registered entities, which do not
have access to the electronic facilities, shall file with their respective revenue
district offices.
For registered business enterprises and other registered enterprises availing of tax
incentives administered by the Investment Promotion Agencies and other
government agencies administering tax incentives, they shall file with their
respective Investment Promotion Agencies or other government agencies
administering tax incentives a complete annual tax incentives report of their
income-based tax incentives, VAT exemptions and zero-rating, customs duty
exemptions, deductions, credits or exclusions from the income tax base, and
exemptions from local taxes, as provided under Section 294 of this Act and in the
special laws of the concerned Investment Promotion Agency or other government
agency administering tax incentives, and respective laws, and a complete annual
benefits report which shall include data such as, but not limited to, the approved
and actual amount of investments, approved and actual employment level and
job creation including information on quality of jobs and hiring of foreign and local
workers, approved and actual exports and imports, domestic purchases, profits
and dividend payout, all taxes paid, withheld and foregone within thirty (30)
calendar days from the statutory deadline for filing of tax returns and payment of
taxes: Provided, That a copy of the report shall be simultaneously submitted to the
Fiscal Incentives Review Board in electronic form.
The Investment Promotion Agencies and other government agencies
administering tax incentives shall, within sixty (60) calendar days from the end of
the statutory deadline for filing of the relevant tax returns, submit to the Bureau
of Internal Revenue, their respective annual tax incentives reports based on the
list of the registered business enterprises and other registered enterprises, which
have filed said tax incentives report: Provided, That the reportorial requirement
under Section 3 of Republic Act No. 10963 or the ‘TRAIN Law’ shall be covered by
this Section.
The details of the tax incentives reports, as provided in the preceding paragraphs,
shall be provided in the implementing rules and regulations of this Act.
The foregoing provisions shall be without prejudice to the right of the Bureau of
Internal Revenue and the Bureau of Customs to assess and/or audit tax liabilities,
if any, within the prescribed period provided in the National Internal Revenue Code
of 1997, as amended, and Republic Act No. 10863, otherwise known as the
Customs Modernization and Tariff Act, as amended, respectively.
SEC. 306. Monitoring, Evaluation, and Reporting of Tax Incentives. -
Notwithstanding any law to the contrary, the Bureau of Internal Revenue and the
Bureau of Customs shall submit to the Department of Finance: (a) all tax and duty
incentives of registered business enterprises and other registered enterprises, as
reflected in their filed tax returns and import entries; and (b) actual tax and duty
incentives as evaluated and determined by the Bureau of Internal Revenue and
the Bureau of Customs.
The Department of Finance shall maintain a single database for monitoring and
analysis of tax incentives granted.
The Fiscal Incentives Review Board is mandated to systematically collect and store
all tax incentives and benefit data from the Department of Finance, Investment
Promotion Agencies, other government agencies administering tax incentives,
registered business enterprises, and other registered enterprises, as well as to
evaluate and assess the process, outcomes, and impact of incentives granted to
firms to determine whether agreed performance targets and intended results and
outcomes are met. The method of evaluation may include the conduct of cost-
benefit analysis or other process and impact evaluation methods: Provided, That
for purposes of this Act, the term cost-benefit analysis refers to the systematic
evaluation of the total costs of granting tax incentives vis-à-vis the total benefits
derived from the grant of tax incentives based on the annual tax incentive report,
annual benefits report, and other related sources, to calculate the net benefit or
cost associated with tax incentives.
For purposes of monitoring and transparency, the Department of Finance shall
submit to the Department of Budget and Management (DBM) a per firm and per
registered project and activity data arranged on a sectoral and per industry basis:
(1) the amount of tax incentives availed of by registered business enterprises and
other registered enterprises; (2) the estimate claims of tax incentives immediately
preceding the current year; (3) the programmed tax incentives for the current year;
and (4) the projected tax incentives for the following year.
The aforesaid data shall be reflected by the DBM in the annual Budget of
Expenditures and Sources of Financing (BESF), which shall be known as the Tax
Incentives Information (TII) Section: Provided, That the tax incentives information
shall include a per firm data related to incentives availed of by registered business
enterprises and other registered enterprises based on the submissions of the
Department of Finance and the concerned Investment Promotion Agencies and
other government agencies administering tax incentives, categorized by sector, by
Investment Promotion Agency or other government agency administering tax
Exempt Entities
incentives, and by type of tax incentive: Provided, further, That the results of the
cost-benefit analysis shall be published at the per firm level by the Fiscal
Incentives Review Board and a report shall be submitted to the President and
Congress on an annual basis.
SEC. 307. Conduct of Impact Evaluation on Tax Incentives. - The Fiscal Incentives
Review Board is mandated to conduct impact evaluation such as a cost-benefit
analysis on the investment and non-investment incentives to determine the
impact of tax incentives on the Philippine economy and on the relevant sector.
For this purpose, the Department of Finance, all heads of the Investment
Promotion Agencies and other government agencies administering tax incentives
shall submit to the Fiscal Incentives Review Board per firm- and per registered
project- or activity-level in a machine-readable format:
(1) Data on tax incentives based on the submissions of registered business
enterprises and other registered enterprises; and
(2) Other investment- and non-investment-related data.
A third party government institution may conduct on its own or upon request of
the Fiscal Incentives Review Board a peer review of the impact evaluation of the
Board, or a parallel impact evaluation on the investment and non-investment
incentives to determine the impact of the tax incentives on the Philippine economy
and on the relevant sector: Provided, That for this purpose the Fiscal Incentives
Review Board may provide anonymized firm-level data to the third party
government institution, subject to a data sharing agreement.
SEC. 308. Penalties for Noncompliance with Filing and Reportorial Requirements.
- Any registered business enterprise or other registered enterprise, which fails to
comply with filing and reportorial requirements with the appropriate Investment
Promotion Agencies or other government agencies administering tax incentives
and/or, which fails to show proof of filing of tax returns using the electronic system
for filing and payment of taxes of the Bureau of Internal Revenue under Section
305 hereof, shall be imposed the following penalties by the appropriate
Investment Promotion Agency or other government agency administering tax
incentives:
(A) First (1st) Violation — Payment of a fine amounting to One hundred thousand
pesos (P100,000.00);
(B) Second (2nd) Violation — Payment of a fine amounting to Five hundred
thousand pesos (P500,000.00); and
(C) Third (3rd) Violation — Cancellation by the Fiscal Incentives Review Board of
the registration of the registered business enterprise or registered entity with the
Investment Promotion Agency or other government agency administering tax
incentives.
Provided, That if the failure to show such proof is not due to the fault of the
registered business enterprises or other registered enterprises, the same shall not
be a ground for the suspension of the Income Tax Holiday (ITH) and/or other tax
incentives availment: Provided, further, That collections from the penalties shall
accrue to the general fund.
After due process, the Fiscal Incentives Review Board or the concerned Investment
Promotion Agency, as the case may be, may cancel the registration, suspend the
enjoyment of incentive benefits of any registered enterprise, and/or require refund
of incentives enjoyed by such enterprise, including interests and monetary
penalties, for any material misrepresentation of information for the purpose of
availing more incentives than what it is entitled to under this Code.
Provided, That the Fiscal Incentives Review Board, with the recommendation of
the Commissioner, may revoke or suspend incentives granted by an Investment
Promotion Agency and/or order a business closure of a registered business
enterprise that violates Title VI (Excise Taxes on Certain Goods) and Title X
(Statutory Offenses and Penalties) of this Code and other related revenue
regulations, orders, or issuances of the government: Provided, further, That such
authority shall cover the acts of the registered business enterprise committed
even in the first year of availment of incentives. Notwithstanding the provisions of
this Section, the Department of Finance, the Bureau of Internal Revenue, and the
Bureau of Customs shall retain their respective mandates, powers and functions
as provided for under this Act and related laws.
Any government official or employee who fails without justifiable reason to provide
or furnish the required tax incentives report or other data or information as
required under Sections 306 and 307 of this Act shall be penalized, after due
process, by a fine equivalent to the official's or employee's basic salary for a period
of one (1) month to six (6) months or by suspension from government service for
not more than one (1) year, or both, in addition to any criminal and administrative
penalties imposable under existing laws.
CHAPTER VI
TRANSITORY AND MISCELLANEOUS PROVISIONS
SEC. 309. Prohibition on Registered Activities. - A qualified registered project or
activity under an Investment Promotion Agency administering an economic zone
Exempt Entities
or freeport shall be exclusively conducted or operated within the geographical
boundaries of the zone or freeport being administered by the Investment
Promotion Agency in which the project or activity is registered: Provided, That a
registered business enterprise may conduct or operate more than one qualified
registered project or activity within the same zone or freeport under the same
Investment Promotion Agency: Provided, further, That any project or activity
conducted or performed outside the geographical boundaries of the zone or
freeport shall not be entitled to the incentives provided in this Act, unless such
project or activity is conducted or operated under another Investment Promotion
Agency.
SEC. 310. Establishment of One-Stop Action Center. - All Investment Promotion
Agencies shall establish a one-stop shop or one-stop action center that will
facilitate and expedite, to the extent possible, the setting up and conduct of
registered projects or activities, including assistance in coordinating with the local
government units and other government agencies to comply with Republic Act No.
11032, otherwise known as the Ease of Doing Business and Efficient Government
Service Delivery Act of 2018: Provided, however, That the enterprises shall
continue to avail of the one-stop shop facility notwithstanding the expiration of
their incentives under this Code.
SEC. 311. Investments Prior to the Effectivity of This Act. - Registered business
enterprises with incentives granted prior to the effectivity of this Act shall be
subject to the following rules:
(A) Registered business enterprises whose projects or activities were granted only
an income tax holiday prior to the effectivity of this Act shall be allowed to continue
with the availment of the income tax holiday for the remaining period of the
income tax holiday as specified in the terms and conditions of their registration:
Provided, That for those that have been granted the income tax holiday but have
not yet availed of the incentive upon the effectivity of this Act, they may use the
income tax holiday for the period specified in the terms and conditions of their
registration;
(B) Registered business enterprises, whose projects or activities were granted an
income tax holiday prior to the effectivity of this Act and that are entitled to the
five percent (5%) tax on gross income earned incentive after the income tax
holiday, shall be allowed to avail of the five percent (5%) tax on gross income
earned incentive based on Subsection (C); and
(C) Registered business enterprises currently availing of the five percent (5%) tax
on gross income earned granted prior to the effectivity of this Act shall be allowed
to continue availing the said tax incentive at the rate of five percent (5%) for ten
(10) years.
The CREATE Law extended special tax incentives to business enterprises
registered with such investment promotion agencies (IPA)
Such as the BOI, PEZA, BCDA, SBMA, CDC, JHMC, Poro Point
Management Corporation (PPMC), Cagayan Economic Zone
Authority (CEZA), Zamboanga City Special Economic Zone
Authority (ZCSEZA), PHIVIDEC Industrial Authority (PIA), Aurora
Pacific Economic Zone and Freeport Authority (APECO), Tourism
Infrastructure and Enterprise Zone Authority (TIEZA), and all
other similar existing authorities or that may be created by law.
(Sec. 293 (H))
Such business enterprises entitled to enjoy the special tax incentives
ordinarily conduct their registered activity in freeport zones or special
economic zones operated by the abovementioned IPA (Investment
Promotion Agencies).
Period of availment of the incentives:
Shall commence from the actual start of commercial operations
with the registered business enterprise availing of the tax
incentives within three (3) years from the date of registration,
unless otherwise provided in the Strategic Investment Priority
Plan and its corresponding guidelines.
These incentives will attach only to registered business entities.
If you derive income form other business sources then hindi na
yan entitled to incentives.
Baniqued:
Ex. You’re a call center or Business Process Outsourcing (BPO). How
would you know that this is operating in an eco-zone building?
Special Economic Zone or Ecozone (Sec. 293(R))
PEZA: if they won’t return then we will revoke the incentive
[the controversy]
The call center BPOs do not want to go back. The investment agencies
confronted the BPOs saying that if their employees do not go back to
the premises then we will revoke your incentives.
DOF: 100% of the workforce to go back or else no incentives.
Take note:
“Registered business enterprise”
Incentive attach only to the registered activity
Exempt Entities
Ex. Registered business of toys thus this is the only business
activity wherein the incentive would attach; if you have other
business sources they are not anymore entitled to the
incentives
Tax Incentives
The incentives granted to business enterprises registered with IPAs as
mentioned above include the ff:
1. Income tax holiday (ITH);
2. special corporate income tax (SCIT) rate equivalent to five (5%)
percent effective July 1, 2020 based on the gross income
earned (GIE) in lieu of all national and local taxes;
3. Enhanced deductions (ED);
4. Customs duties: duty exemption on importation of capital
equipment, raw materials, spare parts, or accessories used
directly and exclusively in the registered project or activity of the
registered business enterprise;
5. VAT exemption on importations, provided that the imported
goods are used directly and exclusively in the registered project
or activity of the business enterprise; and
6. VAT zero-rating (0%) of purchases of goods and services from
local suppliers, provided that such locally procured goods and
services are used directly and exclusively in the registered
project or activity of the business enterprise.
NOTE: In no case, however, shall the enhanced deductions (ED) be
granted simultaneously with the special corporate income tax (SCIT) of
5% on gross income earned (GIE).
CREATE law simply retained the 5% tax on gross income earned
Gross income earned = Gross sales less Direct costs aka
salaries on labor, and production and raw materials
Baniqued:
Take note that the qualification is always in relation to the registered
business activity
Qualifications of a Registered Business Enterprise
How can a business enterprise qualify for incentives or what must they prove?
In order to be entitled to the tax incentives, the registered business
enterprise must: (Sec. 304, NIRC)
(a) be engaged in a project or activity included in the Strategic
Investment Priority Plan (SIPP);
Usually priority plans of Gov; FIRB in coordination with
NEDA
(b) meet the target performance metrics after the agreed time
period;
If may export sales quota after a certain period
(c) install an adequate accounting system that shall identify the
investments, revenues, costs and profits or losses of each
registered project or activity undertaken by the enterprise
separately from the aggregate investments, revenues, costs
and profits or losses of the whole enterprise; or establish a
separate corporation for each registered project or activity if the
IPA should so require;
(d) comply with the e-receipting and e-sales requirement in
accordance with Sections 237 and 237(a) of the NIRC; and
They’re encouraging electronic receiving and recording
of sales
(e) submit annual reports of beneficial ownership of the
organization and related parties.
In no case shall IPAs (Investment promotion agencies) accept
applications unless the project or activity is listed in the SIPP. Projects
or activities that are not listed in the SIPP shall be automatically
disapproved.
Strategic Investment Priority Plan (SIPP)
The BOI (Board of Investments), in coordination with the FIRB, IPAs,
other government agencies with NEDA administering tax incentives, and
the private sector, shall formulate the SIPP to be submitted to the
President for approval.
The Plan may contain recommendations for types of non-fiscal support
needed to create high-skilled jobs:
Grow a local pool of enterprises, particularly micro, small and
medium enterprises (MSMEs), that can supply to domestic and
global value chains, to increase the sophistication of products
and services that are produced and/or sourced domestically, to
Exempt Entities
expand domestic supply and reduce dependence on imports,
and to attract significant foreign capital or investment.
The SIPP shall be valid for a period of three (3) years, subject to review
and amendment every three (3) years thereafter, unless there would be
a supervening event that would necessitate its review.
The SIPP shall contain the following:
(A) Priority projects or activities that are included in the Philippine
Development Plan or its equivalent, or other government programs,
taking into account any of the following:
(1) Substantial amount of investments;
(2) Considerable generation of employment, especially towards
less developed areas;
(3) Considerable amount of net exports;
(4) Use of modern, advance, or new technology;
(5) Processes and innovations that will lead towards the attainment
of the sustainable development goals shall include, but not be
limited to, adoption of adequate environmental protection
systems and sustainability strategies;
(6) Addressing missing links and other gaps in the supply or value
chain or otherwise moving up the value chain or product ladder;
(7) Promotion of market competitiveness;
(8) Enhancement of the capabilities of Filipino enterprises and
professionals to produce and offer increasingly sophisticated
products and services;
(9) Contribution to Philippine food security and increase incomes in
the agriculture and fisheries sector; or
(10) Services and activities that can promote regional and global
operations in the country.
(B) Scope and coverage of location and industry tiers in Section 296; and
(C) Terms and conditions on the grant of enhanced deductions under
Section 294(C). [found below]
Baniqued:
If you know of a business enterprise that wants to be exempted, check
first whether the activity na gustong i-pursue sa ph ay nakalist dito sa
SIPP
Tax Incentives of ITH, SCIT and ED
Income Tax Holiday (ITH)
The ITH is for a period of four (4) to seven (7) years depending
on both the location and industry that the registered enterprise
is engaged in and other relevant factors as may be defined in
the SIPP, and followed by the SCIT rate or ED for five (5) to ten
(10) years as discussed below.
NOTE:
No payment of income tax at all but when the ITH
expires you pay now income tax which is either the SCIT
or RCIT less enhanced deductions
After the lapse of 4-7 years as the case may be, SCIT
(Special Corporate Income Tax Rate) of 5%
OR Corporate income tax rate of 20% + enhanced
deductions available for a period of 5-10 years
Example:
Kung exporter ka and your project is located in the NCR and your
business is under Tier I your Income Tax Holiday is 4 years
commencing from start of commercial operations or 5 years if Tier II or
6 years if you fall under Tier III. Upon expiration of your ITH, SCIT of 5%
or Enhanced deductions for a period of 10 years.
The farther away you locate your plant from NCR, the longer your
income tax holiday [refer to table]
Registered Export Enterprise
Thus, a registered export enterprise whose project or activity is located
in the NCR and falls under Tier I shall enjoy an ITH of 4 years
commencing from the actual start of commercial operation (or 5 years
ITH and 6 years ITH, if falling under Tier II and Tier III, respectively),
followed by the SCIT of 5% or ED for a period of 10 years. On the other
hand, an export enterprise whose project or activity is located in the
metropolitan areas or areas contiguous and adjacent to the NCR and
falls under Tier I shall enjoy an ITH of 5 years commencing from the
actual start of commercial operation (or 6 years ITH and 7 years ITH, if
falling under Tier II and Tier III, respectively), followed by the SCIT of 5%
or ED for a period of 10 years. Finally, an export enterprise whose project
or activity is located in other areas than those mentioned above and falls
under Tier I shall enjoy an ITH of 6 years commencing from start of
commercial operation (or 7years ITH, if falling under Tier II or Tier III),
followed by the SCIT of 5% or ED for a period of 10 years.
Exempt Entities
The period of availment of incentives based on the combination of both
paying jobs; (ii) generation of new knowledge and intellectual property
the location and industry engaged in by the registered export enterprise
registered and/or licensed in the Philippines; (iii) commercialization
is summarized as follows:
of patents, industrial designs, copyrights and utility models owned or
co-owned by a registered business enterprise; (iv) highly technical
Location/Industry Tiers Tier I Tier II Tier III manufacturing; or (v) are critical to the structural transformation of the
Located in National Capital 4 ITH + 10 5 ITH + 10 6 ITH + 10 economy and require substantial catch-up efforts.
Region ED/SCIT ED/SCIT ED/SCIT

Located in Metropolitan areas or Domestic Market Enterprise

5 ITH + 10 6 ITH + 10 7 ITH + 10 NOTE: These are not exporters but they still enjoy incentives
areas contiguous and adjacent to
ED/SCIT ED/SCIT ED/SCIT
the National Capital Region They still enjoy ITH depending on the business or location
They do not enjoy the special income tax of 5% rather after the
expiration their incentive is the Enhanced Deductions for a
Located in all other areas period of 5 years
6 ITH + 10 7 ITH + 10 7 ITH + 10
ED/SCIT ED/SCIT ED/SCIT
Unlike registered export enterprises, domestic do not have the
(ex. Mindanao) option to choose the SCIT or the ED they may ONLY avil of the
ED after their ITH expires.
The business must still be those listed in the SIPP
On the other hand, a domestic market enterprise shall enjoy ITH for four
Baniqued: (4) to seven (7) years again depending on both the location and industry
The length of incentive and length of ITH is dependent on: that the registered enterprise is engaged in, followed by ED for five (5)
1. Location of registered activity or plant and years.
2. On the nature of the business activity you will engage in (Tier) Unlike export enterprises, domestic market enterprises do not have the
option of choosing between SCIT and ED upon the expiration of their ITH.
Business Activity Classification Domestic market enterprises may only avail of the ED for a period of five
(1) Tier I shall include activities that (i) have high potential for job creation; (5) years, following the expiration of their ITH.
(ii) take place in sectors with market failures resulting in The period of availment of incentives based on the combination of both
underprovision of basic goods and services; (iii) generate value the location and industry engaged in by the domestic market enterprise
creation through innovation, upgrading or moving up the value chain; is summarized as follows:
(iv) provide essential support for sectors that are critical to industrial
development; or (v) are emerging owing to potential comparative
Baniqued:
advantage.
If domestic, no SCIT of 5%. After expiration of ITH, the incentive
(2) Tier II shall include activities that produce supplies, parts and
available would be ED.
components, and intermediate services that are not locally produced
but are critical to industrial development and import-substituting
activities, including crude oil refining. Location/Industry Tiers Tier I Tier II Tier III
(3) Tier III activities shall include (i) research and development resulting
in demonstrably significant value-added, higher productivity,
improved efficiency, breakthroughs in science and health, and high-
Exempt Entities
(iv) highly technical manufacturing; or (v) are critical to the
National Capital Region 4 ITH + 5 ED 5 ITH + 5 ED 6 ITH + 5 ED structural transformation of the economy and require
substantial catch-up efforts.

Location of the Registered Project or Activity

Metropolitan areas or areas
contiguous and adjacent to the
NCR
All other areas
The location of the registered project or activity shall be prioritized
according to the level of development as follows:
5 ITH + 5 ED 6 ITH + 5 ED 7 ITH + 5 ED
(1) National Capital Region (NCR);
(2) Metropolitan areas or areas contiguous and adjacent to the
National Capital Region; and
(a) NOTE: The metropolitan areas shall be determined by
the National Economic and Development Authority
6 ITH + 5 ED 7 ITH + 5 ED 7 ITH + 5 ED
(NEDA).
(3) All other areas.

Factors That Determine Tier Classification
Projects or activities falling under Tier I include activities that:
(i) have high potential for job creation;
(ii) take place in sectors with market failures resulting in under-
provision of basic goods and services;
(iii) generate value creation through innovation, upgrading or
moving up the value chain;
(iv) provide essential support for sectors that are critical to
industrial development; or
(v) are emerging owing to potential comparative advantage.
Tier II projects or activities include those
“that produce supplies, parts and components, and
intermediate services that are not locally produced but are
critical to industrial development and import-substituting
activities, including crude oil refining.”
Tier III activities include:
(i) research and development resulting in demonstrably
significant value-added, higher productivity, improved
efficiency, breakthroughs in science and health, and high-
paying jobs;
(ii) generation of new knowledge and intellectual property
registered and/or licensed in the Philippines;
(iii) commercialization of patents, industrial designs, copyrights
and utility models owned or co-owned by a registered business
enterprise;
5% Special Corporate Income Tax Rate
Upon the expiration of their ITH,
Registered export enterprises: shall be entitled to the special
corporate income tax (SCIT) rate of five (5%) percent, effective
July 1, 2020, based on the gross income earned, in lieu of all
national and local taxes.
Domestic market enterprise: not eligible or entitled to claim
SCIT of 5%, only entitled to ED
The period of availment of the SCIT rate of 5% is subject to the conditions
set forth in Section 296 of the NIRC, as amended by CREATE.
Thus, registered export enterprises, whether in Tier I, II or III and
regardless of whether the registered project or activity is located
in the NCR, Metropolitan Areas, or all other areas, shall be
entitled to the SCIT rate of 5% for a period of ten (10) years,
following the ITH.
Unlike export enterprises, however, domestic market enterprises do not
have the option of choosing between SCIT and ED upon the expiration of
their ITH.
Domestic market enterprises may only avail of the ED for a
period of five (5) years, following the expiration of their ITH.
Enhanced Deductions
As discussed earlier, an export enterprise is entitled to an income tax
holiday for a period of four (4) to seven (7) years depending on the
Exempt Entities
location and industry that the registered export enterprise is engaged in
and other relevant factors as may be defined in the SIPP.
Upon expiration of the ITH, the export enterprise may choose between
the SCIT of 5% of GIE or enhanced deductions for ten (10) years.
On the other hand, a domestic market enterprise shall enjoy ITH for four
(4) to seven (7) years again depending on both the location and industry
that the registered enterprise is engaged in, followed by ED for five (5)
years.
Unlike export enterprises, however, domestic market enterprises do not
have the option of choosing between the SCIT of 5% GIE and ED upon
the expiration of their ITH.
Sec. 34, NIRC
SEC. 34. Deductions from Gross Income. -
Ordinary and Necessary Expenses listed in this provision or the deductions in Sec.
34 are enhanced as seen below to be more favorable to the the taxpayer. It will
allow for higher rates of deduction. Kung ano yung allowable deductions mo sa
Sec. 34 dito, mas dadag pa.
Sec. 294 (C ) Enhance Deductions, NIRC
(C) Enhanced Deductions (ED) - For export enterprise and domestic market
enterprise, the following may be allowed as deductions:
(1) Depreciation allowance of the assets acquired for the entity's production
of goods and services (qualified capital expenditure) — additional ten
percent (10%) for buildings; and additional twenty percent (20%) for
machineries and equipment;
(2) Fifty percent (50%) additional deduction on the labor expense incurred in
the taxable year;
(3) One hundred percent (100%) additional deduction on research and
development expense incurred in the taxable year;
(4) One hundred percent (100%) additional deduction on training expense
incurred in the taxable year;
(5) Fifty percent (50%) additional deduction on domestic input expense
incurred in the taxable year;
(6) Fifty percent (50%) additional deduction on power expense incurred in the
taxable year;
(7) Deduction for reinvestment allowance to manufacturing industry — When
a manufacturing registered business enterprise reinvests its undistributed
profit or surplus in any of the projects or activities listed in the Strategic
Investment Priority Plan, the amount reinvested to a maximum of fifty
percent (50%) shall be allowed as a deduction from its taxable income
within a period of five (5) years from the time of such reinvestment; and
(8) Enhanced Net Operating Loss Carry-Over (NOLCO). — The net operating loss
of the registered project or activity during the first three (3) years from the
start of commercial operation, which had not been previously offset as
deduction from gross income, may be carried over as deduction from gross
income within the next five (5) consecutive taxable years immediately
following the year of such loss.
Enhanced Deductions
1) Depreciation allowance of the assets acquired for the entity's production
of goods and services (qualified capital expenditure) — additional ten
percent (10%) for buildings; and additional twenty percent (20%) for
machineries and equipment;
The depreciation allowance mentioned above applies only to
assets that are directly related to the registered enterprise's
production of goods and services other than administrative and
other support services.
Ex. Secretarial, lawyers, marketing – excluded; we only look at
the plant or factory
2) Fifty percent (50%) additional deduction on the labor expense incurred
in the taxable year;
The said additional deduction on labor expense shall not,
however, include salaries, wages, benefits, and other personnel
costs incurred for managerial, administrative, indirect labor,
and support services.
3) One hundred percent (100%) additional deduction on R&D expense
incurred in the taxable year;
The additional deduction on R&D expense shall only apply to
research and development directly related to the registered
project or activity of the entity and shall be limited to local
expenditure incurred for salaries of Filipino employees and
consumables and payments to local research and development
organizations.
4) One hundred percent (100%) additional deduction on training expense
incurred in the taxable year;
The additional deduction on training expense shall only apply to
trainings, as approved by the Investment Promotion Agencies
based on the Strategic Investment Priority Plan, given to the
Exempt Entities
Filipino employees engaged directly in the registered business
enterprise's production of goods and services.
Administrative and support services excluded
Ex. If able to claim 1M deduction before, the deduction that can
be claimed now is 2M
5) Fifty percent (50%) additional deduction on domestic input expense
incurred in the taxable year;
The additional deduction on domestic input expense shall only
apply to domestic input that are directly related to and actually
used in the registered export project or activity of the registered
business enterprise.
6) Fifty percent (50%) additional deduction on power expense incurred in
the taxable year;
The additional deduction on power expense shall only apply to
power utilized for the registered project or activity.
7) Deduction for reinvestment allowance to manufacturing industry —
When a manufacturing registered business enterprise reinvests
its undistributed profit or surplus in any of the projects or
activities listed in the Strategic Investment Priority Plan, the
amount reinvested to a maximum of fifty percent (50%) shall be
allowed as a deduction from its taxable income within a period
of five (5) years from the time of such reinvestment.
The said deduction for reinvestment allowance to the
manufacturing industry shall be determined in the Strategic
Investment Priority Plan.
8) Enhanced Net Operating Loss Carry-Over (NOLCO). —
The net operating loss of the registered project or activity during
the first three (3) years from the start of commercial operation,
which had not been previously offset as deduction from gross
income, may be carried over as deduction from gross income
within the next five (5) consecutive taxable years immediately
following the year of such loss.
In sec. 34 NOLCO is carried over for only 3 years in this
enhanced it is increased to 5 years
Excluded Service Enterprises
The term “registered business enterprise” that is entitled to the
incentives granted by CREATE excludes service enterprises such as:
Those engaged in customs brokerage, trucking or forwarding
services, janitorial services, security services, insurance,
banking, and other financial services, consumers' cooperatives,
credit unions, consultancy services, retail enterprises,
restaurants, or such other similar services, as may be
determined by the Fiscal Incentives Review Board, irrespective
of location, whether inside or outside the zones, duly accredited
or licensed by any of the Investment Promotion Agencies and
whose income derived within the economic zones shall be
subject to taxes under the NIRC, as amended.
NOTE: These entities will not be entitled to incentives. Even if
their income is derived from free port zones, they are still taxed
under the normal tax rates as they are not in the definition of
registered business activities/ entities
Transitory Provisions
NOTE: These transitory provisions will soon expire, so Sir didn’t spend a
lot of time on this
Registered business enterprises whose projects or activities were
granted only an ITH prior to the effectivity of CREATE shall continue to
enjoy the ITH for its remaining period as specified in the terms and
conditions of their registration.
Those that have been granted the ITH but have not yet availed
of the incentive upon the effectivity of CREATE may use the ITH
for the period specified in the terms and conditions of their
registration.
Registered business enterprises whose projects or activities were
granted an ITH prior to the effectivity of CREATE and that are entitled to
the five percent (5%) tax on gross income earned incentive after the ITH
shall be allowed to avail of the five percent (5%) tax on gross income
earned incentive based on Section 311(C) below (i.e., it may avail of the
5% tax on GIE for ten (10) years.
Registered business enterprises currently availing of the five percent
(5%) tax on gross income earned granted prior to the effectivity of
CREATE shall be allowed to continue availing of the said tax incentive at
the rate of five percent (5%) for ten (10) years.
Upon the expiration of the transitory period under Section 311(C) above,
export enterprises registered prior to the effectivity of CREATE shall have
the option to reapply and avail of the incentives granted under Section
Exempt Entities
294(B) for the same period provided under Section 296, and may still be
extended for a certain period not exceeding ten (10) years at any one
time, subject to the conditions and qualifications set forth in the
Strategic Investment Priority Plan and performance review by the Fiscal
Incentives Review Board.
A qualified expansion or entirely new project or activity registered under
CREATE may qualify to avail of incentives and its period of availment,
subject to the qualifications set forth in the Strategic Investment Priority
Plan and performance review by the Fiscal Incentives Review Board.
Existing registered projects or activities prior to the effectivity of CREATE
may qualify to register and avail of the incentives granted under CREATE
for the prescribed period, subject to the criteria and conditions set forth
in the Strategic Investment Priority Plan.
Power of the President to Grant Incentives
Notwithstanding the provisions of Sections 295 and 296, the President
may, in the interest of national economic development and upon the
recommendation of the Fiscal Incentives Review Board, modify the mix,
period or manner of availment of incentives provided under the NIRC, as
amended by CREATE, or craft the appropriate financial support package
for a highly desirable project or a specific industrial activity based on
defined development strategies for creating high-value jobs, building
new industries to diversify economic activities, and attracting significant
foreign and domestic capital or investment, and the fiscal requirements
of the activity or project, subject to maximum incentive levels
recommended by the FIRB.
The grant of income tax holiday shall not, however, exceed eight
(8) years and thereafter, a special corporate income tax rate of
five percent (5%) may be granted.
Moreover, the total period of incentive availment shall not
exceed forty (40) years.
Furthermore, the exercise by the President of his power to grant
incentives shall be based on a positive recommendation from the FIRB
after the latter has determined that the following conditions are
satisfied:
(1) The project has a comprehensive sustainable development plan
with clear inclusive business approaches, and high level of
sophistication and innovation; and
(2) Either:
(a) Minimum investment capital of Fifty Billion Pesos
(P50B) or its equivalent in US dollars; OR
(b) Minimum direct local employment generation of at
least ten thousand (10,000) within three (3) years from
the issuance of the certificate of entitlement.
The term “investment capital” refers to the value of investment indicated
in Philippine currency, excluding the value of land and working capital,
that shall be used to carry out a registered project or activity, except that
land shall be included as investment capital for registered real estate
development and only for this purpose.
Investment capital may include the cost of land improvements,
buildings, leasehold improvements, machinery and equipment,
and other non-current tangible assets.
The FIRB shall determine whether the benefits that the Government may
derive from such investment are clear and convincing and far outweigh
the cost of incentives that will be granted in determining whether a
project or activity is highly desirable.
Fiscal Incentives Review Board (FIRB)
The FIRB, or the Investment Promotion Agencies (IPAS), under a
delegated authority from the FIRB, shall grant the appropriate tax
incentives to be granted to registered business enterprises only to the
extent of the latter’s approved registered project or activity under the
Strategic Investment Priority Plan (SIPP).
The FIRB, among other powers, shall approve or disapprove, the grant of
tax incentives to the extent of the registered project or activity upon the
recommendation of the concerned IPA.
However, the grant of tax incentives to registered projects or
activities with investment capital of One Billion Pesos (P1B) and
below shall be delegated by the Fiscal Incentives Review Board
to the concerned IPA to the extent of the registered project or
activity; provided, that the FIRB may increase the said threshold
amount of One Billion Pesos (P1,000,000,000.00).
1B and below in the level of Investment Promotion Agencies
1B and higher in the level of President or FIRB
The FIRB, among other powers, may cancel, suspend, or withdraw the
enjoyment of fiscal incentives of concerned registered business
enterprises on its own initiative or upon the recommendation of the
Investment Promotion Agency for material violations of any of the
Exempt Entities
conditions imposed in the grant of fiscal incentives, including, but not
limited to:
The non-compliance with the agreed performance
commitments and endorse registered business enterprises
whose incentives are canceled, suspended, or withdrawn to the
concerned revenue agencies for the assessment and collection
of taxes and duties due commencing from the first year of
availment.
Ex. Agreed performance commitment was not met, the FIRB
can cancel, suspend, or withdraw the incentives.
However under the CREATE LAW:
The power of the FIRB to review, cancel, suspend, or withdraw
tax incentives and subsidies does not extend to tax and duty
incentives granted through legislative franchises, which are
expressly excluded from the expanded powers granted to FIRB
by the CREATE Law.
NOTE: This power will be reserved to Congress
Furthermore, the FIRB, among other powers, shall decide on issues, on
its own initiative or upon the recommendation of the Investment
Promotion Agency, after due hearing, concerning the approval,
disapproval, cancellation, suspension, withdrawal, or forfeiture of tax
incentives or tax subsidy in accordance with CREATE.
The FIRB shall decide the matter within ninety (90) days from the date
when the FIRB declares the issues submitted for resolution.
A business enterprise adversely affected by the decision of the FIRB
may, within thirty (30) days from receipt of the adverse decision, appeal
the same to the Court of Tax Appeals. Sec. 297, NIRC, as amended by
Rep. Act No. 11534
Composition of the FIRB
Secretary of the Department of Finance (DOF) – Chairperson
Secretary of the Department of Trade and Industry (DTI) – Co-
Chairperson
Executive Secretary (ES) of the Office of the President – Member
Secretary of the Department of Budget and Management (DBM) –
Member
Director of the National Economic Development Authority (NEDA) -
Member
NOTE: BIR is included in the workforce of the FIRB
Nature of Income Covered by Income Tax Holiday
Incentives will only apply to the fairly registered project or activity
Aegis PeopleSupport, Inc. v. Commissioner of Internal Revenue, G.R. No.
216601, October 7, 2019
FACTS:
Petitioner entered into a hedging contract with a broker, Citibank, in
order to protect its foreign currency revenues or earnings from being
severely devalued in terms of local currency. It considered the hedging
contract as related to its PEZA-registered activity and, therefore,
subject to the preferential tax treatment under Republic Act No. 7916
and Executive Order No. 226, i.e., covered by the income tax incentive
(income tax holiday or the 5% gross income tax) of such enterprise.
[whatever income it derived should be derived by ITH , therefore
should no be liable for tax]
ISSUE:
Whether or not the foreign exchange (Forex) gains realized by a PEZA-
registered enterprise is covered by the income tax incentive (income
tax holiday or the 5% gross income tax) of such enterprise, or subject
to the normal corporate income tax rate.
HELD:
The Supreme Court held that the foreign exchange fluctuation "gains"
of the petitioner under the hedging contract it entered into with
Citibank is covered by the income tax holiday enjoyed by petitioner, a
BOI and PEZA-registered enterprise.
The Supreme Court explained that petitioner may validly enter into a
hedging contract to manage its foreign currencies on-hand earned as
gross revenues.
The hedging contract that petitioner entered into could be considered
very much related to its registered activities and, therefore, still
subject to a preferential tax treatment under Republic Act No. 7916
and Executive Order No. 226.
This case amplifies the meaning of the registered project or activity
Incentives attach to the registered project.
Any extraneous income that is not part of the registered
project or activity will not be covered by the incentives.
BIR was saying that the foreign exchange had no relation to the
registered project, but the SC ruled otherwise because it was done to
protect his revenues from his registered activity.
Exempt Entities
An “offshore gaming licensee” is an: Resident Foreign Corporation
Ex. Manufacturer and you use dollars to get your raw
materials, naturally you need to protect your cash in case of “offshore gaming operator, whether organized abroad or in the
extraordinary valuation Philippines, duly licensed and authorized, through a gaming
license, by the Philippine Amusement and Gaming Corporation
or any special economic zone authority or tourism zone
Taxation of Philippine Offshore Gaming Operators (POGOs)
authority or freeport authority to conduct offshore gaming
An offshore gaming operator or licensee, whether organized as a
operations, including the acceptance of bets from offshore
domestic corporation or a foreign corporation, is subject to a gaming tax
customers, as provided for in their respective charters.”
equivalent to five percent (5%) of:
An offshore gaming licensee shall be considered engaged in doing
1. its entire gross gaming revenues or receipts 5% or
business in the Philippines, i.e., a resident foreign corporation.
2. the agreed predetermined minimum monthly revenue or
receipts from gaming,
Offshore Gaming Provider Not Subject to the 5% Gaming Tax
whichever is higher, which shall be in lieu of all other
Suppliers of software or computers
direct and indirect internal revenue taxes and local
An “offshore gaming service provider” is defined as:
taxes with respect to gaming income. Sec. 125(A),
An accredited service provider to an offshore gaming licensee
NIRC, as amended by Rep. Act No. 11590, Sept. 22,
that is a juridical person duly created or organized within or
2021
outside the Philippines or a natural person, regardless of
“Gross gaming revenue or receipts”
citizenship or residence, who provides ancillary services to an
Means gross wagers less payouts
offshore gaming licensee as defined above or to any gaming
Provided that the taking of wagers made in the Philippines and
licensee or operator with licenses from other jurisdictions.
the grave failure to cooperate with the third-party auditor shall
Such ancillary services shall include, but not limited to,
result in the revocation of the license of the offshore gaming
customer and technical relations and support, information
licensee. Ibid.
technology, gaming software, data provision, payment
The non-gaming revenues of a Philippine-based (i.e., domestic
solutions, and live studio and streaming services.
corporation) offshore gaming licensee as duly licensed by the Philippine
Not the operators, rather the suppliers; they supply technical
Amusement and Gaming Corporation or any special economic zone
support, payment solutions, streaming services etc.
authority or tourism zone authority or freeport authority shall be subject
An accredited gaming service provider to offshore gaming licensees:
to an income tax equivalent to twenty-five percent (25%) of the taxable
Shall not be subject to the gaming tax of 5% imposed under
income derived during each taxable year from all sources within and
Section 125-A,
without the Philippines.
but shall pay the regular corporate income tax as imposed in
The non-gaming revenues derived within the Philippines by a foreign-
Section 27(A) of the Code, i.e., 20%-25%,
based offshore gaming licensee shall be subject to an income tax
and shall be subject to all other applicable local and national
equivalent to twenty-five percent (25%) of the taxable income derived
taxes.
during each taxable year.
i.e., foreign corporation, duly licensed by the Philippine
Taxation of Alien Employees of POGOs
Amusement and Gaming Corporation (PAGCOR) or any special
Alien individuals, regardless of whether resident or non-resident and
economic zone authority or tourism zone authority or freeport
regardless of term and class of working or employment permit or visa,
authority including the acceptance of bets
who are employed and assigned in the Philippines by an offshore
Definition of Offshore Gaming Licensee
Exempt Entities
gaming licensee or its service provider, shall pay a final withholding tax
of twenty-five percent (25%) of their gross income.
However, the minimum final withholding tax due for any taxable month
from said persons shall not be lower than Twelve Thousand Five Hundred
Pesos (P12,500.00).
In computing the tax provided above, gross income includes:
whether in cash or in kind, basic salary/wages, annuities,
compensation, remuneration and other emoluments, such as
honoraria and allowances, received from such service providers
or offshore gaming licensees.
Any income earned from all other sources within the Philippines by the
alien employees referred to above shall be subject to the regular income
tax rates imposed under the NIRC.
And not the final withholding tax of 25%
Will be subject to the regular income tax rates in Sec. 24(A) of
35%
Accounting Period and Methods of Accounting
CHAPTER VIII
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
Sec. 43 to 50, NIRC
SEC. 43. General Rule. - The taxable income shall be computed upon the basis of
the taxpayer's annual accounting period (fiscal year or calendar year, as the case
may be) in accordance with the method of accounting regularly employed in
keeping the books of such taxpayer, but if no such method of accounting has been
so employed, or if the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method as in the opinion of
the Commissioner clearly reflects the income. If the taxpayer's annual accounting
period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has
no annual accounting period, or does not keep books, or if the taxpayer is an
individual, the taxable income shall be computed on the basis of the calendar year.
SEC. 44. Period in which Items of Gross Income Included. - The amount of all items
of gross income shall be included in the gross income for the taxable year in which
received by the taxpayer, unless, under methods of accounting permitted under
Section 43, any such amounts are to be properly accounted for as of a different
period.
In the case of the death of a taxpayer, there shall be included in computing taxable
income for the taxable period in which falls the date of his death, amounts accrued
up to the date of his death if not otherwise properly includible in respect of such
period or a prior period.
SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided
for in this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid
or incurred', dependent upon the method of accounting upon the basis of which the
net income is computed, unless in order to clearly reflect the income, the
deductions should be taken as of a different period. In the case of the death of a
taxpayer, there shall be allowed as deductions for the taxable period in which falls
the date of his death, amounts accrued up to the date of his death if not otherwise
properly allowable in respect of such period or a prior period.
SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual,
changes his accounting period from fiscal year to calendar year, from calendar year
to fiscal year, or from one fiscal year to another, the net income shall, with the
approval of the Commissioner, be computed on the basis of such new accounting
period, subject to the provisions of Section 47.
SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months.
(A) Returns for Short Period Resulting from Change of Accounting Period. - If a
taxpayer, other than an individual, with the approval of the Commissioner, changes
the basis of computing net income from fiscal year to calendar year, a separate
final or adjustment return shall be made for the period between the close of the
last fiscal year for which return was made and the following December 31.
If the change is from calendar year to fiscal year, a separate final or adjustment
return shall be made for the period between the close of the last calendar year for
which return was made and the date designated as the close of the fiscal year.
If the change is from one fiscal year to another fiscal year, a separate final or
adjustment return shall be made for the period between the close of the former
fiscal year and the date designated as the close of the new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate final or
adjustment return is made under Subsection (A) on account of a change in the
accounting period, and in all other cases where a separate final or adjustment
return is required or permitted by rules and regulations prescribed by the Secretary
of Finance, upon recommendation of the Commissioner, to be made for a fractional
part of a year, then the income shall be computed on the basis of the period for
which separate final or adjustment return is made.
SEC. 48. Accounting for Long-term Contracts. - Income from long-term contracts
shall be reported for tax purposes in the manner as provided in this Section. As used
herein, the term 'long-term contracts' means building, installation or construction
contracts covering a period in excess of one (1) year. Persons whose gross income
is derived in whole or in part from such contracts shall report such income upon the
basis of percentage of completion.
The return should be accompanied by a return certificate of architects or engineers
showing the percentage of completion during the taxable year of the entire work
performed under contract.
There should be deducted from such gross income all expenditures made during
the taxable year on account of the contract, account being taken of the material
and supplies on hand at the beginning and end of the taxable period for use in
connection with the work under the contract but not yet so applied. If upon
completion of a contract, it is found that the taxable [net] income arising thereunder
has not been clearly reflected for any year or years, the Commissioner may permit
or require an amended return.
SEC. 49. Installment Basis. –
(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed
Accounting Period and Methods of Accounting
by the Secretary of Finance, upon recommendation of the Commissioner, a person
who regularly sells or otherwise disposes of personal property on the installment
plan may return as income therefrom in any taxable year that proportion of the
installment payments actually received in that year, which the gross profit realized
or to be realized when payment is completed, bears to the total contract price.
(B) Sales of Realty and Casual Sales of Personality. -
In the case:
(1) of a casual sale or other casual disposition of personal property (other than
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), for a price exceeding
One thousand pesos (P1,000), or
(2) of a sale or other disposition of real property, if in either case the initial
payments do not exceed twenty-five percent (25%) of the selling price, the
income may, under the rules and regulations prescribed by the Secretary
of Finance, upon recommendation of the Commissioner, be returned on
the basis and in the manner above prescribed in this Section. As used in
this Section, the term 'initial payments' means the payments received in
cash or property other than evidences of indebtedness of the purchaser
during the taxable period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual
who sells or disposes of real property, considered as capital asset, and is otherwise
qualified to report the gain therefrom under Subsection (B) may pay the capital
gains tax in installments under rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits
of Subsection (A) elects for any taxable year to report his taxable income on the
installment basis, then in computing his income for the year of change or any
subsequent year, amounts actually received during any such year on account of
sales or other dispositions of property made in any prior year shall not be excluded.
SEC. 50. Allocation of Income and Deductions. - In the case of two or more
organizations, trades or businesses (whether or not incorporated and whether or
not organized in the Philippines) owned or controlled directly or indirectly by the
same interests, the Commissioner is authorized to:
a. distribute,
b. apportion or
c. allocate gross income
d. or deductions
between or among such organization, trade or business, if he determined that such
distribution, apportionment or allocation is:
a. necessary in order to prevent evasion of taxes or
b. clearly to reflect the income of any such organization, trade or business.
Fiscal Year vs. Calendar Year
A corporation may employ either calendar year or fiscal year as a basis
for filing its annual income tax return. The timing for reporting an income
or deducting an expense must be done in such a manner as would clearly
reflect the taxpayer’s income. Sec. 52(B)
A taxpayer, other than an individual, may choose either the calendar year
or fiscal year as its annual accounting period.
“Calendar year” means an accounting period of twelve (12) months that
ends on the last day of December, or December 31.
On the other hand, “fiscal year” means an accounting period of twelve
(12) months that ends on the last day of any month other than
December.
Thus, the term “taxable year” means the calendar year or the fiscal year
on the basis of which the net income of the taxpayer is computed, or, in
the case of a return made for a fractional part of a year (“short period”),
the period for which such return is made.
Corporations may adopt either a calendar year or fiscal year to file
their income tax return but individuals can only follow the calendar
year.
Calendar year - jan to dec
Fiscal year - any 12 month period na yung last day ay other than
december 31 i.e. June 30, September 30
Note: Bonus knowledge on the timing Differences
Cash Method v. Accrual Method
The taxable income shall be computed on the basis of the taxpayer’s
annual accounting period (fiscal year or calendar year) in accordance
with the method of accounting (cash method or accrual method)
regularly employed in keeping the books of such taxpayer. Sec. 43
GR: While it is generally in the discretion of the taxpayer to choose which
method of accounting it shall adopt,
EXC: the NIRC empowers the Commissioner to apply another
method if the method employed by the taxpayer does not clearly
reflect his income.
Accounting Period and Methods of Accounting
If the taxpayer has not employed any method of accounting at all, the
Commissioner may compute the taxpayer’s taxable income in
accordance with such a method that, in his opinion, clearly reflects the
taxpayer’s taxable income. Sec. 43, NIRC; Sec. 37, Rev. Regs. No. 2
Accrual Method
“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 becomes
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.”
Isabela Cultural Corporation
“For a taxpayer using the accrual method, the determinative
question is, when do the facts present themselves in such a
manner that the taxpayer must recognize income or expense?
The accrual of income and expense is permitted when the all-
events test has been met.
This test requires:
i. fixing of a right to income or liability to pay; and
ii. the availability of the reasonable accurate
determination of such income or liability.”
If a taxpayer on accrual method of accounting fails to claim
some expenses as deductions in the current taxable year when
they were incurred, it may not claim such deductions in the
succeeding taxable year.
The taxpayer has the burden of proof of establishing that a
particular expense claimed as a deduction properly belongs to
a particular taxable year and not to another.
Thus, the SC affirmed the disallowance of legal and audit fees
claimed by an accrual taxpayer as deductions from its gross
income for 1986 on the basis of a finding that such fees were
incurred in 1984-1985 and 1985, respectively, and the taxpayer
could have determined with reasonable accuracy the exact
amounts of such fees in the year incurred, the service providers
having been its long-time lawyers and auditors.
If you belatedly declare, this will be disallowed by the BIR as out of
period
ING Bank N.V. v. Commissioner of Internal Revenue, G.R. No. 167679,
July 22, 2015, 763 SCRA 359, 400 (read in original)
The petitioner-employer accrued bonuses to officers and
employees during taxable years 1996 and 1997 but the
bonuses were not actually paid or distributed until the following
year.
Petitioner claimed the accrued bonuses as deductions from
gross income in the year/s they were accrued but it did not pay
or remit to the BIR the withholding tax on said bonuses until the
following year when the bonuses were actually paid/distributed
to the officers and employees.
The BIR disallowed the deductions claimed for the accrued
bonuses on the ground of non-withholding of the applicable
withholding tax.
The Supreme Court held that the obligation of petitioner to
deduct and withhold the tax on the accrued bonuses arose at
the time the bonuses were:
1. paid or accrued OR
2. recorded as an expense in the books of the payor or
employer, whichever comes first.
In other words, the employer accrued payments in 1996 and claimed
them as deduction from gross income but did not remit withholding
tax, saying that he paid in 1997.
When it incurred, he should have subjected this to withholding tax
Filipinas Synthetic Fiber Corporation v. Court of Appeals, 316 SCRA 480
(1999),
The Supreme Court ruled that the obligation to withhold the tax
on interest payment due to a non-resident foreign corporation
arose at the time of accrual, that is:
when the payor already deducted from its gross income
the interest expense due to the foreign corporation, and
not at the time of actual remittance of the amount due.
The Supreme Court remarked that petitioner, having already
claimed the expense as a deduction from its gross income, had
Accounting Period and Methods of Accounting
already taken advantage of the tax benefit provided in the law
in the form of deduction from gross income.
Accrual Method
Even if the income was not yet received or the liability not yet paid, the
taxpayer must record this as an expense or a deduction.
Baniqued on Filipinas v CA
It is unfair when the employer benefits from a deduction from gross
income but the government did not receive payments made by the
payor.
The withholding tax is due when such payment is subject to
withholding tax. In income tax of foreign non-res:
Non-resident foreign not engaged in trade business —
absolute that the Ph agent should withhold tax and remit to
the government of 25% withholding tax based on the gross
amount
Change of Accounting Period
Such change requires prior approval of the Commissioner of Internal
Revenue.
Should a taxpayer, other than an individual, change its accounting period
from fiscal year to calendar year, or vice-versa, or from one fiscal year to
another, it shall then compute its net income on the basis of such new
accounting period.
A taxpayer who changes its accounting period from fiscal year to
calendar year is required to file a short period return for the period
between the close of the last fiscal year for which a return was filed and
the following December 31.
Reason: When you change your accounting method there is a
period that might not be covered.
Ex. If a taxpayer whose fiscal year ends on June 30 shifts to
calendar year,
It must file a short period return for the period July 1-
December 31. Thereafter, it shall file its income tax
return through a calendar year for the period January 1-
December 31 of each year.
If the change is from calendar year to fiscal year, the short period return
would cover the period between the close of the last calendar year for
which a return was filed and the date designated as the close of the fiscal
year.
Ex. if a taxpayer who is on a calendar year basis shifts to fiscal
year which ends on June 30,
it must file a short period return for the period January
1-June 30. Thereafter, it shall file its annual income tax
return for the period July 1-June 30.
If the change is from one fiscal year to another, a short period return
must be made for the period between the close of the former fiscal year
and the date designated as the close of the new fiscal year.
Ex. if a taxpayer whose fiscal year ends on June 30 adopts a new
fiscal that ends on September 30,
it must file a short period return for the period July 1-
September 30. Thereafter, it shall file its annual
income tax return for the period October 1-September
30.
Accounting for Long-Term Contracts
Definition of “long term contracts”
“building, installation or construction contracts covering a
period in excess of one (1) year.”
Taxpayers deriving income from long-term contracts shall report their
income on the basis of percentage of completion.
Necessarily, their architects or engineers must certify or attest to the
percentage of completion of the work performed during the taxable year
and such certification is required to be attached to the tax return filed by
the taxpayer for that taxable year. Sec. 48
There shall be deducted from the gross income computed under the
“percentage of completion” method all expenditures made during the
taxable year, taking into account all materials and supplies on hand at
the beginning and end of the taxable period for use in connection with
the work under the contract but not yet so applied.
If, upon completion of the contract, it is found that the taxable income
has not been clearly reflected for any taxable year or years, then the
Commissioner of Internal Revenue may permit or require an amended
return to be filed. Sec. 48; see also Sec. 44, Rev. Regs. No. 2
Installment Sale v. Deferred Payment Sale
Accounting Period and Methods of Accounting
Under Section 49 of the NIRC, “a person who regularly sells or otherwise
disposes of personal property on the installment plan may return as
income therefrom in any taxable year that proportion of the installment
payments actually received in that year, which the gross profit realized
or to be realized when payment is completed, bears to the contract
price.”
The above provision covers dealers in personal property, that is:
Those engaged in the business of selling personal properties in
the regular course of business such as dealers of household
appliances, automotive dealers, etc.
Ex. SM appliances, auto dealers, ABENSON
The formula for computing the income to be reported for the taxable
year in which the sales were made is as follows:
In the case of casual sales of personal property (other than property of a
kind which would properly be included in the inventory of the taxpayer if
on hand at the close of the taxable year), OR sales and other disposition
of real property,
The seller may also report the income derived during the taxable
year when the sales were made under the installment method
as illustrated above,
provided that the initial payments in each casual sale of
personal property or sale of real property do not exceed 25% of
the selling price.
Difference between the two:
1. Dealer (regularly sells) + personal property
2. Not a dealer + personal property/real property
Definition of “initial payments”
“the payments received in cash or property other than evidences
of indebtedness of the purchaser during the taxable period in
which the sale or other disposition is made.” Section 49(B)
Does not include promissory notes
Bañas, Jr. v. Court of Appeals, 325 SCRA 259, 279 (2000)
Where a taxpayer who sold a parcel of land and reported the
income from the sale on installment basis (since according to
him, the initial payments in the year of sale supposedly did not
exceed 25% of the selling price) discounted with the buyer on
the same day that the seller sold the property the very
promissory note issued by the buyer to cover the installment
payments.
In other words, the buyer executed a promissory note in favor of the seller. On
the same day, the seller told the buyer that the seller can return the promissory
note, discounted. So instead of paying 1M as indicated in the promissory note,
he was only paid 900k.
the Supreme Court said this was tantamount to a circumvention
of the maximum 25% rule on installment sale. Consequently,
the taxpayer became disqualified to report the income
on installment basis and
he should have reported in his income tax return the
income derived from the discounting as if he got paid
in cash (rather than on installment) for the entire
purchase price of the property.
An individual who sells real property, considered as a capital asset, and
who is otherwise qualified to report the gain derived from such sale
under the installment method, may pay the final capital gains tax in
installment. Section 49(C)
Indirect Methods of Computing Income
“Net worth and expenditures method”
BIR investigates a taxpayer whose net worth increased
significantly year after year but the taxpayer’s reported income
in the taxable years for which he was examined had not
increased proportionately to the increases in his net worth.
Done when the BIR suspects that a taxpayer has been under-
declare tax income; where it Investigates the net worth and
scrutinize increases year per year and compare that to the
income that had been reported in the previous income tax years
In Aznar v. Court of Tax Appeals
The BIR’s initial findings indicated that taxpayer had under
declared his income for the years 1946, 1947, 1948, 1949,
Accounting Period and Methods of Accounting
1950 and 1951 by 227%, 564%, 95%, 486%, 2,946% and
490%, respectively, a clear evidence of false or fraudulent
income tax return with an intent to evade the payment of tax.
The SC refused to disregard sworn statements submitted by the
taxpayer to PNB when he applied with the latter for a loan. The
taxpayer’s argument was that he included those figures in his
sworn statements only for the purpose of obtaining a bigger
credit from the bank.
SC: To believe the taxpayer’s argument is to cast
suspicion on the character of a man who can no longer
defend himself. In other words, he admitted that he
reported false income tax returns to get a loan; so why
should the Court take his side?
“These statements were under oath and the natural
implication is that the information therein reflected is
presumed to be the true and accurate financial
condition of the one who executed those statements.”
The presumption now is that the filing of the income tax
returns have been reported fraudulently.
Collector of Internal Revenue v. Jamir
The BIR employed “expenditures method” in Collector of
Internal Revenue v. Jamir, where the Supreme Court, while
agreeing with the Government that so much of the taxpayer’s
expenditures as was in excess of his reported income is
undeclared income, this should be reckoned with on an annual
basis rather than on a per month basis.
Thus, the aggregate yearly expenditures should be deducted
from the declared yearly income, not the expenditures incurred
each month from the declared income for such month.
SC: BIR was wrong in employing the expenditures method on a
monthly basis. Yearly/annual expenditures and income should
have been looked at.
Bureau of Internal Revenue v. Court of Appeals, G.R. No. 197590, Nov.
24, 2014
Spouses were charged with tax evasion after the BIR compared
their expenditures year after year.
1
Baniqued doesn’t agree. So many books longer than three years! By a mere revenue issuance
amended NIRC.
The BIR took note of the income reported for taxable years
1998-2003 by the Manly spouses and compared that with the
expenditures incurred by the latter, particularly the acquisition
of a luxurious vacation house in Tagaytay City in 2000, a Toyota
RAV4 in 2001, and a Toyota Prado in 2003.
Since the accused spouses could not explain the sources of the
funds used to acquire the said properties other than to generally
claim that the funds came from their combined earnings and
savings accumulated in the past 24 years, the BIR concluded
that the spouses under declared their taxable income and that
the underdeclaration exceeded 30% of their reported or
declared income, hence, constituting prima facie fraud.
The SC likewise noted the huge disparity between the accused’s
reported or declared income and their cash acquisitions, thus
reinforcing the existence of probable cause to indict the spouses
for tax evasion.
Current Rules:
GR: BIR is no longer requiring taxpayers to prove financial capacity when
acquiring property. But this doesn’t mean that the BIR cannot investigate.
EXC: if the person in whose name is registered is a child, then it is presumed
to be a gift
Period to Keep Books of Accounts
Under Section 2 of Revenue Regulations No. 17-2013, the BIR requires
taxpayers to preserve their books of accounts, including subsidiary
books and other accounting records, for a period of 10 years 1(not 3
years under Sec. 235) reckoned from:
the day following the deadline in filing a tax return, OR
if filed after the deadline, from the date of the filing of the tax
return, for the taxable year when the last entry was made in the
books of accounts.
Reasons given by the BIR included the following:
1. In case of fraud, falsity or omission to file a return, the
government has 10 years to assess, the 3-year prescriptive
Accounting Period and Methods of Accounting
period is extended in case of an agreement to do so between
the taxpayer and the BIR,
2. In case there is a pending tax case, protest or refund/tax credit
claim, the books of accounts and other records material to the
case may be needed until the case is finally resolved, and
3. In the case of tax-exempt entities or those granted tax
incentives, they are subject to periodic examination by the BIR
for purposes of ascertaining their compliance with the
conditions for their exemption or entitlement to incentives
The term “accounting records” includes:
The corresponding invoices, receipts, vouchers and returns, and
other source documents supporting the entries in the books of
accounts.
[14] TAX RETURNS, RATES AND PAYMENTS
Tax Rates, Returns and Payments
Employees earning salaries or wages
The employee’s tax due or payable must be the same with the tax
withheld
If it's the same, there is no more need for an annual income tax return
on April 15. The certificate of tax withheld filed by the employer and
acknowledged by the employee will be filed with the BIR.
If it’s not the same, the employer may make a complaint or file a refund.
Otherwise, he will get sued.
Exercise of profession
Tax due from the businessman or professional will be computed in
accordance to Sec. 24A with 35% as the max income tax rate. This is
imposable on the net income (after COGS and ordinary and nec business
expenses)
In wages, gross amount excluding the exempt benefits (de
minimis, 13th month pay, convenience for the employer test
etc.)
ITR: Domestic Corporations
Self-employed individuals and/or professionals, whose gross sales or
gross receipts and other non-operating income does not exceed the
value-added tax (VAT) threshold of Php3,000,000 as provided in Section
109(BB) of the NIRC, shall have the option to avail of :
an eight percent (8%) tax on gross sales ; or
gross receipts and other non-operating income in excess of Two
hundred fifty thousand pesos (P250,000) in lieu of the
graduated income tax rates under Section 24(A)(2)(a) and the
percentage tax under Section 116 of the NIRC.
For mixed income earners, [i.e., individuals earning both compensation
income and income from business or exercise of a profession] the
compensation income shall be subject to the graduated income tax
rates under Section 24(A)(2)(a),
For the business income from business or exercise of profession
shall be subject to either :
the 8% income tax rate on gross sales ; or
receipts not exceeding Php3,000,000 mentioned
above, ; or
the graduated income tax rates under Section
24(A)(2)(a), at the option of the taxpayer, while gross
sales or receipts in excess of Php3,000,000 shall be
subject to the graduated income tax rates under
Section 24(A)(2)(a).
Self-employed individuals and/or professionals,
Threshold is 3M.
If you go above this value, you can no longer avail of the 8% income tax
rate.
Mixed income earner
Employee with a side business.
To compute, compensation income as an employee is subjected to
graduated tax rate of sec. 24A2A. For business income, you have the
option
8% and fixed income tax rate or
Graduated tax rates of Sec. 24A2
Provided that the business income does not exceed 3M.
Tax Rate: 25% of net income effective July 1, 2020; can be 20% provided
that the any of these be present: unless
(a) net income and gross assets do not exceed P5,000,000 and
P100 Million, respectively, in which case the rate shall be 20%,
or
(b) a reduced rate applies, or
(c) MCIT is higher than the regular corporate income tax.
Domestic corporations file their quarterly ITR
[14] TAX RETURNS, RATES AND PAYMENTS
ITR - Income Tax Return
No later than 60 days from the close of each of the first 3
quarters.
Note that this is cumulative.
Annual ITR –
If calendar year, no later than April 15 or
If fiscal year, no later than the 15th day of the 4th month
following the close of the fiscal year
Pay-as-you-file
So when the corp/indiv files ITR, the income tax is paid at the
time of the filing of the return
Corporations file their ITRs with the RDO where the taxpayer is
registered. Mostly, electronic filing so filing is online.
If the corporation is a large taxpayer, no particular RDO, but with
the national office, also online.
Venue
Generally, AAB (Authorized Agent Bank) within the jurisdiction
of the RDO (Revenue District Office) where the taxpayer is
registered, unless LTS (Large Taxpayer Services).
Corporations
Domestic corp is generally subjected to the 25% of net income tax.
Gross sales - COGS - SRA = gross profit/gross income - nec/ord
business expense (sec. 24) = net income
HOWEVER, this 25% may be reduced to 20% provided you meet the ff
conditions:
1. Net income of the corp does not exceed 5M AND
2. Gross assets do not exceed 100M.
BUT some taxpayers are subject to special rate
Proprietary educational institutions or Proprietary hospitals
(10% special rate)
International carriers (2% special tax rate)
Income Tax Return of Individuals
Sec. 51, NIRC
SEC. 51. Individual Return. -
(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, 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.
(2) 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): [52] 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, [53] 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. [54]
(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. [55]
(3) 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.
(4) The income tax return shall be filed in duplicate by the following persons:
(a) A resident citizen - on his income from all sources;
(b) A nonresident citizen - on his income derived from sources within the
Philippines;
(c) A resident alien - on his income derived from sources within the
Philippines; and
(d) A nonresident alien engaged in trade or business in the Philippines - on
his income derived from sources within the Philippines.
(5) The income tax return (ITR) shall consist of a maximum of four (4) pages in
[14] TAX RETURNS, RATES AND PAYMENTS
paper form or electronic form, and shall only contain the following information:
(A) Personal profile and information;
(B) Total gross sales, receipts or income from compensation for services
rendered, conduct of trade or business or the exercise of profession,
except income subject to final tax as provided under this Code,
(C) Allowable deductions under this Code;
(D) Taxable income as defined in Section 31 of this Code; and
(E) Income tax due and payable. [56]
(B) Where to File. - Except in cases where the Commissioner otherwise permits,
the return shall be filed with an authorized agent bank, Revenue District Officer,
Collection Agent or duly authorized Treasurer of the city or municipality in which
such person has his legal residence or principal place of business in the
Philippines, or if there be no legal residence or place of business in the
Philippines, with the Office of the Commissioner.
(C) When to File. -
(1) The return of any individual specified above shall be filed on or before the
fifteenth (15th) day of April of each year covering income for the preceding
taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded thru a local
stock exchange as prescribed under Section 24(C)shall file a return
within thirty (30) days after each transaction and a final consolidated
return on or before April 15 of each year covering all stock transactions
of the preceding taxable year; and
(b) From the sale or disposition of real property under Section 24(D) shall
file a return within thirty (30) days following each sale or other
disposition.
(D) Husband and Wife. - Married individuals, whether citizens, resident or
nonresident aliens, who do not derive income purely from compensation, shall
file a return for the taxable year to include the income of both spouses, but where
it is impracticable for the spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall be consolidated by the
Bureau for purposes of verification for the taxable year.
(E) Return of Parent to Include Income of Children. - The income of unmarried
minors derived from properly received from a living parent shall be included in
the return of the parent, except (1) when the donor's tax has been paid on such
property, or (2) when the transfer of such property is exempt from donor's tax.
(F) Persons Under Disability. - If the taxpayer is unable to make his own return,
the return may be made by his duly authorized agent or representative or by the
guardian or other person charged with the care of his person or property, the
principal and his representative or guardian assuming the responsibility of
making the return and incurring penalties provided for erroneous, false or
fraudulent returns.
(G) Signature Presumed Correct. - The fact that an individual's name is signed to
a filed return shall be prima facie evidence for all purposes that the return was
actually signed by him.
Annual ITR
On or before the 15th day of April of each year.
This can be payable in 2 installments:
April 15 when ITR is filed,
then Oct. 15.
Quarterly ITR (“Estimated Tax”)
ALL professional or businessmen for their income derived from
conduct of trade or business follow this. Otherwise, violation
on or before May 15, Aug. 15, Nov. 15, and May 15 of following
year.
“Estimated Tax”
“the amount which the individual declared as income tax in his
final adjusted and annual income tax return for the preceding
taxable year minus the sum of the credits allowed under [Title II
– Tax on Income] against the said tax.” Sec. 74(C), NIRC
Venue
Generally, AAB (Authorized Agent Bank) within the jurisdiction
of the RDO (Revenue District Office) where taxpayers are
registered.
The following are subject to final taxes:
1. Capital Gains Tax on Corporations
a. Shares of stock –
i. CGT return within 30 days from date of sale,
ii. Consolidated return for all transactions during the
taxable year – on or before the 15th day of the 4th
month following the close of the taxable year.
Venue:
[14] TAX RETURNS, RATES AND PAYMENTS
GR: AAB within the jurisdiction of the RDO Creditable Withholding Tax
where taxpayer is registered, On or before the 10th day of the succeeding month.
EXP: LT (LTS). Generally applies to:
b. Real property (capital asset) – CGT return within 30 days from Compensation income,
date of sale. Income derived from conduct of trade or business,
Venue: Exercise of profession, and
GR: AAB within the jurisdiction of the RDO Dealings in property (sales and exchanges).
where property is located, Final Withholding Tax
EXP: LT (LTS). On or before the 10th day of the succeeding month.
NOTE: No need to mention in Income Tax Return
Generally applies to:
Shares of stock
Tax is based on Net Capital Gain Items of passive income and
Amount realized - Less basis = Your Net Gain or Loss Income payments to non-resident persons (NRA-
nonETB and NRFC).
Real property as capital asset
6% is not based on gain.
If capital asset, it is 6% Withholding Tax
Only if an income payment about to be made is among those enumerated
Real property Ordinary asset under the withholding tax regulations are subject to withholding tax.
The tax that applies is not 6%, rather our formula gain/loss will apply No obligation to withhold if:
For corporation 25/20% as the case may be based on the gain. NOT a withholding agent
Note the “gain” is lumped Income payment is NOT subject to withholding tax

Baniqued:
gain derived from shares of Stock etc. no longer include this in computing Ex. Payor of an income to someone
in gross income of tax return because the taxes paid are already final This particular payment to someone is subject to withholding tax
Same as passive income. Those subjected to FWT, no longer included in Must remit on or before 10th
computing gross income – because those are already final. Suppose during the month of May, you are required to remit in BIR on or
before 10th of June

2. Capital Gains Tax on Individuals Trade or Business there will be “Creditable Withholding Tax”
a. Shares of stock Lawyer, lessor, contract who received such income payment required to
i. CGT return within 30 days from date of sale, file May 15, and then the will claim
ii. Final consolidated return for all transactions during the
Note: Items of Passive Income [interests, dividends, royalties etc]
taxable year – on or before the 15th day of April
Subject to Final Withholding Tax
of each year. Currently no need to mention in ITR
b. Real property (capital asset) – CGT return within 30 days from Yung mag babayad ng interest etc. it’s the person who will withhold.
date of sale. Do not confuse with 15%/6% in our previous discussion , this is termed as
Venue: AAB within the jurisdiction of the RDO where “Final Tax” too
property is located.
Various Income Payments Subject To WIthholding Tax
If you fail to withhold then the expense you incurred will not be deducted.
Withholding Tax Returns
[14] TAX RETURNS, RATES AND PAYMENTS
1) Those individually engaged in the practice of profession or callings;
New Regulation: If you pay for the tax you should have withheld
and the interest and surcharge for late payment then you will be lawyers; certified public accountants; doctors of medicine; architects;
allowed to claim the expense as a deduction of gross income. civil, electrical, chemical, mechanical, structural, industrial, mining,
sanitary, metallurgical and geodetic engineers; marine surveyors;
doctors of veterinary science; dentists; professional appraisers;
Various Income Payments Subject To WIthholding Tax
connoisseurs of tobacco; actuaries; interior decorators, designers, real
On the gross professional, promotional, and talent fees or any other form
estate service practitioners (RESP), (i.e., real estate consultants, real
of remuneration for the services rendered by the following: [CREDITABLE
estate appraisers and real estate brokers) requiring government
WITHHOLDING TAXES]
licensure examination given by the Real Estate Service pursuant to
Republic Act No. 9646 and all other professions requiring government
licensure examination regulated by the Professional Regulations
Commission, Supreme Court, etc.
Individual payee:
2) Professional entertainers, such as, but not limited to, actors and
actresses, singers, lyricists, composers and emcees;
If gross income for the current year did not - Five percent (5%) 3) Professional athletes including basketball players, pelotaris and jockeys;
exceed P3M 4) All directors and producers involved in movies, stage, radio, television
If gross income is more than P3M, or VAT - Ten percent (10%) and musical productions;
Registered regardless of amount 5) Insurance agents and insurance adjusters;
6) Management and technical consultants;
7) Bookkeeping agents and agencies;
Non-individual payee:
8) Other recipients of talent fees;
If gross income for the current year did not - Ten percent (10%) 9) Fees of directors who are not employees of the company paying such
exceed P720,000 fees, whose duties are confined to attendance at and participation in the
meetings of the board of directors;
10) Income Payments to certain brokers and agents — on gross
If gross income exceeds P720,000 - Fifteen percent
(15%) commissions of customs, insurance, stock, immigration and
commercial brokers, fees of agents of professional entertainers and real
estate service practitioners (RESPs), (i.e., real estate consultants, real
estate appraisers and real estate brokers) who failed or did not take up
Example: When you pay promotional fees to endorsers or an individual, If this the licensure examination given by and not registered with the Real
individual's gross income does not exceed 3M, you as payor will withhold 5% Estate Service under the Professional Regulations Commission;
of the fee.
(B) Rentals
Q: How will the payor know the annual gross income?
(1) Real Properties — On gross rental for the continued use or possession of
A: The payee should present a sworn state for example stating that the income
does not exceed 3M. However, under circumstances that you know it’s beyond real property used in business which the payor or obligor has not taken
that, know the right amount to withhold. Otherwise, you might be assessed by or is not taking title, or in which he has no equity — Five percent (5%).
BIR with under withholding. (2) Personal Properties — On gross rental or lease in excess of Ten Thousand
Pesos (10,000) annually for the continued use or possession of personal
property used in business which the payor or obligor has not taken or is
[14] TAX RETURNS, RATES AND PAYMENTS
not taking title, or in which he has no equity, except those under financial
lease arrangements with leasing and finance companies authorized to
operate under Republic Act No. 8556 (Financing Company Act of 1998)
— Five percent (5%).
(C) Income payments to certain contractors — On gross payments to the following
contractors, whether individual or corporate — Two percent (2%).
(1) General engineering contractors — Those whose principal contracting
business in connection with fixed works requiring specialized
engineering knowledge and skill including the following divisions or
subjects:(a) Reclamation works; (b) Railroads; (c) Highways, streets
and roads; (d) Tunnels; (e) Airports and airways; (f) Waste reduction
plants; (g) Bridges, overpasses, underpasses and other similar works;
(h) Pipelines and other systems for the transmission of petroleum and
other liquid or gaseous substances; (i) Land leveling; (j) Excavating;
(k) Trenching; l) Paving; and (m) Surfacing work.
(2) General Building contractors — Those whose principal contracting
business is in connection with any structure built, for the support, shelter
and enclosure of persons, animals, chattels, or movable property of any
kind, requiring in its construction the use of more than two unrelated
building trades or crafts, or to do or superintend the whole or any part
thereto. Such structure includes sewers and sewerage disposal plants
and systems, parks, playgrounds, and other recreational works,
refineries, chemical plants and similar industrial plants requiring
specialized engineering knowledge and skills, powerhouse, power plants
and other utility plants and installation, mines and metallurgical plants,
cement and concrete works in connection with the above-mentioned
fixed works.
(3) Specialty Contractors — Those whose operations pertain to the
performance of construction work requiring special skill and whose
principal contracting business involves the use of specialized building
trades or crafts.
(4) Other contractors —
(a) Filling, demolition and salvage work contractors and operators
of mine drilling apparatus;
(b) Operators of dockyards;
(c) Persons engaged in the installation of water system, and gas or
electric light, heat or power;
(d) Operators of stevedoring, warehousing or forwarding
establishments;
(e) Transportation contractors which include common carriers for
the carriage of goods and merchandise of whatever kind by
land, air or water, where the gross payments by the payor to the
same payee amounts to at least two thousand pesos (P2,000)
per month, regardless of the number of shipments during the
month;
(f) Printers, bookbinders, lithographers and publishers except
those principally engaged in the publication or printing of any
newspaper, magazine, review or bulletin which appears at
regular intervals, with fixed prices for subscription and sale;
(g) Messengerial, janitorial, private detective and/or security
agencies, credit and/or collection agencies and other business
agencies;
(h) Advertising agencies, exclusive of gross payments to media;
Baniqued : Suppose 100M, out of this 90M is payable to
television print media, those payments allocated to 3rd parties
such as television, radio and newspaper will not be subject to
withholding tax. The recipient might be the one subject to
withholding tax!
(i) Independent producers of television, radio and stage
performances or shows;
(j) Independent producers of "jingles";
(k) Labor recruiting agencies and/or "labor-only" contractors. For
this purpose, any person who undertakes to supply workers to
an employer shall be deemed to be engaged in "labor-only"
contracting where such person does not have substantial capital
or investment in the form of tools, equipment, machineries,
work premises and other materials and the workers recruited
and placed by such person are performing activities which are
directly related to the principal business or operations of the
employer which the workers are habitually employed;
(l) Persons engaged in the installation of elevators, central air
conditioning units, computer machines and other equipment
and machineries and the maintenance services thereon;
(m) Persons engaged in the sale of computer services, computer
programmers, software/program developer/designer, internet
service providers, web page designing, computer data
[14] TAX RETURNS, RATES AND PAYMENTS
processing, conversion or base services and other computer
related activities;
(n) Persons engaged in landscaping services;
(o) Persons engaged in the collection and disposal of garbage;
(p) TV and radio station operators on sale of TV and radio airtime;
and
(q) TV and radio blocktimers on sale of TV and radio commercial
spots.
F) Gross selling price or total amount of consideration or its equivalent paid to
the seller/owner for the sale, exchange, or transfer of real property classified as
ordinary asset — A creditable withholding tax based on the gross selling
price/total amount of consideration or the fair market value determined in
accordance with Section 6(E) of the Code, whichever is higher, paid to the
seller/owner for the sale, transfer or exchange of real property, other than capital
asset, shall be imposed upon the withholding agent/buyer, in accordance with
the following schedule:
A. Where the seller/transferor is exempt from the creditable withholding
tax pursuant to Sec. 2.57.5 of these Regulations (e.g., socialized
housing) — Exempt
B. Upon the following values of real property, where the seller/transferor is
habitually engaged in the real estate business:
With a selling price of five hundred thousand pesos
(P500,000.00) or less — 1.5%
With a selling price of more than five hundred thousand pesos
(P500,000.00) but not more than two million pesos
(P2,000,000.00) — 3.0%
With selling price of more than two million pesos
(P2,000,000.00) — 5.0%
C. Where the seller/transferor is not habitually engaged in the real estate
business — 6.0%
Note: this will only apply to real properties classified as ordinary asset
Buyer who buys real property other than capital assets.
Ex. A buys property from DMCI. When A bought the property from this developer,
the buyer must withhold according to the listing above.
Most real estate developers do not allow buyers to withhold.
Their business practice is dapat pag binayaran ni buyer it’s still the whole
amount; the real estate developer will be the one to withhold they will
file on behalf of the BUYER.
The anomaly here is that, the sale document they won’t notarize it first
so that they won’t have to remit on or before 10th day of the succeeding
month.
Consequence is delayed title of the buyer
Ex. A bought property used in trade or business but the seller is not a real estate
developer nor habitually engaged – this is just his sideline he is a practicing
attorney.
When A bought property from the seller, A should withhold 6% tax, file
on or before 10th day of the succeeding month.
Note: Capital Asset
Final capital gains tax means that seller pays the 6% on his own.
I) Income payment made by top withholding agents, either private corporations
or individuals, to their local/resident supplier of goods and local/resident
supplier of services other than those covered by other rates of withholding tax. —
Income payments made by any of the top withholding agents, including non-
resident aliens engaged in trade or business in the Philippines, shall be subjected
to the following withholding tax rates:
Supplier of goods — One percent (1%)
Supplier of services — Two percent (2%)
Top withholding agents shall refer to those taxpayers whose gross
sales/receipts or gross purchases or claimed deductible itemized
expenses, as the case may be, amounted to TWELVE MILLION PESOS
(P12,000,000.00) during the preceding taxable year.
The top withholding agents by concerned LTS/RRs/RDOs shall be
published in a newspaper of general circulation. It may also be posted in
the BIR website. Those shall serve as the "notice" to the top withholding
agents. The obligation to withhold under this sub-section shall
commence on the first (1st) day of the month following the month of
publication.
Taxpayers who are classified as top withholding agents shall remain as
such until failure to satisfy the aforesaid criteria and duly published as
delisted from the existing list of top withholding agents.
The top agents are notified by BIR ; also in BIR’s website
You remain as top agent unless BIR delisted you
[14] TAX RETURNS, RATES AND PAYMENTS
Interest on foreign loans 20%
Definition of Terms
The term "goods" pertains to tangible personal property. It does not Dividends received from a domestic corporation 15%, with
include intangible personal property, as well as agricultural products application of
which are defined under item (N) of this Section. tax sparing
The term "local resident suppliers of goods/suppliers of services" provision
pertains to a supplier from whom any of the top withholding agents,
regularly makes its purchases of goods/services. As a general rule, this Cinematographic film owners, lessors 25%
term does not include a casual purchase of goods/services, that is
purchase made from a non-regular supplier and oftentimes involving a Charter fees of vessels 4.5%
single purchase.
However, a single purchase which involves Ten thousand pesos Charter fees of aircraft, machineries 7.5%
(P10,000) or more shall be subject to withholding tax under this
subsection.
The term "regular suppliers," for purposes of these regulations, refer to
suppliers who are engaged in business or exercise of profession/calling SECTION 2.57.3. NIRC
with whom the taxpayer-buyer has transacted at least six (6) SECTION 2.57.3. Persons Required to Deduct and Withhold. — The following
transactions, regardless of the amount per transaction, either in the persons are hereby constituted as withholding agents for purposes of the
previous year or current year.'' creditable tax required to be withheld on income payments enumerated in Section
Does not include casual purchase of goods. But suppose 2.57.2:
amount involved 10K or more, buyer is required to withhold 1% (A) In general, any juridical person, whether or not engaged in trade or
or the case may be! business; [partnership, corporation or association]
(B) An individual, with respect to payments made in connection with his trade
or business. However, insofar as taxable sale, exchange or transfer of real
Final Withholding Taxes property is concerned, individual buyers who are not engaged in trade or
Interest on bank deposits, royalties, prizes, winnings 20% business are also constituted as withholding agents;
(C) All government offices including government-owned or controlled
Royalties on books and literary and musical compositions 10% corporations, as well as provincial, city and municipal governments.

The obligation to withhold is imposed upon the buyer-payor of income although

Dividends 10%
the burden of tax is really upon the seller-income earner/payee; hence,
unjustifiable refusal of the latter to be subjected to withholding shall be a ground
Branch profits remittance tax 15% for the mandatory audit of all internal revenue tax liabilities, as well as the
imposition of penalties pursuant to Section 275 of the NIRC, upon verified
Income payments of the above and other items of income 25% complaint of the buyer-payor.
to a NRA-nonETB
The payor is not constituted as withholding agent
Income payments of the above and other items of income 25%%, unless a
to a NRFC special rate
Final Tax [But Not Withheld at Source]
applies
[14] TAX RETURNS, RATES AND PAYMENTS
Capital gains tax on sale of shares not listed 15%
and traded in the stock exchange of net capital gains
Capital gains tax on sale of real property 6%
classified as capital asset of the gross selling price (but
not lower than prescribed
zonal value)
Enumeration of income payments subject to creditable withholding tax
(CWT) or final withholding tax (FWT) is exclusive.
Time of Withholding — The obligation of the payor to deduct and withhold
the tax under Section 2.57 of the regulations arises at the time an
income is paid or payable, whichever comes first.
The term "payable" refers to the date the obligation becomes due,
demandable or legally enforceable.
Note: The Seller himself will be the one to pay
The list of withholding tax is an exclusive list
Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 11-18, [January 31,
2018]
"SECTION 2.83.4. Substituted Filing of Income Tax Returns by Employees
Receiving Purely Compensation Income. — Individual taxpayers receiving
purely compensation income, regardless of amount, from only one employer
in the Philippines for the calendar year, the income tax of which has been
withheld correctly by the said employer (tax due equals tax withheld) shall not
be required to file Annual Income Tax Return for Individuals Earning Purely
Compensation Income (BIR Form No. 1700). 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.
The following individuals, however, are not qualified for substituted filing and
therefore, still required to file Income Tax Return in accordance with existing
regulations:
(A) Individuals deriving compensation from two or more employers
concurrently or successively at any time during the taxable year.
(B) Employees deriving compensation income, regardless of the amount,
whether from a single or several employers during the calendar year,
the income tax of which has not been withheld correctly (i.e., tax due
is not equal to the tax withheld) resulting to collectible or refundable
return.
(C) Individuals deriving other non-business, non-professional-related
income in addition to compensation income not otherwise subject to
a final tax.
(D) Individuals receiving purely compensation income from a single
employer, although the income tax of which has been correctly
withheld, but whose spouse falls under Section 2.83.4(A), 2.83.4(B)
and 2.83.4(C) of these regulations.
(E) Non-resident aliens engaged in trade or business in the Philippines
deriving purely compensation income, or compensation income and
other non-business, non-professional-related income.
Monthly Remittance Return of Income Taxes Withheld on Compensation
(BIR Form 1601-C)
Monthly Remittance Form for Creditable Income Taxes Withheld
(Expanded) (BIR Form 0619-E)
Quarterly Remittance Return of Creditable Income Taxes Withheld
(Expanded) (BIR Form 1601-E)
Annual Information Return of Income Taxes Withheld on Compensation
and Final Withholding Taxes (BIR Form 1604-CF) – due on January 31 of
the following year. Attach Alphalist of Employees.
Annual Information Return of Creditable Income Taxes Withheld
(Expanded)/Income Payments Exempt from Withholding Tax (BIR Form
1604-E) – due on March 1 of the following year. Attach Alphalist of
Payees Subjected to EWT.
Who can file a claim for refund of excess or erroneously withheld taxes?
Withholding agent.
In Wander Philippines, Inc., Wander Philippines
filed a claim for refund of over-withheld tax on
dividends remitted to its parent company in
Switzerland, invoking the tax-sparing provision in
Section 28(B)(5)(b) of the NIRC.
The SC dismissed the BIR’s argument that Wander
Philippines is not the proper party to the refund claim,
but rather the payee, its parent company in
Switzerland.
[14] TAX RETURNS, RATES AND PAYMENTS
Wander Philippines in this case is the proper party to
claim for refund.
Payee/Income Recipient.
Procter & Gamble PMC,
The SC ruled that it is the payee, Procter & Gamble
U.S.A. (P&G USA), a non-resident foreign corporation,
and not the payor/remitter/withholding agent, Procter
& Gamble Phils. (P&G Phil), who is the real party of
interest.
Fortunately, more than 3 years later, the SC En Banc
reconsidered the above decision of its 2nd Division that
the withholding agent (P&G Phil.) has no capacity to
bring suit on behalf of its principal (P&G USA) which is
the proper party in interest in its claim for refund.
Commissioner of Internal Revenue vs. Procter &
Gamble Philippine Manufacturing Corporation, G.R. No.
66838 (Resolution), Dec. 2, 1991, 204 SCRA 377
[15] GENERAL PRINCIPLES OF TAXATION
Lifeblood Theory
Taxation is indispensable. Without it, the government would be
paralyzed.
Must be collected promptly. Cannot be postponed. Lorenzo v. Posadas
The law frowns upon exemptions from taxation and statutes granting tax
exemptions are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing authority. Paseo Realty & Development
Corp.
BIR’s pleadings or any other court would always cite the lifeblood theory
Exemption construed against taxpayer
Paseo Realty & Development Corp.
Shall not be delivered until 10 years later
It was argued that estate shouldn't be made for 10 years
Of Course SC said cannot postpone
Under TRAIN law , tax to be paid within 1 year from the death of the person.
The lifeblood states that taxes are the lifeblood of the state; without
doctrine taxes, the government will not operate.
The necessity states that the government cannot continue to operate
theory without taxes to pay for expenses; hence, it can compel
its citizens to pay up. The benefits received principle
states that taxes are what we pay for a civilized society—
we pay, the government protects.
The symbiotic states that taxpayers and the government have
relationship reciprocal obligations: the taxpayer to pay taxes and the
doctrine government to provide protection and benefits
Principles of Sound Tax System [FAT]
1. Fiscal Adequacy
Sufficient to defray the expenses of the government.
Chavez v. Ongpin, the SC held :
“To continue collecting real property taxes based on valuations
arrived at several years ago, in disregard of the increases in the
value of real properties that have occurred since then, is not in
consonance with a sound tax system.”
The SC sustained the validity of Executive Order No. 73 that
accelerated to January 1, 1987, instead of January 1, 1988, the
implementation of the 1984 general revision of real property
values inasmuch as the real property taxes being collected then
by local government units were still based on the outdated 1978
general revision of property market values.
2. Theoretical Justice
Sec. 28, Article VI of the Constitution mandates that “[t]he rule of
taxation shall be uniform and equitable and directs Congress to “evolve
a progressive system of taxation.”
Reyes v. Almanzor:
the SC took into account the rental restrictions that hampered
the ability of real property owners to demand fair rental from
tenants.
Thus, the SC said that the market value must be determined
using the “income approach method” as this is the method that
is more realistic, equitable and constitutional. Otherwise, said
the Court, the resulting yearly real estate taxes would
admittedly exceed the sum total of the annual rentals paid or
payable by the dweller tenants under the Rent Control Law
(Pres. Decree No. 20).
Consequently, the SC nullified the assessments arrived at
through the “comparable sales approach” for being excessive,
inequitable, confiscatory and unconstitutional.
The Court found the assessments unconstitutional because they
violated the provisions of the Constitution that taxation must not
only be uniform but also equitable and progressive and no
person may be deprived of his property without due process of
law. The assessments in question will result in the owner being
made liable for taxes that he can ill afford and eventually result
in the forfeiture of his properties.
[15] GENERAL PRINCIPLES OF TAXATION
3. Administrative Feasibility
Whenever the Government enacts a revenue or tax measure, it must see
to it that it would be in a position to enforce it. Otherwise, of what use is
a tax law that the Government does not have the power to exact
obedience to or compliance on the part of those upon whom the tax is
levied?
The tax system should be capable of being implemented and
administered in an efficient manner, without causing undue
inconvenience to taxpayers.
The simpler the tax system, the better in order to entice taxpayers to
comply with the same. Tax compliance is likely to be low where the tax
system is unreasonably complicated and too cumbersome to abide by.
Every revenue measure passed by Congress, there must be means by
government to enforce it
Baniqued’s Story:
Casino operators to withhold 20% on winnings of customers or clients
For example : Baniqued goes to Casino and plays poker, with 1M betting
money. Unfortunately, Baniqued only had 200K chips left. He went to the
cashier and encashed the chips.
Objection of Baniqued:
Tax should be on the winnings; and not the remaining money in
someone’s pocket. In his position this was a position of loss.
This taxation is unjust and a deprivation of due process
Besides the difficulty of determining whether it should be taxed is a violation
of administrative feasibility.
Limitations on Taxing Power (Inherent Limitations)
A. Public Purpose
Taxes collected by the State may not be used for the benefit of any
private individual or person.
The State may only disburse taxes collected in accordance with an
appropriation law enacted for a public purpose, that is, for the support
of the State and to fund operations and programs that the Government
undertakes to promote public good.
In Pascual v. Secretary of Public Works
Congress made an appropriation for the construction of roads
in a private land
The SC held that the legislature is without the power to
appropriate public revenues for anything but a public purpose.
Incidental advantage to the public or to the State, which results
from the promotion of private enterprises or business, does not
justify their aid by the use of public money.
Thus, where, for instance, the land on which projected feeder
roads are to be constructed belongs to private persons, an
appropriation made by Congress for that purpose is null and
void, and a donation to the government, made over five (5)
months after the approval and effectivity of the Act for the
purpose of giving a “semblance of legality” to the appropriation,
does not cure the defect.”
In Valentin Tio v. Videogram Regulatory Board, et. al.
Regulate the flagrant violation of pornographic films and
violations of IP rights. It was argued that this was not for public
purpose but for private purpose only.
SC held that even if a statute results in incidentally favoring one
industry over another, this fact alone does not mean that the
statute was enacted not for a public purpose but for the benefit
of private persons or businesses.
Thus, the SC held that “the levy of the 30% tax is for a public
purpose, it was imposed primarily to answer the need for
regulating the video industry, particularly because of the
rampant film piracy, the flagrant violation of intellectual
property rights, and the proliferation of pornographic video
tapes. And while it was also an objective of the DECREE to
protect the movie industry, the tax remains a valid imposition.
The public purpose of a tax may legally exist even if the motive
which impelled the legislature to impose the tax was to favor
one industry over another.
It is inherent in the power to tax that a State be free to select
the subject of taxation, and it has been repeatedly held that
“inequities which result from a singling out of one particular
class for taxation or exemption infringes no constitutional
limitation.” Taxation has been made the implement of the
state’s police power.”
B. Legislative
Legislative power resides only in Congress.
[15] GENERAL PRINCIPLES OF TAXATION
Art. VI, Sec. 24 of the Constitution states that all appropriation, revenue
A tax credit causes a greater benefit
or tariff bills shall originate exclusively in the House of Representatives, The Congress wanted tax credit but the BIR disagreed stating that this muse
but the Senate may propose or concur with amendments. be only a tax deduction.
Tolentino v. Secretary of Finance
The mere fact, however, that a House Bill approved on Baniqued Story on Congress Tax Credit vs BIR Regulation:
third reading by the House of Representatives was There was a client who was severely prejudiced by this tax deduction only.
consolidated with a Senate Bill and thereafter further When the deliberations were studied the Congress truly wanted a tax credit.
The BIR stated in their regulation that it could only be claimed as a
amended during the deliberations in the Conference
deduction and they were stubborn. However this client did not want to go
Committee, composed of representatives of the two out in the open. Thus what we suggested is they use a smaller company to
houses of Congress, does not contravene the above file a test case. They went to court and the matter reached to the SC and the
provision of the Constitution that all appropriation, SC said yes it was intended to be a tax credit and not merely a tax
revenue or tariff bills shall originate exclusively in the deduction.
House of Representatives. Baniqued won but BIR did not wish to back off but there was already an SC
Baniqued: How do you know whether an act of a particular agency of the decision so BIR had no choice. The regulation was declared void.
What BIR did eventually including the DOF was to move Congress to amend
government constitutes legislative power rather than a mere exercise of the law to make it a Tax deduction and not a tax credit which Congress
administrative power? obliged.
There is an exercise of discretion to ascertain the following – Now, the Current Senior Citizens law states that it must be a tax deduction
a. basis, amount, or rate of tax; instead of the previous tax credit.
b. person or property that is subject to tax;
c. exemptions and exclusions from tax; and
d. manner of collecting the tax – may not be delegated However, the power to fill in the details and manner as to the
away by Congress, without violating the non-delegation enforcement and administration of a tax law may be delegated to
of legislative power under the Constitution. various specialized administrative agencies like the DOF and BIR.
The discretion on a-d cannot be delegated
Baniqued on discretion: All that is required in order for a revenue regulation to be valid is that it
Any of these matters is legislative in nature. must:
Only Congress has this discretion. a. be germane to the object and purpose of the law;
a. Magkano yung tax b. not contradict, but conform to, the standards the law prescribes;
b. Kanino kokolektahin yung tax? Sino or what property? and
c. Sino yung exempted or excluded sa tax?
d. How will the tax be collected? c. be issued for the sole purpose of carrying into effect the general
provisions of the tax laws sought to be enforced.
Senior Citizen Law The delegation by Congress of legislative power to the executive branch
Tax credit is an off-setting peso for peso against your tax payable must meet two tests1, namely:
In a case of a tax deduction if your tax is 30% for every deducting that you a. the completeness test
have paid, it is only to the extent of your tax paid only for 30 pesos because b. the sufficient standard test.
this is your corporate tax rate. In other words the tax benefit to you is only
30 pesos because that is your tax rate.

1
Jaime N. Soriano, et. al. v. Secretary of Finance and the Commissioner of Internal Revenue, citing Tatad v.
Secretary of the Department of Energy, La Suerte Cigar & Cigarette Factory v. Court of Appeals, etc.
[15] GENERAL PRINCIPLES OF TAXATION
Completeness test Sufficient standard test
requires the law to be complete in requires adequate guidelines or
all its terms and conditions, such limitations in the law that map
that the only thing the delegate out the boundaries of the
will have to do is to enforce it. delegate’s authority and canalize
the delegation.”
C. Territorial
The State’s power to tax may only be exercised in the territory that it
governs. As a general rule, it may not tax properties or persons situated
or doing business outside its taxing jurisdiction.
Due to the non- application of tax laws extra- territiorality
If an interest in property is taxed, the situs of either the property or
interest must be found within the state.
If an income is taxed, the recipient thereof must have a domicile within
the state or the property or business out of which the income issues must
be situated within the state so that the income may be said to have a
situs therein. Manila Gas Corporation
E.g., Non-Resident Foreign Persons, VAT
Non-resident aliens cant be subject to estate tax unless they have properties
in the PH.
Transactions occurring abroad even if entered into by Filipinos or domestic
corporations cannot be subject to VAT.
VAT apply to sale of good and services within the Ph.
D. International Comity
Article II, Section 2 of the Constitution expressly provides that the
Philippines “adopts the generally accepted principles of international
law as part of the law of the land and adheres to the policy of peace,
equality, justice, freedom, cooperation, and amity with all nations.”
In Tañada v. Angara
the Supreme Court held that the Agreement Establishing the
WTO does not derogate from Congress the power to tax since
the sovereignty of any state as a member of a family of nations
is not absolute.
By their inherent nature, treaties really limit or restrict the
absoluteness of sovereignty. By their voluntary act, nations may
surrender some aspects of their state power in exchange for
greater benefits granted by or derived from a convention or pact.
The sovereignty of a state therefore cannot in fact and in reality
be considered absolute. Certain restrictions enter into the
picture:
1. limitations imposed by the very nature of membership
in the family of nations and
2. limitations imposed by treaty stipulations.
Suppose donal trump[non-resident alien] has 15% share in XYZ Corporation, Ph Corp.
Donald wants to sell this to Biden. Will Trump be subject to CGT 15% on sales of share
on stock of Ph corp?
Sec 25B last sentence “ xxx Capital gains realized by a nonresident alien
individual not engaged in trade or business in the Philippines from the sale of
shares of stock in any domestic corporation and real property shall be subject
to the income tax prescribed under Subsections (C) and (D) of Section 24.”
Sec. 24(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the
rate of (15%) is hereby imposed upon the net capital gains realized during
the taxable year from the sale, barter, exchange or other disposition of shares
of stock in a domestic orporation, except shares sold, or disposed of through
the stock exchange.
Tax treaty US and PH
That sale shall not be subject to tax
This is a treaty override
Suppose Singaporean entity in tech. Globe Ph engages this Singaporean company in
connection with tech project here in the Ph – mostly consultancy in tech sector.
Singaporean company providing services. Globe will pay for services. Services to be
rendered here in Ph not exceeding 183 days. Will the SIngaporean entity be taxed on
the fees it derived from Globe?
Yes. This is a non-resident foreign corporation, so there is a tax of 25% on
gross income. HOWEVER, there is a treaty override.
Tax treaties: These are business profits, so they are not taxable in the PH.
UNLESS the Singaporean entity has a permanent establishment in
the Philippines.
So in this case, the Singaporean entity has no office in the PH.
Personnel lang meron dito. Provided that those employees don't stay
in the PH performing these services not exceeding 183 days, then
the income derived from these sources will NOT be subject to tax.
Rule on business profits
Business treaties shall be taxable on the PH if:
[15] GENERAL PRINCIPLES OF TAXATION
1. Alien/Foreign corp derives income in the PH
2. The income recipient has a permanent establishment in the PH
HOWEVER, rendering services exceeding 183 days makes it
a permanent establishment in the PH
[15] GENERAL PRINCIPLES OF TAXATION
C. Non-Impairment of Contracts
Limitations on Taxing Power – Constitutional Limitations
A. Non-Deprivation Without Due Process
Article III, Section 1 of the Constitution states that
“[n]o person shall be deprived of life, liberty or property without
due process of law, nor shall any person be denied the equal
protection of the laws.”
In Sison, Jr. v. Ancheta
the Supreme Court brushed aside the taxpayer’s argument that
the amendment introduced by Batas Pambansa Blg. 135 to the
NIRC would result in undue discrimination against him by the
imposition of higher rates of income tax upon his income arising
from the exercise of his profession vis-a-vis those that are
imposed upon fixed income or salaried individual taxpayers.
Neither did the Supreme Court buy his arguments that the
amendment amounted to class legislation and that it was
oppressive and capricious in character.
The power to tax is an attribute of sovereignty. It is supposedly the
strongest of all the powers of government. But, for all its plenitude, the
power to tax is not unconfined. The Constitution lays down some
restrictions.
The power to tax involves the power to destroy. But, Justice Holmes
wrote, “the power to tax is not the power to destroy while this Court sits."
So it is in the Philippines.
B. Equal Protection
It suffices that the laws operate equally and uniformly on all persons
under similar circumstances or that all persons must be treated in the
same manner, the conditions not being different, both in the privileges
conferred and the liabilities imposed.
Any classification made should be based on substantial distinctions
germane to the purpose of the law. PAGCOR v. Bureau of Internal
Revenue
See also Mindanao Shopping Destination Corporation
where the SC found a valid basis for the classification and
imposition of different local business tax rates for wholesalers
and retailers.
Article III, Section 10 of the Constitution states that
“[n]o law impairing the obligation of contracts shall be passed.”
NOTE: This does not apply to franchises
See Manila Electric Company
the SC held that contractual exemptions, where the non-
impairment clause of the Constitution can rightly be invoked,
are those agreed to by the taxing authority in contracts, such as
those contained in government bonds or debentures, lawfully
entered into by them under enabling laws in which the
Government, acting in its private capacity, sheds its cloak of
authority and waives its governmental immunity.
Truly, tax exemptions of this kind may not be revoked without
impairing the obligation of contracts.
These contractual tax exemptions, however, should not be confused with
tax exemptions granted under franchises.
A franchise partakes the nature of a grant which is beyond the
purview of the non-impairment clause of the Constitution.
Indeed, Article XII, Section 11, of the Constitution is explicit that
no franchise for the operation of a public utility shall be granted
except under the condition that such privilege shall be subject
to amendment, alteration or repeal by Congress as and when
the common good so requires.
In Philippine Amusement and Gaming Corporation (PAGCOR),
PAGCOR asserted that private parties/investors transacted with
it with PAGCOR’s tax exemption as the main inducement for
their decision to invest or partner with PAGCOR. The withdrawal
of such exemption in effect constitutes an impairment of
contract. The SC, however, held that franchises are granted on
the understanding that they are subject to amendment,
alteration, or repeal by Congress, hence, beyond the purview of
the non-impairment clause of the Constitution.
Similarly, in Tolentino v. Secretary of Finance,
the Supreme Court held that “not only are existing laws read into
contracts in order to fix obligations as between parties, but the
reservation of essential attributes of sovereign power is also
read into contracts as a basic postulate of the legal order.”
However, in Province of Misamis Oriental v. Cagayan Electric Power and
Light Company, Inc.,
[15] GENERAL PRINCIPLES OF TAXATION
the Supreme Court ruled that CEPALCO, which was granted a
franchise under Republic Act No. 3247 to install, operate and
maintain an electric light, heat and power system in the City of
Cagayan de Oro and its suburbs, was exempt from payment of
local franchise tax of ½ of 1% of its gross earnings levied by the
province of Misamis Oriental because CEPALCO’s payment of
the 3% franchise tax on its gross earnings was in lieu of all taxes
and assessments of whatever authority upon privileges,
earnings, income, franchise, and poles, wires, transformers, and
insulators of the said grantee under its charter.
The Supreme Court pointed out that “such exemption is part of
the inducement for the acceptance of the franchise and the
rendition of public service by the grantee” and that since “a
charter is in the nature of a private contract, the imposition of
another franchise tax on the corporation by the local authority
would constitute an impairment of the contract between the
government and the corporation.”
D. No Imprisonment for Non-Payment of Poll Tax
Article III, Section 20 of the Constitution states that
“[n]o person shall be imprisoned for debt or non-payment of a
poll tax.”
A poll tax is one levied on persons who are residents within the territory
of the taxing authority without regard to their property, business or
occupation.
Thus, only the basic community tax under the Local Government Code
could qualify as a poll tax, and the non-payment of the other or additional
taxes therein imposed, not being in the nature of poll taxes, may be
validly penalized by imprisonment.
The prohibition is against “imprisonment” for non-payment of a poll tax.
Hence, the imposition of a “fine” (provided no subsidiary imprisonment)
does not contravene the Constitution. Neither would an imprisonment
for any violation, other than non-payment of the tax, be unconstitutional.
E. Uniform, Equitable and Progressive
Article VI, Section 28 of the Constitution states that
“[t]he rule of taxation shall be uniform and equitable” and
“Congress shall evolve a progressive system of taxation.”
The term “uniform” requires that all subjects or objects of taxation that
are similarly situated shall be treated or put on equal footing both in
privileges and liabilities.
As held in City of Baguio v. de Leon, a tax is considered uniform when it
operates with the same force and effect in every place where the subject
may be found.
The rule of uniformity, however, does not call for perfect uniformity or
perfect equality because this is hardly attainable.
See also Commissioner v. Lingayen Gulf Electric, G.R. No. 23771, August
4, 1988, 164 SCRA 27
On the other hand, the term “equitable” means fair, just, reasonable and
proportionate to one’s ability to pay. Thus, where there are special
circumstances that impact the market value of a real property, these
must be taken into account so as to fairly determine the true market
value of the property. Reyes v. Almanzor
The term “progressive” means that as a person’s income increases, so
must the tax that he is supposed to pay, while “regressive” taxation
occurs when a person’s income increases but his income tax rate
decreases.
The present graduated income tax rates aptly illustrate the
progressive system of taxation.
The progressive requirement would place emphasis on direct
rather than indirect taxes, on non-essentiality rather than
essentiality to the taxpayer of the object of taxation, or on the
taxpayer’s ability to pay.
F. Non-Delegation of Legislative Power
The discretion to ascertain the following –
(a) basis, amount, or rate of tax;
(b) person or property that is subject to tax;
(c) exemptions and exclusions from tax; and
(d) manner of collecting the tax – may not be delegated away by
Congress, without violating the non-delegation of legislative
power under the Constitution. La Suerte Cigar & Cigarette
Factory v. Court of Appeals
However, the power to fill in the details and manner as to the
enforcement and administration of a tax law may be delegated to
various specialized administrative agencies like the DOF.
[15] GENERAL PRINCIPLES OF TAXATION
All that is required in order for a revenue regulation to be valid is that it
must:
(1) be germane to the object and purpose of the law;
(2) not contradict, but conform to, the standards the law prescribes;
and
(3) be issued for the sole purpose of carrying into effect the general
provisions of the tax laws sought to be enforced.
The delegation by Congress of legislative power to the executive branch
must meet two tests, namely, the completeness test and the sufficient
standard test.
“The first test requires the law to be complete in all its terms
and conditions, such that the only thing the delegate will have
to do is to enforce it.
The sufficient standard test requires adequate guidelines or
limitations in the law that map out the boundaries of the
delegate’s authority and canalize the delegation.” Jaime N.
Soriano, et. al. v. Secretary of Finance, citing Tatad v. Secretary
of the Department of Energy
Article VI, Section 28(2) of the Constitution itself empowers Congress to
“authorize the president to fix within specified limits, and subject to such
limitations and restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other duties or imposts
within the framework of the national development program of the
government.”
G. Exemption of Religious, Charitable or Educational Institutions
Article VI, Section 28(3) of the Constitution states that
“[c]haritable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements actually, directly, and
exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.”
The above provision refers only to real property taxes, but not to other
kinds of taxes, such as income tax, or special levies or assessments,
unless the Constitution itself provides for a broader or blanket
exemption, such as in the case of non-stock, non-profit
educational institutions as discussed below, or
unless Congress, by law, grants exemption from such other
taxes or special levies or assessments, such as the Local
Government Code of 1991 that exempts from real property tax
and special levies on real property “[a]ll charitable institutions,
churches parsonages or convents appurtenant thereto including
mosques, non-profit or religious cemeteries and all lands,
buildings, and improvements which are actually, directly, and
exclusively used for religious, charitable, or educational
purposes.”
In Lladoc v. Commissioner of Internal Revenue, the Supreme Court held
that the assessment by the BIR of the then donee’s gift tax on a cash
donation to the Catholic Parish of Victorias, Negros Occidental to be used
for building a new church in the locality did not violate the constitutional
provision exempting from taxation cemeteries, churches and
personages or convents, appurtenant thereto, and all lands, buildings,
and improvements used exclusively for religious purposes since the said
exemption relates only to the payment of taxes assessed on such
properties enumerated, such as property taxes, as distinguished from
excise taxes.
As to charitable institutions, the SC held in Lung Center of the Philippines
v. Quezon City that portions of the property of Lung Center of the
Philippines that were being leased to private individuals for their clinics,
a canteen, and a commercial garden were not exempt from real property
tax because the said portions were not used actually, directly and
exclusively for charitable purposes. However, the portions of the property
used for the treatment of patients and the dispensation of medical
services to them, whether paying or non-paying, were covered by the
exemption.
The exemption in favor of property used exclusively for charitable or
educational purposes is not limited to property actually “indispensable”
therefor but it extends to facilities that are necessary for the
accomplishment of said purposes, such as:
In the case of hospitals, a school for training nurses, a nurses’
home, property used to provide housing facilities for interns,
resident doctors, superintendents, and other members of the
hospital staff, and recreational facilities for student nurses,
interns and residents such as athletic fields, including a farm
used for the inmates of the institution.”
The Supreme Court reiterated the above principle in Abra Valley College,
Inc. v. Aquino, where the Court held exempt from real property tax a
portion of the school building used as a residence of the school director
[15] GENERAL PRINCIPLES OF TAXATION
and his family but not the portion that was leased to a marketing firm
for commercial purposes.
The latter portion (underlined) of the said decision may be deemed
modified or supplanted by the decision of the Supreme Court in De la
Salle University where the Supreme Court held the said university
exempt from income tax and value-added tax on its rental income from
restaurants, canteens and bookstores operating within its campus to the
extent that such rental income is used actually, directly and exclusively
for educational purposes.
A non-stock, non-profit educational institution is exempt from all taxes
and duties by express provision of Article XIV, Section 4(3) of the
Philippine Constitution which states that
“[a]ll 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.”
The Constitution further states that
“[a]ll grants, endowments, donations, or contributions used
actually, directly, and exclusively for educational purposes shall
be exempt from tax,” subject to such conditions as may be
prescribed by law.
See DLSU which the SC held to be exempt from income tax and value-
added tax on its rental income from restaurants, canteens and
bookstores operating within its campus to the extent that such rental
income is used actually, directly and exclusively for educational
purposes.
The SC affirmed through the CTA finding that not all of the rental
income was used actually, directly and exclusively for
educational purposes, hence, the remainder of the rental
income not so used was held subject to income tax and VAT.
See also DLSU-College of St. Benilde
It does not matter where the income was sourced, for as long it is used
actually, directly and exclusively for educational purposes, it is exempt
under the Constitution.
Even parking fees. If the school can show that the profits derived therefrom will be
used for educational purposes, it will be covered by the tax exemption
H. Congressional Approval of Exemption
It is fundamental that only the Constitution may grant exemptions from
tax or Congress, through a law duly enacted.
Hence, any person invoking or claiming exemption from tax should be
able to cite a constitutional or statutory basis.
As a rule, exemptions from tax are strictly construed against the
taxpayer, and in favor of the taxing power.
As the Supreme Court declared in Philippine Long Distance Telephone
Co. v. City of Davao, “[t]ax exemptions should be granted only by clear
and unequivocal provision of law on the basis of language too plain to
be mistaken,” and “[t]hey cannot be extended by mere implication or
inference.”
I. Public Purpose
Article VI, Section 29 of the Constitution states that
“[n]o money shall be paid out of the Treasury except in
pursuance of an appropriation made by law.
In other words, no public funds may be disbursed except in pursuant of an
appropriation made by law
It further states that
“[n]o public money or property shall be appropriated, applied,
paid, or employed, directly or indirectly, for the use, benefit, or
support of any sect, church, denomination, sectarian institution,
or system of religion, of any priest, preacher, minister, or other
religious teacher or dignitary as such, except when such priest,
preacher, minister, or dignitary is assigned to the armed forces,
or to any penal institution, or government orphanage or
leprosarium.”
Finally, Article VI, Section 29 provides that:
“[a]ll money collected on any tax levied for a special purpose
shall be treated as a special fund and paid for such purpose
only”
and that “[i]f the purpose for which a special fund was created
has been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the Government.”
Pascual v. Secretary of Public Works, supra,
[15] GENERAL PRINCIPLES OF TAXATION
where the Supreme Court held that “the legislature is without
the power to appropriate public revenues for anything but a
public purpose.
Thus, where, for instance, the land on which projected feeder
roads are to be constructed belongs to private persons, an
appropriation made by Congress for that purpose is null and
void, and a donation to the government, made over five (5)
months after the approval and effectivity of the Act for the
purpose of giving a “semblance of legality” to the appropriation,
does not cure the defect.”
Not even this afterthought, where the private persons subsequently donated the
properties to the government would cure the defect
In Valentin Tio v. Videogram Regulatory Board, et. al., supra,
the Supreme Court held that even if a statute results in
incidentally favoring one industry over another, this fact alone
does not mean that the statute was enacted not for a public
purpose but for the benefit of private persons or businesses.
In this case, while it may favor the movie industry, this does not mean that there was
no public purpose
In Gaston v. Republic Planters Bank, 158 SCRA 626
The Supreme Court ruled that the “stabilization funds” that the
State (PHILSUCOM) collected for the promotion of the sugar
industry were in the nature of taxes, hence, the collection
thereof did not give rise to an implied trust for the benefit of the
sugar producers.
Consequently, the revenues derived therefrom shall be treated
as a special fund to be administered for the purpose intended,
and no part thereof may be used for the exclusive benefit of any
private person or entity but for the benefit of the entire sugar
industry.
Once the purpose for which the special fund was created had
been fulfilled, the balance, if any, shall be transferred to the
general funds of the Government pursuant to Article VI, Section
29(3) of the Constitution.
J. Veto Power of the President
Under Article VI, Section 27 of the Constitution, every bill passed by
Congress shall, before it becomes a law, be presented to the President
for his approval.
If he does not approve it, he shall veto it and return the same
with his objections to the House of Representatives where it
originated.
The House of Representatives may, by a vote of two-thirds of all its
members, reconsider the bill, that is, pass the bill despite the President’s
veto, after which it shall send the same bill, as reconsidered by the
House, to the Senate which, also by a vote of two-thirds of all its
members, likewise reconsider the veto.
If both the House of Representatives and the Senate, by a vote
of two-thirds of their respective members voting separately,
reconsider the veto by the President, the bill shall become a law.
NOTE: President may veto it wholly or partly. When the President
vetoes a law, the legislature may reconsider or override that
veto made by the President.
In the exercise of his veto power, the President may veto any particular
item or items in the revenue or tariff bill, but the veto shall not affect the
item or items of the bill that he does not object to.
The President must communicate his veto of any bill to the
House of Representatives where the bill originated within thirty
(30) days from his receipt thereof. Otherwise, the bill shall lapse
into law as if he had signed it.
K. Senate Concurrence with Treaties or International Agreements
Article VII, Section 21 of the Constitution states that “[n]o treaty or
international agreement shall be valid and effective unless concurred in
by at least two-thirds of all the Members of the Senate.”
The requirement of Senate concurrence applies to:
a. international agreements involving political issues or changes
of national policy and
b. international agreements of a permanent character which
usually take the form of treaties.
The requirement of concurrence by the Senate does not apply to:
a. Executive agreements such as those covering subjects as
commercial and consular relations, most-favored nation rights,
[15] GENERAL PRINCIPLES OF TAXATION
patent rights, trademark and copyright protection, postal and
navigation arrangements and the settlement of claims.
b. Executive agreements embodying adjustments of detail,
carrying out well established national policies and traditions
and those involving arrangements of a more or less temporary
nature.
L. Judicial Review
Article VIII, Section 1 of the 1987 Constitution provides that
“[t]he judicial power shall be vested in one Supreme Court and
in such lower courts as may be established by law” and that
“[j]udicial power includes the duty of the courts of justice to
settle actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not
there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or
instrumentality of the Government.”
Article VIII, Section 5(2) of the Constitution states in part that
the Supreme Court shall have the power to “[r]eview, revise,
reverse, modify or affirm on appeal or certiorari, as the law or
the Rules of Court may provide, final judgments and orders of
lower courts in [a]ll cases in which the constitutionality or
validity of any treaty, international or executive agreement, law,
presidential decree, proclamation, order, instruction, ordinance,
or regulation is in question”, final judgements and orders of
lower courts in [a]ll cases involving the legality of any tax,
impost, assessment, or toll or any penalty imposed in relation
thereto” and “[a]ll cases in which only an error or question of law
is involved.”
Finally, Article VIII, Section 4(2) of the Constitution provides that
“[a]ll cases involving the constitutionality of a treaty,
international or executive agreement, or law, shall be heard by
the Supreme Court en banc” and “shall be decided with the
concurrence of a majority of the members who actually took
part in the deliberations on the issues in the case and voted
thereon.”
On the basis of the above-cited constitutional provisions, the Supreme
Court declared that the CTA does have certiorari power:
The CTA may determine whether or not the RTC committed
grave abuse of discretion amounting to lack of or in excess of
jurisdiction in issuing an interlocutory order in cases falling
within the exclusive appellate jurisdiction of the CTA. City of
Manila v. Grecia-Cuerdo, G.R. No. 175723, Feb. 4, 2014, 715
SCRA 182
Similarly, the Court of Tax Appeals has original jurisdiction over a petition
for certiorari assailing the jurisdiction of the Secretary of the Department
of Justice in a preliminary investigation involving violations of the Tariff
and Customs Code. Bureau of Customs v. Devanadera, G.R. No. 193253,
Sept. 8, 2015, 770 SCRA 1, involving the dismissal by the Secretary of
Justice of BOC’s complaint-affidavit against private respondents for
violation of the TCCP on the ground of lack of probable cause.
See also Petron, Philamlife and BDO cases.
The CTA (Court of Tax Appeals) does have certiorari power
They may pass upon the Constitutionality of BIR order or regulations
They may pass upon the Constitutionality or validity of any issuance of the
BIR even absent any controversy or disputed assessment or claim for
refund.
No need to go up to the SC to have any tax regulation stricken down as void
or unconstitutional because you may bring this directly to the CTA
M. Grant of Taxing Power to Local Government Units
The Constitution directs the State to ensure the autonomy of local
governments.
Thus, Article II, Section 25 states that “[t]he State shall ensure the
autonomy of local governments.” Moreover, after providing in Article X,
Section 1 that “[t]he territorial and political subdivisions of the Republic
of the Philippines are the provinces, cities, municipalities and
barangays”, the Constitution, in Article X, Section 2, mandates that “[t]he
territorial and political subdivisions shall enjoy local autonomy.”
However, Article X, Section 5 declares that “[e]ach local government unit
shall have the power to create its own sources of revenue and to levy
taxes, fees, and charges subject to such guidelines and limitations as
the Congress may provide, consistent with the basic policy of local
autonomy”, with such taxes, fees and charges accruing exclusively to the
local governments.
[15] GENERAL PRINCIPLES OF TAXATION
See limitations on taxing powers of LGUs under the LGC of 1991
BOOK II
LOCAL TAXATION AND FISCAL MATTERS
TITLE I
LOCAL GOVERNMENT TAXATION
CHAPTER I
General Provisions
Section 133. Common Limitations on the Taxing Powers of Local Government Units.
-
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis
causa, except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on wharves,
tonnage dues, and all other kinds of customs fees, charges and dues except
wharfage on wharves constructed and maintained by the local government
unit concerned;
(e) Taxes, fees, and charges and other impositions upon goods carried into or
out of, or passing through, the territorial jurisdictions of local government
units in the guise of charges for wharfage, tolls for bridges or otherwise, or
other taxes, fees, or charges in any form whatsoever upon such goods or
merchandise;
(f) Taxes, fees or charges on agricultural and aquatic products when sold by
marginal farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of Investments as
pioneer or non-pioneer for a period of six (6) and four (4) years, respectively
from the date of registration;
(h) Excise taxes on articles enumerated under the national Internal Revenue
Code, as amended, and taxes, fees or charges on petroleum products;
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or
similar transactions on goods or services except as otherwise provided
herein;
(j) Taxes on the gross receipts of transportation contractors and persons
engaged in the transportation of passengers or freight by hire and common
carriers by air, land or water, except as provided in this Code;
(k) Taxes on premiums paid by way or reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving thereof, except
tricycles;
(m) Taxes, fees, or other charges on Philippine products actually exported,
except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises
and cooperatives duly registered under R.A. No. 6810 and Republic Act
Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known
as the "Cooperative Code of the Philippines" respectively; and
(o) Taxes, fees or charges of any kind on the National Government, its agencies
and instrumentalities, and local government units.
N. No Restraint of Trade or Unfair Competition
Art. XII, Sec. 19 behooves the State to:
“regulate or prohibit monopolies when the public interest so
requires, and
declares that “[n]o combinations in restraint of trade or unfair
competition shall be allowed.”
While the Constitution clearly frowns upon monopolies, combinations in
restraint of trade, or unfair competition, it did not prohibit monopolies
outright but allowed Congress to prohibit monopolies.
The term “combinations in restraint of trade” was understood in the
context of anti-trust legislation for the protection of consumers.
It was on this constitutional mandate that Congress eventually
passed Republic Act No. 10667, otherwise known as the
Philippine Competition Act, in 2015 after languishing in
Congress for twenty four (24) years.
It is believed that the said legislation will promote and protect
competitive market, protect the well-being of consumers and
preserve the efficiency of competition in the marketplace.
Enforcement of this law will help ensure that markets are open
and free, challenging anticompetitive business practices while
maintaining an environment where businesses can compete
based on the quality of their work.
Congress frowns upon monopolies, combinations of restraint of trade, and
unfair competition
Double Taxation
[15] GENERAL PRINCIPLES OF TAXATION
For double taxation in the objectionable or prohibited sense to exist:
1. the same property must be taxed twice, when it should be taxed
but once;
2. both taxes must be imposed on the same property or subject
matter, for the same purpose, by the same taxing authority,
within the same jurisdiction or taxing district, during the same
taxing period; and
3. they must be the same kind or character of tax.
In any event, there is no constitutional prohibition against double
taxation in the Philippines.
La Suerte Cigar & Cigarette Factory,
the Supreme Court found no double taxation where the specific
tax challenged was imposed by explicit provisions of the Tax
Code on two different articles or products, namely, stemmed
leaf tobacco and cigar or cigarette.
Similarly, in Procter & Gamble Phil. Mftg. Corp. v. Municipality of Jagna,
Province of Bohol,
the Supreme Court declined to strike down an ordinance passed
by a municipality in Bohol that imposed a storage fee on copra
stored in a warehouse located in the said municipality.
The Court ruled that there is no double taxation since “a tax on
plaintiff's products is different from a tax on the privilege of
storing copra in a bodega situated within the territorial boundary
of defendant municipality.”
In other words, the two taxes are not of the same character. One
is on the products, one is on the privilege of storing such
products in a bodega, considering the fire hazard that such
products posed.
In Punsalan, et. al. v. Municipal Board of Manila, et. al.,
Two lawyers, a doctor, an accountant, a dentist and a
pharmacist filed a class suit that assailed the validity of an
ordinance of the city of Manila that levied an occupation tax
(now professional tax), in an amount not exceeding P50 per
annum, on persons engaged in the various professions like
them.
They argued that since they have already paid their occupation
tax under the NIRC, to be made again to pay another occupation
tax to the city of Manila is unjust and oppressive because it
creates discrimination within a class in that while professionals
with offices in Manila have to pay the tax, outsiders who have
no offices in the city of Manila but practice their profession
therein are not subject to the tax. Moreover, the plaintiffs
argued that the imposition amounts to double taxation.
NOTE: No more occupation tax in the NIRC today.
The Supreme Court in Punsalan, however, ruled that, “plaintiffs
make a distinction that is not found in the ordinance. The
ordinance imposes the tax upon every person “exercising” or
“pursuing” – in the City of Manila naturally – any one of the
occupations named, but does not say that such person must
have his office in Manila. What constitutes exercise or pursuit of
a profession in the city is a matter of judicial determination.”
On the matter of double taxation, the Supreme Court also
dismissed the argument about double taxation because one tax
is imposed by the local government, city of Manila, while the
other is imposed by the state. Besides, it is well-settled that
double taxation is not per se illegal or unconstitutional.
In other words, the taxes are not being imposed by the same
taxing jurisdiction. One is imposed by the State, one by the local
taxing jurisdiction.
In City of Manila v. Coca-Cola Bottlers Philippines, Inc., (fave Bar q)
the Supreme Court granted the taxpayer’s claim for refund of
taxes paid under Section 21 of Tax Ordinance No. 7794 because
it had already paid local business tax under Section 14 of the
same ordinance.
Section 21 imposes local business tax on manufacturers, etc. of
liquors, distilled spirits, wines and any other article of
commerce, while Section 14 levies another local business tax
on the sale of similar products albeit imposed on the consumers
or end-users of the articles sold by the business enterprise.
The Court opined that the above constitutes double taxation
since these are being imposed:
(1) on the same subject matter – the privilege of doing
business in the City of Manila;
(2) for the same purpose – to make persons conducting
business within the City of Manila contribute to city
revenues;
(3) by the same taxing authority – petitioner City of Manila;
[15] GENERAL PRINCIPLES OF TAXATION
(4) within the same taxing jurisdiction – within the
LIcense Fee Tax
territorial jurisdiction of the City of Manila;
(5) for the same taxing periods – per calendar year; and For the purpose of regulating a lawful For the purpose of raising revenue
(6) of the same kind or character – a local business tax business or occupation
imposed on gross sales or receipts of the business.
Must be commensurate or No limit on taxation, purely legislative
proportionate to the regulation

Direct Double Taxes Indirect Double Taxes

In Progressive Development Corporation v. Quezon City,
prohibited allowed the taxpayer challenged a supervision fee or license tax of 5%
(formerly 10%) of gross receipts from market stall rentals
double taxation in the strict sense Double taxation in imposed by an ordinance on owners and operators of public
the broad sense is indirect double markets on the ground that it partook of a tax on income which
taxation. the LGU may not impose.
The Court, after expounding on the distinction between a license
The same property must be taxed simply means that there are two or
twice; Both taxes must be imposed: more pecuniary impositions on a fee and a tax, held that the 5% tax constitutes not a tax on
On the same property or subject matter. income but rather a license tax or fee for the regulation of the
subject matter, business in which the taxpayer was engaged in.
For the same purpose, The taxpayer, said the Court, failed to show “that the tax is so
By the same State, unreasonably large and excessive and so grossly
Government, or taxing
disproportionate to the costs of the regulatory service being
authority,
Within the same jurisdiction, performed by the respondent as to compel the Court to
During the same taxing characterize the imposition as a revenue measure exclusively.”
period, and Besides, the Court took judicial cognizance of the fact that fresh
The two taxes are of the meat, fish, poultry and other foodstuffs are sold in the
same kind or character taxpayer’s public market, which requires close supervision and
control by the local government for the protection of the health
of the public by insuring that sanitary and hygienic conditions
License Fee v. Tax are at all times observed in the market.
A license fee is The Court added that the use of the gross amount of stall rentals
“imposed for the regulation of lawful business or occupation in as basis for determining the amount of license tax to be paid
the exercise of police power, the amount of which is invariably does not by itself make the license tax a tax on income that the
limited to cover the expenses of issuing the license and the cost local government is prohibited from imposing.
of the necessary surveillance, inspection or supervision by the
government.” LGUs cant impose income tax and other national tax (VAT, GST, etc.)
If unpaid, the business or activity itself subject to the license fee
can become illegal, unlike, generally, in the case of non-
payment of a tax. In Ferrer, Jr. v. Bautista, G.R. No. 210551 , June 30, 2015, 762 Phil. 233,
Supreme Court held that the social housing tax levied by the
Quezon City Government on property owners in Quezon City was
[15] GENERAL PRINCIPLES OF TAXATION
not a pure exercise of taxing power or merely to raise revenue,
but rather it was levied with a regulatory purpose.
The levy was primarily in the exercise of the police power, rather
than the taxing power, as it was done for the general welfare of
the entire city whereby the local government sought to remove
or relocate illegal settlers from danger areas such as esteros,
railroad tracks, garbage dumps, riverbanks, shorelines,
waterways, and other public places like sidewalks, roads, parks,
and playgrounds and relocate them, in coordination with the
National Housing Authority, to resettlement sites with basic
services and facilities and access to employment and livelihood
opportunities sufficient to meet the basic needs of the affected
families.
Nonetheless, the Supreme Court cautioned that “[t]hough broad
and far-reaching, police power is subordinate to constitutional
limitations and is subject to the requirement that its exercise
must be:
1. reasonable and
2. for the public good.
In Procter & Gamble Philippine Manufacturing Corp. v. Municipality of
Jagna
The Supreme Court did not find excessive and confiscatory a
municipal license tax or fee of P0.10 per 100 kilos of copra
stored by P&G PMC in a bodega within the local government’s
territory.
The Supreme Court recognized that “municipal corporations are
allowed wide discretion in determining the rates of imposable
license fees even in cases of purely police power measures.
In the absence of proof as to municipal conditions and the
nature of the business being taxed as well as other factors
relevant to the issue of arbitrariness or unreasonableness of the
questioned rates, Courts will go slow in writing off an
Ordinance.”
Moreover, in Procter & Gamble,
The Court noted that storing copra in a bodega poses some
hazard to public safety in view of its high oil content which can
give rise to conflagration thus the Ordinance itself directs the
authorities to put such bodegas on regular surveillance.
The Court also dismissed the taxpayer’s argument that the
imposition is beyond the cost of regulation and surveillance or
excessive.
Smart Communications, Inc. v. Municipality of Malvar, Batangas
The Supreme Court considered as a fee, and not a tax, amount
levied by a municipality through a local tax ordinance on steel
towers put up by a telecommunications company for the
purpose of receiving and transmitting cellular communications
within the covered area embraced by the territorial jurisdiction
of the municipality.
The Court noted that the imposition was the purpose of
regulating the placing, stringing, attaching, installing, repair and
construction of various structures that may be hazardous to the
welfare of its inhabitants.
The Court further clarified that the fees are not impositions on
the buildings or structures themselves, but rather on the activity
subject of government regulation, such as the installation and
construction of the structures.
However, in Matalin Coconut Co., Inc. v. Municipal Council of Malabang,
Lanao del Sur,
The Court, however, found excessive in a police inspection fee
levied by an ordinance at the rate of P0.30 per sack of cassava
starch produced and shipped out of the municipality’s territory
upon showing that all that the local police does is to verify at the
police checkpoint the number of bags loaded per trip.
Besides, there was a finding that the taxpayer makes only a
marginal average profit of P0.40 per bag while the police
inspection fee is P0.30 per bag.
Under such circumstances, the business might as well
close down.
Furthermore, the court did not give credence to the pretention
of the LGU:
that its police also determine if the cassava starch is fit
for human consumption (because they are
incompetent to do that) and
that the police provide escort protection against
undesirable elements while on transit (because the
taxpayer did not request for that)
[15] GENERAL PRINCIPLES OF TAXATION
Toll v. Tax
properties under the Local
A “toll” is an act or demand on proprietorship or ownership. Its Government Code of 1991, the
imposition is generally contractual in nature, and it may be demanded special levy imposed on lands
by private persons or entities. specially benefited by public works
Toll fees collected by tollways, such as NLEX, SCTEX, CAVITEX, Startoll, projects or improvements by the LGU
and the like, are examples of this kind of exaction. where the lands are situated pursuant
The motorists are free to avail or not to avail of the facility and thereby to Sec. 240 of the LGC of 1991.
not be burdened by the toll. It is clearly contractual in nature.
Unlike taxes which are required by the State Police Power v. Eminent Domain
Police Power Eminent Domain
Note: Toll v. Tax is a favorite bar question
"state authority to enact legislation Article III, Section 9 of the
A toll fee is not a tax it is an amount collected by the toll operator and this is that may interfere with personal Constitution, on the other hand,
generally contractual in nature and this is merely a recovery of the capital liberty or property in order to promote embodies the state’s power of
shelled out for the highway. the general welfare eminent domain, albeit subject to the
Private entities operate the toll ways and at the expiration of the period they condition that “[p]rivate property shall
will turn it over to the government and the gov’t will collect. not be taken for public use without
Individuals are not duty bound to use toll ways thus these are just compensation.”
contractual in nature
Taxes are forced impositions of the state which are not contractual inherent power of the State to the inherent power of the State to
in nature regulate or to restrain the use of take or appropriate private property
liberty and property for public welfare. for public use.

The only limitation is that the

Toll Fees Taxes restriction imposed should be The Constitution, however, requires
reasonable, not oppressive. In other that private property shall not be
Generally contractual in nature, Not contractual in nature, forced words, to be a valid exercise of police taken without due process of law and
merely a recovery of the capital impositions of the state which are power, it must have a lawful subject or the payment of just compensation.
shelled out for the highway by objective and a lawful method of Manila Memorial Park
proprietors accomplishing the goal.

General v. Special Taxes

Police power has been defined as the "state authority to enact legislation
General or fiscal taxes Special, Regulatory or Sumptuary that may interfere with personal liberty or property in order to promote
taxes the general welfare."
Thus, as defined, it consists of an imposition or restraint upon
Imposed for the general purposes of taxes imposed for a particular
the government legitimate object of government, liberty or property in order to foster the common good.
There is no express provision in the Constitution relating specifically to
such as income tax, value-added tax, such as the Special Education Fund the State’s police power.
excise tax, percentage tax and DST. levied in addition to the basic real However, the Supreme Court explained in Basco v. PAGCOR,
property tax imposed on real G.R. No. 91649, May 14, 1991, 274 Phil. 323, 196 SCRA 52,
that police power is inherent in the sovereignty of the state.
[15] GENERAL PRINCIPLES OF TAXATION
Police vs Eminent domain is also a favorite bar question
Tax Avoidance v. Tax Evasion
Tax Avoidance Tax Evasion
Right ; legal ; Not a right, illegal
involves saving on taxes using legal involves the use of forbidden and
means. illegal devices to lessen and
minimize tax.
integration of 3 factors :
The end to be achieved, i.e.,
payment of less than that
known by the taxpayer to be
legally due, or the non-
payment of tax when it is
shown that a tax is due,
• State of mind which is
"evil," in "bad faith," "willful,"
or "deliberate and not
accidental," and
• Course of action or failure
of action that is unlawful.
(CIR v. Estate of Benigno
Toda, G.R. No. 147188,
September 14, 2004)
While tax avoidance schemes and arrangements are not prohibited, tax
laws cannot be circumvented in order to evade the payment of just
taxes.”
It is well-settled that a taxpayer has the legal right to reduce the
amount of what would be his taxes or altogether avoid them by
means which the law permits.
See Non-Recognition Transactions, Capital v. Ordinary Gain, etc.
In Lincoln Philippine Life Insurance Company,
The Supreme Court held that “to claim that the increase in the
amount insured (by virtue of the automatic increase clause
incorporated into the policy at the time of issuance) should not
be included in the computation of the documentary stamp taxes
due on the policy would be a clear evasion of the law requiring
that the tax be computed on the basis of the amount insured by
the policy.”
Tax evasion scheme
Policy na may automatic increase in the amount insured under circumstances, pero
yung insurance company binayaran na DST was coputed in the basis of the amt of
the policy, hindi sinama yung increase resulting from automatic increase clause
incorporated in the policy to avoid the payment of higher amount of DST because of
the higher insurance coverage.
In International Exchange Bank v. Commissioner of Internal Revenue
The Supreme Court also remarked that “to claim that time
deposits evidenced by passbooks should not be subject to DST
is a clear evasion of the rule on equality and uniformity of
taxation that requires the imposition of DST on documents
evidencing transactions of the same kind, in this particular case,
on all certificates of deposits drawing interest.”
Bank: time deposit nag-issue ng passbook para kunwari regualr savings account na
hindi subject to DST.
Republic v. Gonzales
fraud is a state of mind and it need not be proved by direct
evidence but may be inferred from the circumstances of the
case. Thus, in the said case, the failure of the taxpayer, a private
concessionaire in the U.S. Military Base at Clark Field, Angeles
City, to declare for taxation purposes his true and actual income
derived from the manufacture and sale of furniture to the Clark
Field Air Base for two consecutive years was indicative of his
fraudulent intent to cheat the Government of its due taxes.
Moreover, the same taxpayer also did not report some local
sales made to parties outside the base.
Tax evasion
Willful blindness doctrine: A taxpayer can no longer raise the
defense that the errors on their tax returns are not their
responsibility or that it is the fault of the accountants they hired
[15] GENERAL PRINCIPLES OF TAXATION
Intent to defraud need not be shown for a conviction of The Supreme Court stated that the manufacturer, who is directly
tax evasion. liable for the excise tax, cannot invoke the excise tax exemption
granted by law to its buyers.
Taxpayer operated a restaurant in Cllark. Hindi niya dineclare yung true and acutla
income in the sale of furniture for 2 consecutive year. He also didn’t report local sales
to parties outside the airbase. There’s an exemption of excise tax in the sale of petroleum products
to international carriers like airlines. But this is imposed on the
manufacturer.
See also TCCEC, Benigno Toda Cannot withdraw the petroleum without first paying the excise tax.
Thus, Shell paid the excise tax before withdrawing the petroleum.
Direct Tax v. Indirect Tax BIR denied refund claim.
The exemption can only be claimed by international carrier,
Direct Taxes Indirect Taxes not the manufacturer or producer of the petroleum product.
SC: agreed with BIR.
Taxes which are demanded from Taxes that are levied on transactions While The manufacturer is liable for excise tax, then it
persons who are primarily burdened or activities before the articles cannot invoke the excise tax exemption granted to
to pay them” subject matter thereof reach the international carriers or buyers.
consumers to whom the burden of Shell filed a motion for reconsideration.
the tax may ultimately be charged or
shifted
In G.R. No. 188497, Feb. 19, 2014,
such as income tax, estate and such as value added tax. Decision was reconsidered, with 1944 Chicago Convention on
donor’s tax. International Aviation as its ground, which exempts aircraft fuel
consumed for international transport from taxes, customs
For example, Section 105 of the NIRC, as amended, expressly provides duties, inspection fees or similar national or local duties and
that the value added tax is an indirect tax and the same may be shifted charges.
or passed on to the buyer, transferee or lessee of the goods, properties That way, the practice by international airlines of filling their
or services. aircraft with as much fuel as possible (“tankering”) purchased
In Commissioner of Internal Revenue v. Pilipinas Shell Petroleum in a jurisdiction that imposes no or low tax would be avoided,
Corporation, GR 188497, April 25, 2012 explained the Supreme Court.
This raised an interesting issue on whether or not the exemption
from excise tax of petroleum products sold to international SC: Granted the claim for refund but on a different ground.
carriers attaches to the petroleum products themselves or to Aircraft fuel is exempt from tax, duties.
the international carriers.
Pilipinas Shell filed a claim for refund or tax credit of the excise Baniqued: ah case ni sir ‘to
taxes it had already paid (at the time of removal from the place Language of the law is clear. The following are exempt: sale of
of production) on petroleum products sold to international petroleum to international carriers. So why can’t shell invoke that
exemption? SC says this exemption attaches to the international
carriers.
carriers. He disagrees on two grounds:
The SC reversed the CTA decision granting the refund/tax credit Alcohol, petroleum, etc. are products subject to excise tax. Excise tax
claim on the ground that the exemption attaches to the is imposed on the manufacturer or producer of the article or goods
international carriers, and not to the petroleum products. subject to excise tax.
So when the law exempts the sale of petroleum products to
[15] GENERAL PRINCIPLES OF TAXATION
legislative intent evincing that a tax statute should operate retroactively
international carriers, then that can only be invoked by the
person on whom the excise tax is imposed—manufacturer. should be explicit and perfectly clear. Lorenzo v. Posadas, 64 Phil. 353
For the international carrier to invoke the exemption, it While a law granting exemption from tax has no retroactive application
should be a manufacturer itself of the petroleum product. unless Congress has expressly so provided, where the words of the
Baka raw bitter pill to swallow if reversed on the same ground statute, however, point to an intention of the legislature to make an
exemption retroactive, subject to the fulfillment of certain conditions by
Ad Valorem Tax v. Specific Tax the grantees of the exemption, then the exemption may be availed of
retroactively by the persons that the law seeks to benefit. Commissioner
Ad Valorem Specific Taxes of Internal Revenue v. Botelho Shipping Corp., G.R. Nos. L-21633-34
In Botelho Shipping Corp., the respondents contracted to purchase
taxes that are based upon the value of taxes that are imposed per head, unit
the article or good subject to tax. or number, or by weight or volume and vessels from the Reparations Commission of the Philippines procured
which require no assessment beyond from Japan pursuant to the Philippines-Japanese Reparations
a listing and classification of the Agreement. When the vessels arrived in the Philippines, the Bureau of
subjects or articles to be taxed. Customs and the Bureau of Internal Revenue assessed the respondents
compensating tax (now value-added tax on imported goods) and refused
E.g., excise tax on alcohol products, E.g., excise tax on petroleum products
to reconsider their position, prompting respondents to appeal to the
cigarettes, (x% of NRP), automobiles (Php per liter/kg of volume capacity
(x% of manufacturer’s selling price or or weight, per kg., per metric ton), Court of Tax Appeals. While the appeal was pending, Republic Act No.
importer’s selling price), non-essential sweetened beverage tax (Php per liter 3079 amended Republic Act No. 1789 - the Original Reparations Act,
goods (x% of wholesale price or value of volume capacity). under which the aforementioned contracts with the buyers had been
used by BOC in case of imported executed - by exempting buyers of reparations goods acquired from the
goods), metallic and non-metallic Commission, from liability for the compensating tax. Consequently, the
mineral products (x% of actual market respondent buyers applied for “renovation” of their contracts for the
value of the gross output).
purpose of availing of the exemption.
This is a classic illustration of a retroactive application of a
National Tax v. Local Tax statue because it was clear from the statute itself that the
National Tax Local Tax Congress deemed it proper to state its retroactivity
The Commissioner challenged the retroactive application to respondents
of the exemption from compensating tax. The Supreme Court, however,
imposed by the national government, imposed by local governments, such held that Section 14 of Republic Act No. 1789, as amended by Republic
such as the income tax, value-added as the local business taxes, CTC, RPT, Act No. 3079, makes it "clear and explicit, that Congress intended to
tax, percentage tax, excise taxes, DST, and LTT imposed under the Local
benefit both those who purchased goods, including vessels, from the
estate tax, donor’s tax, and other Government Code of 1991.
internal revenue taxes. Reparations Commission both under the old law and the amendment
thereto, thus, meeting the first ground of appellant's contention that
retroactive application of a statute is not permitted unless Congress
itself intended it. G.R. Nos. L-21633-34, June 29, 1967, 126 Phil. 846-
Prospective Application of Tax Laws
853
A statute should be considered as prospective in its operation, whether
On the other hand, in Surigao Consolidated Mining Co., Inc. v. Collector
it enacts, amends, or repeals unless the language of the statute clearly
of Internal Revenue, G.R. No. L-14878, where the petitioner sought a
demands or expresses that it shall have a retroactive effect. The
refund of the amount of ad valorem tax it had previously paid on
[15] GENERAL PRINCIPLES OF TAXATION
minerals removed from its mines but allegedly lost in transit on account
of the war (World War II), the Supreme Court held that:
“[t]he application of a statute creating an exemption from
taxation to taxes already assessed depends upon whether it is
retrospective in its operation. Such a statute has no
retrospective operation, unless by the terms thereof it clearly
appears to be the intention of the legislature that the exemption
shall relate back to taxes which have already become fixed, as
a statute which releases a person or corporation from a burden
common to the whole community should be strictly construed.”
Petitioner in Surigao Consolidated Mining argued that since the law
condoned the taxes due from taxpayers who failed to pay their taxes, it
was unfair to deny this benefit to those taxpayers who promptly paid
theirs. The Supreme Court, however, pointed out that the condonation
referred to unpaid taxes only, and condonation of a tax liability is
essentially equivalent to, and is in the nature of, a tax exemption.
Consequently, condonation should be sustained only when expressed in
explicit terms by reason of the universal rule that “he who claims an
exemption from his share of the common burden of taxation must justify
his claim by showing that the legislature intended to exempt him by
words too plain to be mistaken.”
Imprescriptibility of Taxes
The right of the Government to assess and collect internal revenue taxes
levied under the National Internal Revenue Code are subject to
prescriptive periods prescribed in Sections 203 and 222 thereof.
Sections 203; 222
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as
provided in Section 222, internal revenue taxes shall be assessed within
three (3) years after the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the collection of such
taxes shall be begun after the expiration of such period: Provided, That in a
case where a return is filed beyond the period prescribed by law, the three
(3)-year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed by law
for the filing thereof shall be considered as filed on such last day.
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection
of Taxes.-
(a) In the case of a false or fraudulent return with intent to evade tax or of
failure to file a return, the tax may be assessed, or a proceeding in court for
the collection of such tax may be filed without assessment, at any time
within ten (10) years after the discovery of the falsity, fraud or omission:
Provided, That in a fraud assessment which has become final and executory,
the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for the collection thereof.
(b) If before the expiration of the time prescribed in Section 203 for the
assessment of the tax, both the Commissioner and the taxpayer have agreed
in writing to its assessment after such time, the tax may be assessed within
the period agreed upon. The period so agreed upon may be extended by
subsequent written agreement made before the expiration of the period
previously agreed upon.
(c) Any internal revenue tax which has been assessed within the period of
limitation as prescribed in paragraph (a) hereof may be collected by distraint
or levy or by a proceeding in court within five (5) years following the
assessment of the tax.
(d) Any internal revenue tax, which has been assessed within the period
agreed upon as provided in paragraph (b) hereinabove, may be collected by
distraint or levy or by a proceeding in court within the period agreed upon in
writing before the expiration of the five (5) -year period. The period so agreed
upon may be extended by subsequent written agreements made before the
expiration of the period previously agreed upon.
(e) Provided, however, That nothing in the immediately preceding and
paragraph (a) hereof shall be construed to authorize the examination and
investigation or inquiry into any tax return filed in accordance with the
provisions of any tax amnesty law or decree.
As a general rule, however, unless otherwise provided by the tax law
itself, taxes are imprescriptible. Commissioner of Internal Revenue v.
Ayala Securities Corporation, L-29485, Nov. 21, 1980, 189 Phil. 159,
where the Supreme Court reversed its earlier decision that the right of
the Government to assess the IAET has prescribed and ruled instead that
the NIRC then in force did not require the filing of a return for the 25%
surtax on improperly accumulated earnings, hence, the right of the
Commissioner to assess the IAET was not time-barred.
[15] GENERAL PRINCIPLES OF TAXATION
Earlier, in United Equipment & Supply Company vs. Commissioner of
Internal Revenue, CTA Case No. 1795, Oct. 30, 1971, aff’d by the
Supreme Court En Banc in G. R. No. L-35653, Resolution, October 25,
1972, the Supreme Court held that the provisions of sections 331 and
332 [now Sections 203 and 222] of the NIRC for prescriptive periods of
five (5) [now three (3) years] and ten (10) years after the filing of the
return do not apply to the tax on the taxpayer's unreasonably
accumulated surplus (IAET) under section 25 [now Section 29] of the
NIRC since no return is required to be filed by law or by regulation on
such unduly accumulated surplus on earnings.
Imprescriptibility of Tax
The Government may always assess deficiency of tax but if there is no
return stated by law for the specific tax then the principle of
imprescriptibility of tax will apply because generally the government
only has 3 years but if there is no return then the right of the
government to assess is imprescriptible.
The right of the government to assess internal revenue tax does not
prescribe
Doctrine of Equitable Recoupment
“Strictly, this common law doctrine to the effect that a claim for refund
barred by prescription may be allowed to offset unsettled tax liabilities
should be pertinent only to taxes arising from the same transaction on
which an overpayment is made and underpayment is due. The doctrine
finds no sound application to cases where the taxes involved are totally
unrelated.” VITUG & ACOSTA, TAX LAW AND JURISPRUDENCE 45 (2000)
In Collector v. University of Santo Tomas, 104 Phil. 1062, however, the
Supreme Court rejected altogether the said doctrine, saying that it was
not convinced of the wisdom and propriety thereof, and that it may work
to tempt both the collecting agency and the taxpayer to delay and
neglect their respective pursuits of legal action within the period set by
law.
Compensation or Set-Off
The Supreme Court has consistently held that taxes are not subject of
set-off or legal compensation.
In Philex Mining Corporation v. Commissioner of Internal Revenue, G.R.
No. 125704, the Supreme Court affirmed the CTA’s ruling that “for legal
compensation to take place, both obligations must be liquidated and
demandable. Liquidated debts are those where the exact amount has
already been determined.
In the instant case, the claims of Philex for VAT refund is still
pending litigation, and still has to be determined by the CTA. A
fortiori, the liquidated debt of Philex to the government cannot,
therefore, be set-off against the unliquidated claim which Philex
believed it exists in its favor.
The SC in Philex Mining said further:
“In several instances prior to the instant case, we have already
made the pronouncement that taxes cannot be subject to
compensation for the simple reason that the government and
the taxpayer are not creditors and debtors of each other.
There is a material distinction between a tax and debt.
Debts are due to the Government in its corporate capacity,
while taxes are due to the Government in its sovereign
capacity. We find no cogent reason to deviate from the
aforementioned distinction.” Citing Cordero v. Gonda, 18 SCRA
331 (1966) and Commissioner of Internal Revenue v. Palanca,
18 SCRA 496 (1966)
in Republic v. Mambulao Lumber Co., G.R. No. L-17725, February 28,
1962, 6 SCRA 858,
respondent Mambulao Lumber Co. paid to the Government
reforestation charges in the amount of P9,127.50 as a timber
licensee or concessionaire which shall form part of a fund to be
known as the Reforestation Fund, the same to be expended by
the Director of Forestry, with the approval of the Secretary of
Agriculture and Natural Resources, for the reforestation or
afforestation, among others, of denuded areas which, upon
investigation, are found to be needing reforestation or
afforestation. Alleging that the Government did not disburse the
said fund paid by respondent for the purpose for which it was
intended, respondent asserted that it should be set off against
the forest charges in the amount of P4,802.37 that it owed the
Government and sought to be collected from it pursuant to the
provisions of the NIRC. The Supreme Court held that such
compensation or set-off is not permitted by law as the
respondent and the Government are not mutually creditors and
debtors of each other.
[15] GENERAL PRINCIPLES OF TAXATION
In contrast, however, the SC in Domingo v. Garlitos, G.R. No. L-18994, and all government functions would be paralyzed.” Thus,
June 29, 1963, 8 SCRA 443, allowed compensation or set-off since it Section 291 (now Section 218 ) provides that no injunction shall
appears that both the claim of the Government for inheritance taxes and be granted to restrain the collection of taxes. The Court also
the claim of the intestate for services rendered have already become reasoned that if no injunction is allowed, except as provided by
overdue and demandable as well as fully liquidated. Hence, the SC held law such as in Republic Act No. 1125 (CTA Charter), in judicial
that “[c]ompensation, therefore, takes place by operation of law, in proceedings, more so where the challenge to an assessment is
accordance with the provisions of Articles 1279 and 1290 of the Civil still in the administrative level. The Court even mockingly said,
Code, and both debts are extinguished to the concurrent amount.” In the “to require the petitioner to actually refund to the private
said case, the estate owed the Government estate and inheritance taxes, respondent the amount of the judgment debt, which he will later
charges and penalties amounting to P40,058.55 pursuant to a final and have the right to distrain for payment of its sales tax liability is
executory order issued by the Court of First Instance of Leyte in special in our view an idle ritual.”
proceedings No. 14 entitled "In the Matter of the Intestate Estate of the In Commissioner of Internal Revenue v. Court of Tax Appeals,
Late Walter Scott Price”. In order to enforce the claim against the estate, G.R. No. 106611, July 21, 1994, 234 SCRA 348, 357 the
the fiscal petitioned the lower court for the execution of the judgment. Supreme Court also allowed offsetting of taxes in a tax refund
The lower court however denied the petition on the ground that the case where there was an existing deficiency income and
execution is not justifiable as the Government is indebted to the estate business tax assessment against the taxpayer. The Supreme
under administration in the amount of P262,200 for services rendered Court said that “to award such refund despite the existence of
by the administratrix Simeona K. Price. that deficiency assessment is an absurdity and a polarity in
It appears, however, in Garlitos that compensation might not be conceptual effects” and that “to grant the refund without
proper here as the inheritance and estate taxes were the liability determination of the proper assessment and the tax due would
of the estate while the amount owing from the Government was inevitably result in multiplicity of proceedings or suits.
owed not to the estate but to the Leyte Cadastral Survey, Inc.,
represented by the administratrix Simeona K. Price.
Baniqued : In my opinion, however, the answer is “no” because the offsetting
May the BIR offset a pending deficiency assessment against an
deprives the taxpayer of due process considering that the deficiency
approved claim for refund or tax credit?
assessment will have to be acted upon independently of the refund claim, and
Commissioner of Internal Revenue v. Cebu Portland Cement
defenses raised by the taxpayer will have to be addressed. If offsetting were
Company, 156 SCRA 535, 541 (1987), answered this in the
automatically allowed, the right of the taxpayer to protest the assessment is
affirmative. The said case involved a judgment debt
rendered nugatory.
representing overpayment of ad valorem taxes on cement
produced and sold by the taxpayer that the CTA ordered the CIR
to refund to the taxpayer but which the CIR offset against an In BPI Securities Corp. v. CIR, CTA Case No. 6089, Aug. 22,
outstanding sales tax deficiency assessment that the taxpayer 2002, the Court of Tax Appeals held that the taxpayer’s
protested but which protest was pending resolution by the CIR. entitlement to a refund may not be offset by the preliminary
Permitting the offsetting, the SC explained, “the argument that finding of the BIR examiners that the taxpayer owed the
the assessment cannot as yet be enforced because it is still Government deficiency internal revenue taxes especially so if
being contested loses sight of the urgency of the need to collect such findings were not even in the form of a formal assessment
taxes as “the lifeblood of the government.” The Court added, “if yet but, instead, embodied only in a memorandum report of the
the payment of taxes could be postponed by simply questioning investigating revenue officers.
their validity, the machinery of the state would grind to a halt Similarly, in A. Soriano Corp. v. CIR, CTA Case No. 5351, Oct. 27,
1998, the Tax Court held that the taxpayer’s claim for refund of
[15] GENERAL PRINCIPLES OF TAXATION
unutilized creditable withholding taxes may not be offset or
defeated by preliminary findings of a revenue officer proposing
to assess the taxpayer deficiency internal revenue taxes.
In FNCB Finance v. CIR, CTA Case No. 3717, May 10, 1993 , the
Tax Court sounded even more emphatic about the arbitrariness
and injustice of offsetting a refund claim against a proposed
deficiency assessment in an amount even much larger than the
amount of excess taxes sought to be refunded. Said the Court:
”The act of respondent smacks of whim or caprice.
There was arbitrary disallowance of deductible
expenses to create a deficiency tax. No chance was
even accorded to petitioner to rebut the findings. The
element of due process was sorely lacking. x x x An
assessment fixes and determines the tax liability of a
taxpayer. Without an assessment, there is no debt from
taxpayer, and there is no obligation on his part which
can be enforced in an action. Accordingly, respondent
cannot be allowed to apply the tax credit claimed
against the alleged deficiency tax when no assessment
has been made. ”
The Supreme Court in SMI-ED Phil. Technology, Inc. v.
Commissioner of Internal Revenue, G.R. No. 175410, Nov. 12,
2014, 739 SCRA 691, 707, held that “the question of tax
deficiency is distinct and unrelated to the question of taxpayer’s
entitlement to refund. Tax deficiencies should be subject to
assessment procedures and the rules of prescription.
CGB: It is basic that the taxpayer has the right, in observance of
due process, to challenge any deficiency assessment issued by
the BIR. The process of issuing a final assessment notice and
protesting the same constitutes an administrative proceeding
separate and distinct from the refund claim, especially so when
the refund claim and the assessment refer to different taxable
periods. It is possible that the Commissioner may eventually
cancel deficiency assessment, in whole or in part, if he finds the
protest meritorious, in which case offsetting the same while the
protest is pending resolution by the Commissioner or pending
reinvestigation against an approved refund claim of the same
taxpayer is premature and improper.
Amnesty, Compromise and Abatement
Amnesty
Once a taxpayer has availed of amnesty, he is generally immune from
the payment of taxes and penalties in addition thereto, and the
appurtenant civil, criminal or administrative liability or fine arising from
the failure to pay any and all internal revenue taxes for the period
covered. Consequently, the BIR may no longer examine the books of
accounts and other records of the taxpayer for the period covered by the
amnesty.
The Supreme Court explained the nature of a tax amnesty:
“A tax amnesty is a general pardon or the intentional
overlooking by the State of its authority to impose penalties on
persons otherwise guilty of violation of a tax law. It partakes of
an absolute waiver by the government of its right to collect what
is due it and to give tax evaders who wish to relent a chance to
start with a clean slate. A tax amnesty, much like a tax
exemption, is never favored or presumed in law. The grant of a
tax amnesty, similar to a tax exemption, must be construed
strictly against the taxpayer and liberally in favor of the taxing
authority.” LG Electronics Philippines, Inc. v. Commissioner of
Internal Revenue, G.R. No. 165451, Dec. 3, 2014, 743 SCRA
511; see also Philippine Banking Corporation v. Commissioner
of Internal Revenue, 577 SCRA 366 (2009), Metropolitan Bank
and Trust Company (Metrobank) v. Commissioner of Internal
Revenue, 595 SCRA 234 (2009) and Asia International
Auctioneers, Inc. v. Commissioner of Internal Revenue, 682
SCRA 49 (2012)
The coverage of an amnesty would at times exclude failure of a
withholding agent to remit what it has already withheld but not the
failure itself of the withholding agent to withhold the tax.
Also normally excluded from the coverage are tax cases subject of final
and executory judgment by the courts.
Failure to withhold — may be covered
Failure to remit the withheld taxes to BIR — cannot be covered by Amnesty
Compromise
[15] GENERAL PRINCIPLES OF TAXATION
Section 204 of the NIRC authorizes the Commissioner to compromise
the payment of any internal revenue tax when :
1. a reasonable doubt as to the validity of the claim against the
taxpayer exists, or
2. the financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax.
As a general rule [GR] however, the compromise offer must not be less
than forty (40%) percent of the basic tax assessed,
with the exception of financial incapacity on the part of the
taxpayer where the latter may offer at least ten (10%) percent
of the basic tax assessed.
Any compromise offer that is less than the minimum percentage
mentioned above or where the basic tax assessed is more than One
Million (Php1,000,000.00) Pesos requires the prior approval by a
majority of all the members of the Evaluation Board composed of the
Commissioner of Internal Revenue and the four (4) Deputy
Commissioners.
Rev. Regs. No. 9-2013, May 10, 2013, amending Rev. Regs. No. 30-
2002,
requires payment of the compromise offer upon filing of the
application for compromise settlement. If the application is
denied, the amount paid upon filing of the application shall be
deducted from the total outstanding tax liabilities.
Furthermore, Rev. Mem. Circular No. 34-2014, April 1, 2014,
clarifies that an assessment based on the “best evidence
obtainable” does not necessarily constitute a “doubtful
assessment” within the purview of Rev. Regs. No. 30-2002.
Abatement
Abatement
The Commissioner may abate or cancel a tax liability if :
1. the tax or any portion thereof appears to be unjustly or
excessively assessed, or
2. the administration and collection costs involved do not justify
the collection of the amount due.
The Commissioner had in countless occasions in the past abated or
condoned the payment of interest, surcharge and compromise penalties
in cases where taxpayers relied on previous rulings that the
Commissioner subsequently revoked, where there was confusion
resulting from difficult questions of law, or where there were conflicting
interpretations or understanding of certain tax provisions.
The Commissioner, for instance, invoked her abatement power when
she waived the imposition of surcharges, interests and compromise
penalties on Filipino and some alien employees of foreign governments,
embassies, diplomatic missions and international organizations who
erroneously believed that they were exempt from income tax just like
their employers and subsequently availed of the abatement. Rev. Regs.
No. 7-2013, April 29, 2013, as amended by Rev. Regs. No. 8-2013, May
9, 2013
Interpretation and Construction of Tax Statutes
A. Strict Interpretation
Tax burdens are not to be imposed, nor presumed to be imposed
beyond what the statute expressly and clearly provides, tax
statutes that levy or impose taxes being construed strictissimi
juris against the Government and liberally in favor of the
taxpayer. The revenue authorities must first show clearly who
are covered by the tax imposition because tax cannot be
imposed without clear and express words for that purpose. It is
a hornbook principle in the interpretation of tax laws that a
statute will not be construed as imposing a tax unless it does so
clearly, expressly and unambiguously. VITUG & ACOSTA, supra,
citing Commissioner of Internal Revenue v. Court of Appeals,
Central Vegetable Mfg. Co., Inc. and CTA, G.R. No. 122161, Feb.
23, 1999.
B. Liberal Interpretation
On the other hand, tax exemptions (or equivalent provisions
such as tax amnesties and tax condonations), including
incentives and preferential tax treatment, are not presumed,
and, when granted, are strictly construed against the taxpayer,
grantee or beneficiary.
As mentioned earlier, there is no tax by silence but, where the
law levies a tax, so also must the tax exemption be explicit in
the law. Tax exemption may not be anchored solely on the
ground of equity, though equity can be a basis for an exemption
pursuant to a law enacted by Congress. VITUG & ACOSTA, supra,
[15] GENERAL PRINCIPLES OF TAXATION
citing Floro Cement v. Gorospe, 200 SCRA 480, Luzon
Stevedoring Co. v. Court of Tax Appeals, G.R. No. 30232, July 29,
1988, 163 SCRA 647, and several other cases.
Taxpayer’s Suit
A. Requirement of Actual Case or Controversy
The SC will not exercise its power of judicial review unless there
is an actual case brought before it calling for the exercise of its
judicial power. As the eminent lawyer-priest and distinguished
constitutional law professor, Fr. Bernas, wrote:
x x x the Court has no authority to pass upon issues of
constitutionality through advisory opinions, and it has no
authority to resolve hypothetical or feigned constitutional
problems, or friendly suits collusively arranged between parties
without real adverse interests. Nor will the Court normally
entertain a petition touching on an issue that has already
become moot because then there would no longer be a “flesh
and blood” case for the Court to resolve. JOAQUIN G. BERNAS,
S.J., THE 1987 CONSTITUTION OF THE REPUBLIC OF THE
PHILIPPINES: A COMMENTARY 938 (2003 Ed.)
An actual case or controversy exists when there is a “conflict of
legal rights” or “an assertion of opposite legal claims
susceptible of judicial resolution. Ibid.
In Manila Memorial Park, the petitioners challenged the
constitutionality of the tax deduction scheme adopted for the
senior citizens discount provided in RA 9257 and its
implementing regulations.
B. Requirement of Legal Standing
A person or entity has the requisite standing to challenge the
validity or constitutionality of a law, regulation, decree, order,
instruction, ordinance or any governmental act or issuance, for
that matter, only if he has a personal and substantial interest in
the case such that he has sustained, or will sustain, direct injury
as a result of its enforcement. BERNAS, supra, at 940, citing
People v. Vera, 65 Phil. 56, 89 (1937) and Macasiano v.
National Housing Authority, 224 SCRA 236 (1993)
In order for a person or entity to have legal standing, therefore,
it must be shown that :
1. the petitioner has suffered, or will suffer, injury,
2. the injury is attributable to the law, regulation, decree,
order, instruction, ordinance or governmental act or
issuance challenged, and
3. the injury is redressable by the remedy sought by the
petitioner. Ibid.
In Ferrer, Jr. v. Bautista, G.R. No. 210551 , June 30, 2015, 762
Phil. 233,
the Supreme Court held that a property owner in
Quezon City had legal standing to assail the validity and
constitutionality of a Social Housing Tax and Garbage
Fee levied by the Quezon City Government pursuant to
ordinances enacted by the Sanggunian. The Supreme
Court noted that respondent local government officials
did not dispute that petitioner was a registered owner
of a residential property in Quezon City and that he paid
property tax which already included the social housing
tax and the garbage fee. Thus, petitioner had a
substantial right to seek a refund of the payments he
made and to stop future imposition. The Court added
that while he was a lone petitioner, petitioner’s cause
of action to declare the validity of the subject
ordinances is substantial and of paramount interest to
similarly situated property owners in Quezon City.
NOTE:
1. In several cases to-date, the Supreme Court has
allowed a taxpayer to challenge a law, regulation,
decree, order, instruction, ordinance or any
governmental act or issuance even if the taxpayer has
not sustained, or will not sustain, a direct injury as a
result of the implementation or enforcement of such
law, regulation, decree, order, instruction, ordinance or
governmental act or issuance, if there is a showing that
there is involved an expenditure of public funds for the
enforcement of an unconstitutional law, regulation,
decree, order, instruction, ordinance or governmental
issuance.
2. The theory is that the expenditure of public funds by an
officer of the State for the purpose of implementing or
[15] GENERAL PRINCIPLES OF TAXATION
enforcing an unconstitutional law or government
issuance constitutes a misapplication of such public
funds, which a taxpayer may enjoin in a legal action.
E.g., Land Bank of the Philippines v. Cacayuran, G.R. No.
191667, April 17, 2013, 696 SCRA 861, 869-870,
where the Municipality of Agoo, La Union mortgaged in
favor of Land Bank the Agoo Public Plaza [a property of
public dominion], a portion of its internal revenue
allotment (IRA), and the monthly income from a
proposed project as collateral for loans obtained from
Land Bank for the purpose of redeveloping the plaza
into a commercial center. The Supreme Court declared
the loans and the resolutions passed by the
Sanggunian void for being ultra vires and held the
officers who authorized the passage of the resolutions
personally liable for the loans.
In Demetria v. Alba, G.R. No. 71977, Feb. 27, 1987, 232 Phil.
222-232,
the Supreme Court upheld the taxpayer’s standing to
challenge Section 44 of the Budget Reform Decree of
1977 which they claim constitutes an illegal transfer of
public moneys.
In Maceda v. Macaraig, Jr., 197 SCRA 771,
petitioner alleged that he had the requisite legal
standing to question the legality of the tax refund to the
National Power Corporation (NPC) by way of a tax credit
certificate and the use of the said tax credit certificate
in payment of NPC’s tax and customs duty liabilities to
the Government. Petitioner argued that, as a taxpayer
and a duly-elected senator of the Philippines, he had
the standing to assail what he believed was a case of
illegal expenditure of tax money.
A member of Congress also has legal standing to challenge the
validity or constitutionality of a BIR regulation that, in his
opinion, amounts to usurpation of the legislative power of
Congress. Purisima v. Lazatin, G.R. No. 210588, Nov. 29, 2016,
811 SCRA 205
In Alliance of Quezon City Homeowners’ Association, Inc. v.
Quezon City Government, G.R. No. 230651, Sept.18, 2018, 880
SCRA 349, petitioner association assailed the validity and
constitutionality of the 2016 Ordinance passed by the
Sangguniang Panlungsod of Quezon City. The assailed
ordinance approved the revised schedule of FMVs of all lands
and Basic Unit Construction Cost for buildings and other
structures, whether for residential, commercial, and industrial
uses, and set the new assessment levels at five percent (5%) for
residential and fourteen percent (14%) for commercial and
industrial classifications. The revised schedule increased the
FMVs of real properties in QC indicated in the 1995 Ordinance
by about 500% to supposedly reflect the prevailing market price
of real properties in QC.
The SC upheld the Quezon City Government and denied
the petition on the ground that Alliance lacked the
capacity to sue in its own name. Alliance in fact
admitted that it had no juridical personality,
considering the revocation of its SEC Certificate of
Registration and its failure to register with the HLURB
as a homeowner's association.
Its belated assertion that the members of its Board of
Trustees, who were owners of real properties in QC,
filed the petition in their own personal capacities
proved unavailing since the Supreme Court noted that
the said trustees did not join the action as petitioners.
Distinguish Alliance of Quezon City Homeowners’ Association,
Inc. from Samahan ng mga Progresibong Kabataan (SPARK) v.
Quezon City, G.R. No. 225442, August 8, 2017, where the
Supreme Court decided to give due course to the petition
despite the lack of legal capacity to sue of petitioner SPARK
(also an unincorporated association like Alliance) because
individuals or natural persons joined as co-petitioners in the suit,
unlike in Alliance of Quezon City Homeowners Association.
Doctrine of Transcendental Importance
The Courts, especially the Supreme Court, will refrain from entertaining
any legal action challenging the constitutionality of a law or regulation
unless a justiciable controversy is presented before it. The Supreme
Court, however, through the years has declined to apply the rule rigidly if
[15] GENERAL PRINCIPLES OF TAXATION
it determines that the case involves a matter of transcendental
importance, or imbued with significant public interest.
Transcendental public interest requires that the substantive issues be
met head on and decided on the merits, rather than skirted or deflected
by procedural matters, e.g., wrong remedy, wrong mode of appeal, non-
exhaustion of administrative remedies, legal standing, hierarchy of
courts, etc.
Tatad v. Secretary of the Department of Energy,
the SC sustained the legal standing of petitioners therein to
challenge the constitutionality of Republic Act No. 8180,
otherwise known as the Oil Deregulation Law, declining to rigidly
apply the rule on a petitioner's locus standi.
Alliance of Quezon City Homeowners’ Association, Inc. v. Quezon City
Government,
where the SC dismissed the respondent Quezon City
Government’s arguments that the petition was procedurally
infirm because, among others, Alliance:
a. failed to exhaust its administrative remedies under the
LGC, which were to question the assessments on the
taxpayers' properties by filing a protest before the City
Treasurer, as well as to assail the constitutionality of
the 2016 Ordinance before the Secretary of Justice;
b. violated the hierarchy of courts when it directly filed its
petition before the Supreme Court; and
c. was not a real party-in-interest because it did not own
any real property in QC to be affected by the 2016
Ordinance.
In Ferrer, Jr. v. Bautista,
the Supreme Court took cognizance of a petition filed by a
property owner in Quezon City who assailed the validity and
constitutionality of a Social Housing Tax and Garbage Fee levied
by the Quezon City Government notwithstanding that the
petition for certiorari directly filed with the Supreme Court was
improper, a petition for declaratory relief being the proper
remedy but over which the Supreme Court has only an appellate
jurisdiction.
Nonetheless, the Supreme Court treated the petition as one of
prohibition or mandamus, over which the Court may exercise
original jurisdiction.
Doctrine of Operative Fact
As a general rule, a void law or administrative act cannot be the source
of legal rights or obligations. Article 7 of the Civil Code states: "Laws are
repealed only by subsequent ones, and their violation or non-observance
shall not be excused by disuse, or custom or practice to the contrary.
When the courts declared a law to be inconsistent with the Constitution,
the former shall be void and the latter shall govern. Administrative or
executive acts, orders and regulations shall be valid only when they are
not contrary to the laws or the Constitution."
[GR] a judicial declaration of invalidity may not necessarily obliterate all
the effects and consequences of a void act prior to such declaration.
[EXP] The doctrine of operative fact, however, is an exception to
the general rule. [Commissioner of Internal Revenue v. San
Roque Power Corp., G.R. Nos. 187485, 196113 & 197156
(Resolution), October 8, 2013, 719 Phil. 137-205]
The case of Mandanas v. Ochoa, Jr., G.R. Nos. 199802 & 208488, July
3, 2018,
a recent illustration of how the Supreme Court applied the
doctrine of operative fact to decline a retroactive application of
its declaration of nullity or unconstitutionality of a statute
relating to how exactly the internal revenue allotment (IRA) of
LGUs is to be computed.
Petitioner Mandanas, et al. alleged therein that certain
collections of national internal revenue taxes (NIRT) by the
Bureau of Customs (BOC), specifically, excise taxes, value added
taxes (VATs) and documentary stamp taxes (DSTs), have not
been included in the base amounts for purposes of computing
the IRA. Mandanas averred that such taxes, even though
collected by the BOC, should form part of the base from which
the IRA should be computed because they constituted NIRTs.
Consequently, LGUs should be entitled to the release of the
additional amount of P60,750,000,000.00 as their IRA for FY
2012. Lastly, and for the same reason, the LGUs should also be
given their unpaid IRA for FY 1992 to FY 2011, inclusive,
totaling P438,103,906,675.73.
[15] GENERAL PRINCIPLES OF TAXATION
Petitioner Enrique Garcia, Jr., on the other hand, argued that, consequences that cannot always be erased, ignored or
based on Sec. 6, Art. X the 1987 Constitution, the just share of disregarded. In short, it nullifies the void law or executive act but
the LGUs shall be computed on the basis of all national taxes. sustains its effects. It provides an exception to the general rule
He thus averred that the insertion by Congress of the words that a void or unconstitutional law produces no effect.
internal revenue in the phrase national taxes found in Section
284 of the LGC diminished the base for determining the just
share of the LGUs, and, therefore, unconstitutional. He also
assailed, for the same reason, the validity and constitutionality
of the exclusion of certain taxes and accounts pursuant to or in
accordance with special laws. Furthermore, Garcia asserted
that value-added taxes and excise taxes collected by the BOC
should be included in the computation of the IRA.
He thus prayed that the respondents be ordered to compute the
IRA of LGUs on the basis of all national tax collections, and
thereafter distribute any shortfall to the LGUs.
Section 6, Article X of the Constitution reads, “Local government
units shall have a just share, as determined by law, in the
national taxes which shall be automatically released to them.”
Section 284. Allotment of Internal Revenue Taxes. — Local
government units shall have a share in the national internal
revenue taxes based on the collection of the third fiscal year
preceding the current fiscal year as follows:
a. On the first year of the effectivity of this Code, thirty
percent (30%);
b. On the second year, thirty-five percent (35%); and
c. On the third year and thereafter, forty percent (40%).
xxx
The Supreme Court ruled that, indeed, Congress exceeded its
constitutional boundary by restricting the base for computation
of the just share of the LGUs to national internal revenue taxes,
instead of the much broader base of national taxes, which also
includes customs duties collected by the BOC.
However, in denying the prayer of petitioners for retroactive
distribution to the LGUs of the share that they should have
received pursuant to a proper computation of the base of the
IRA, the Supreme Court invoked the “doctrine of operative fact”.
The doctrine of operative fact recognizes the existence of the
law or executive act prior to the determination of its
unconstitutionality as an operative fact that produced
[15] GENERAL PRINCIPLES OF TAXATION
Recap of Income Taxation
I. Structure and definitional concepts
Principles
Recovery of deductive items
Discharge of indebtedness
Income from illegal sources
Stock dividends not being taxable because there’s no realization
+++ other items
Remember: illustrative examples as to how each of these structural and
definitional concepts would apply to real life situations
Income taxation was classified into:
Compensation income; Income derived from T/B, profession;
Passive income
For salaries and compensation income - you can’t claim
deduction from gross compensation income; you are taxable on
the entire amount of salaries; excluded: employee benefits
(that’s why we discussed 13th month pay, convenience of
employer, de minimis, separation benefits, minimum wage,
etc.)
Employer deducts withholding tax, with the end of the year, the
tax withheld from salaries is the income tax liability you have to
pay on april 15 of the following year (called substituted filing)
In lieu of the employee filing an income tax return, the
employer instead files the withholding tax return; and
the latter will take the place of the former
Tax of salary wage is sec 24A of the NIRC
Indiv deriving income from T/B, profession taxed based on net
income; get the benefit of income deductions UNLIKE salary of
an individual
Withholding taxes - where you are a consultant
GR: client will withhold a withholding tax on payments
made to you and that is called a creditable withholding
tax bec the income you receive as a lawyer or
professional fees you receive or may paupahan ka ng
condo; your tenants who withhold the 5 or 10% you the
income recipient will report those ----
Tax rates you pay is in acc to Sec. 24A; except that you
have the option to pay the 8% if you’re a self-employed
individual like a lawyer and gross receipts does not
exceed 3M, then you have the benefit of opting to pay
the 8% fixed tax based on gross rates without the
benefit of deductions. (no more taxed on the basis of
Sec. 24A)
Items of passive income - are generally subject to a final
withholding tax. As desting from creditable withholding tax:
Items of passive sub fwt
II. Gains from Dealings and Properties
Gains from dealings in property
GR: Amount realized less(-) basis = gain or loss will apply
1. For purposes of determining gain or loss from sales or
exchanges of property, this formula generally applies.
Whether selling a land or automobile.
Shares of Stock
GR of Shares — 15% based on Shares not listed nor traded in
Net Capital Gain Stock Exchange —1%
2. 15% applicable rate of NCG. You’re selling shares of
stock. Subject to CGT based on the net capital
gain[NCG]; since the tax is based on the gain, then the
formula will apply.
EXC: Sale of shares of stock that are listed and
traded in the stock exchange. Because the tax
is NOT based on the gain this time. Just like the
sale of rela property classified as a capital
asset. NOT based on the gain.
Sale or exchange of capital assets holding
period applies.
EXC:
1. Youre selling a real property cap asset, this from does
not apply. You are still taxable at 6% whether indiv or
corporation kahit magka gain or loss ka. Basta bayad
ka lagi ng 6% provided that the real property subject to
he sale is a real capital asset.
[15] GENERAL PRINCIPLES OF TAXATION
2. Sale of shares of stock listed and traded in the stock
exchange the tax is 1%. The formula does not apply
because the tax is not based on the gain.
Holding period
Holding period does not apply where the sale involves:
1. Real property classified as capital asset
2. Shares of stock of a domestic corporation
Baniqued’s Bar Exam 2018 question - Shares of stock being
sold in a foreign corporation, obviously a capital asset if held for
investment —> in which case the holding period will apply
Nonresident aliens
Sec. 25
If you’re an alien + resident, taxable like you and me.
Sec. 24 - taxed like a Filipino citizen + resident; you’re
under graduated rates
Alien + Non res (sec. 25)
Engaged in t/b - taxed like Fil cit res (Sec. 24A rates;
items of passive income)
Not engaged in t/b - 25% based on gross amount; AND
this is a final withholding tax. Kasi hindi na siya
magrereport ng income or magfifile ng income tax
return for that matter.
Corporation - Sec. 27
Domestic corp - 20% or 25% CIT
Maliit + net taxable income does not exceed 25M total
assets does not exceed 100M - 20%
Otherwise, 25% CIT
Items of passive income that apply to indiv applies also to corp
Royalty - 20%
Sells real property classified as cap aset - 6% like indiv
Sells share of domestic corp - 15% based on net capital
gain
Shares are traded in stock exc - 1%
Domestic Intercompany dividends — Dividends paid by
another domestic corporation has NO TAX
Foreign corporation - Sec. 28
T/B in PH - then it’s a resident foreign corporation
GR: taxed like a domestic corp
EXC: 20% does NOT apply to a resident foreign
corporation. Only 25%.
Branch profits remittance tax - applies to RESIDENT
foreign corporation or foreign corp doing business in
the PH
Don’t discuss this when the subject taxpayer is
a NON RESIDENT FOREIGNCORP. Because by
definition this does not do business in the PH,
so how cajn you have a branch in the PH?
15% tax.
Don’t confuse this with dividends. Remittance
of branch profits to its head office
Not all remittances of branch profits are subj
to BPRT. Enterprise registered with freeport
zones or economic zones have NO BPRT.
Tax pairing - NON-RESIDENT foreign corporation
So don’t apply the tax pairing provision hen the
receipitnet of the dividend income is a resident
foreign corporation. Because it’ll be like a
inter-company dividend na not subject to tax.
Don’t apply this when the taxpayer who
receives div income is
Applies only when the recipient of the dividend
income is an non-resident foreign corporation
NEVER when the dividend income recipient is
an non-resident alien individual. No
counterpart provision for a non-resident alien.
NO eBENEFIT OF GROSS DEDUCTIONs
Nonres aliens not engaged in trade or business
Nonres corp
Both are taxable on gross amount
III. Income Derived from PH Source (source rules)
Determine the status of the person, source of the income
Income receipt is non res alien t/b or not; res foreign corp or
non-res foreign corp
[15] GENERAL PRINCIPLES OF TAXATION
If not engaged in t/b as an alien or corp, you’re taxable on the
gross amount without the benefit of tax deduction
Alien ka, dapat taxed only on ph source
GR: Others are taxable on net income
EXC: Non res
Gross sales/receipts - always your starting point less cogs less
discounts and allowance = gross profit or gross income
Never confuse gross profit/income[dito deductible
yung costs] vs gross revenues
IV. Sales and Exchanges of Property
Instances when the gain or loss even if you use the formula amt realize
- basis = gain/loss; the gain/loss is not subject to tax or not deductible.
This pertains to non-recognition transactions.
Non-recognition transactions
Transfer of prop in exch for shares of stock which results to the
control of the maximum of 5 transferors, wheter natural or corp
1. One transferor along with more transferor (not exceeding four,
a total of five), as a result, the transferors gain control over the
corp
A,B, C, D, indivs or corp, they transfer one land each to
an existing corporation. They receive shares of stock. If
ABCD and E after the transfer of property to corp X
acquire at least 51% of the issued capistock of X, then
no gain or loss shall be recognzied. This is an asset for
shares swap.
EX. If the transferee corp is NOT an existing corp, so a
new corp about to be organized. Your parents have a
property and sell it now, malaki babayaran nila na tax
= 35% tapos may VAT pa. TO avoid that, they transfer
this to a new corp in exchange for stock, thus owning
100% of the corporation.
No acquisition of control, then it’s a fail for share swap.
No non-recog transfer. The gain/loss shall be taxable or
recognized.
2. Statutory merger
Happens to least two corporations, and one corporation
survives.
Absorbed corporations end up own shares of the
surviving corporation (continuity of interest)
No control required
For a valid merger, there must be a valid business
purpose. So if the purpose is to avoid tax, then this will
probably not be approved.
3. Consolidation
All the parties to the consolidation will cease to exist
All the assets and liabilities of the absorbed entities will
transfer to the new corporation
4. De Facto Merger
One corp acquires sub all the assets of another
corporation. Kapalit, the shareholders of the acquired
corporation ay tatanggap ng shares of the acquiring
corporation
If less than 80% assets is acquired, then it’s not a de
facto merger.
Because “substantially all of the assets” means at least
80% of all the assets
Then the rest of the assets may still exist, unlike in a
merger or consolidation
There must also be a bona fide business purpose
CREATE Law intro a BIRI org. One corp acquires stock
of another corporation. In acquiring the stock of
another corp, it doesn’t mean substantially all.
Indiv A owns company X 100%. Y acquires 100
of the shares of X from A. A receives shares of
stock from Y. Is this a non-recognition
transaction?
This is an acquisition of stock in exchange for
stock. After the acquisition of stock in X, did Y
acquire control over X? Yes. Because he
bought all the stock.
Is this a BIRI org? Yes. Because now X will own
all the stock of corp Sec. 40-C-2-B.
1. One corp acquires stock of another
corp
2. In exchange, the corp issues its own
stock
[15] GENERAL PRINCIPLES OF TAXATION
3. After the acquisition, the acquiring
corp acquires control of such corp
whose shares are acquired by it
A, the shareholder of X, receives shares from
Y, which represents at least 51% of the issued
capital stock of Y. is it still a biri org? Yes.
Can it be an asset for shares swap? Yes. There
can be an overlap
1. One or more transferor
2. Transfer shares
3. Solely for stock
4. Acquired 51%
A Corpoation owns 100% of X Corporation. Y
wants to acquire that 100%. So X now will be
owned 100% by Y. A owns 30% of Y. Is this still
a biri org? Yes.
Is it also a siri org? Yes because it can also
overlap. Sec. 40-C-C-2-C
Y acquires substnatially all the assets of A. Or
the shares A owned in X. In exchange, Y issued
shares representing 51% of Y. Asset for share
swap? Yes.
V. Tax Arbitrage [check NIRC}
You have to reduce the deduction for interest
Do not make the mistake of using 20% — they reduce it based on the
interest
You reduce by an amount equivalent to 20% based on the income
subject to Final Tax.
VI. Clarification about MCIT
Applies to both resident foreign corp
Non-resident Foreign Corp (Sec 28b)
Not doing bus in PH, taxable at 25% like a non-resident alien not
engaged in T/B in the PH. taxed on gross amount wo benefit of
deductions
EXC: special tax rates (MEMORIZE)
Cinematographic film owners
Owners of vessels, aircraft, machineries of equipment
VII. Remittance and Branch Discussion
Non-resibdent foreign corporation — not doing business in the Ph, kaya
no branch profit remittance tax
Resident foreign corporation — apply branch profit remittance tax
Tax Sparing applicable to non resident foreign corporation ; never apply
if alien individual
Resident foreign corporation just like intercompany receiving dividend—
not subject to tax
Non resident foreign receiving from Filipino corporation — apply tax
sparing
If not applicable the 25%
Do not apply tax sparing when the tax payer who receives dividend
income is a non resident alien who is not doing t/b in Ph
Branch profit remittance 15% tax —> remittace of dividends of domestic
corp to non resident foreign corp
Not all remittance would be subject to BPRT exp PEZA
registered or economic zones no BPRT
VIII. Registered Business Enterprises ***
IX. Clarification about Withholding tax
GR : Client of the lawyer will withhold tax —> creditable withholding tax
against the other party
Creditable WIthholding Tax Final Withholding Tax
You the income recipient are still Item of income that has been
required to report the income subj to FWT you no longer record
subj or include the computation of the
gross income. Di mo na isasali to
Except the tax withheld by the sa income ta return
client will be deducted from the
tax payable/due Kung ano nawithhold ng nagbyad
sayo, yun na yung tax mo. Wala
ka nang babayaran iba.
Here need mo pa ideclare yung example :
prof fees mo, rental fees as The dividends given to
lessor you no need to report.
The royalty given to you
like passive income no
need to report.