BAR OPERATIONS COMMISSIONS

KARIZ ELIZABETH TEH

Chairman

Honey Joy Belen Vice-Chair for Academics, Kathleen Trine De Lara Vice-Chair for
Administration, Jhoanna Paula Bitor Operations Officer, Michael Angelo Tamayo Secretary,
Rhian Lee Tiangco Treasurer, Shianne Camille Dionisio Auditor, Gillian Albay Public
Relations Officers, Mikyla Cordero Volunteer Core Head, Ayla Monica Cristobal Creative
Director

Charles Bautista Secretary, John Paul Nanit Treasurer JOHN PAUL WANIA
Commissioner
Van Regine Perlas Auditor
Aldrin Chavez
Deputy Commisioner

Joefranz Bilo
Ma. Amalia Gumangan
Joseph Eric Pocholo Briones
Subject Heads

Camille Bianca Pinto, Mac

Vincent Javier, John Maxwel
Mendoza, Mariashem Gasatan,
Ma. Victoria Santiago, Riza
Andalan, Paul Joshua Rivera,
Kathleen Marcelo, John Freko
Dioquino, Kenken Lagutan, Mark
Anthony Camposuelo, Mike
Ferdinand Santos
Members

ACKNOWLEDGMENT
Justice Antonio E.B. Nachura, Retired
Dean Domingo M. Navarro
Asst. Dean Erik C. Lazo
Atty. Gabriel P. Dela Peña
Atty. Roberto Belarmino M. Lock
Atty. Rizalina V. Lumbera
Atty. Agnes B. Santos
Atty. Prime Ramos
Atty. Calai Fabie
Atty. Cris Tenorio

O
Atty. Victor Carlo Antonio V. Cayco

center
Atty. Roderick M. Villostas
for Director
legal
Atty. Antony J. Parreño, Atty. Lester Ople
CLEAR education Research Fellows

and Brando de Torres, Maricar Asuncion, Jayson Galapon

Research Staff
research
 TABLE OF CONTENTS

I. GENERAL PRINCIPLES OF TAXATION...................................................... 1

A. Concept and Purpose of Taxation...……………………………………………………………... 1

B. Distinguish: Power of Taxation, Police Power, and Eminent Domain………………… 4

C. Theory and basis of Taxation…………….………………………………………………………… 5

D. Jurisdiction Over Subjects and Objects…………………………………………………………. 5

E. Principles of a Sound Tax System...….………………….………………………………………. 6

F. Inherent and Constitutional Limitations on Taxation..……………………………………. 6

G. Stages or Aspects of Taxation……………………………………………………………………... 16

H. Requisites of a Valid Tax…………………………………………………………………………….. 16

I. Kinds of Taxes………………………...…………………………………………………………………. 16

J. General Concepts in Taxation….…………………………………………………………………… 18

K. Constructions and Interpretation of Tax Laws, Rules and Regulations……………... 27

II. NATIONAL INTERNAL REVENUE CODE…………………………………………. 29

A. Taxing Authority………………………………………………………………………………………… 28

B. Income Tax………………………………………………………………………………………………. 36

C. Estate Tax……………………………..………………………………………………………………….. 127

D. Donor‘s Tax……………….………………………………………………………………………………. 142

E. Value-Added Tax………………………………………………………………………………………… 150

F. Percentage Taxes: Concept and Nature……………………………..…………………………. 192

G. Excise Tax: Concept and Nature…………………………………………………………………… 198

H. Documentary Stamp Tax: Concept and Nature………………………………………………. 198

I. Tax Remedies Under the National Internal Revenue Code………………………………. 201

III. LOCAL TAXATION…………………………….……………………………………… 256

A. Local Government Taxation…………………………………………………………………………. 254

B. Real Property Taxation……………………………………………………………………………….. 282

IV. JUDICIAL REMEDIES…………………………….………………………………….. 298

A. Jurisdiction of the Court of Tax Appeals..………………………………………………………. 298

B. Procedure……………………………………………………………….…………………………………. 301
 Purple Notes
Taxation Law
PART I. GENERAL PRINCIPLES To say that ―the power to tax is the power
to destroy‖ is to describe not the purposes
for which the taxing power may be used but
A. Concept and Purpose of Taxation the but the degree of vigor with which the
taxing power may be employed in order to
1. Definition raise revenue. (1 Cooley 179-181)

Taxation is the power by which the 1. Taxation as an Inherent Attribute of

sovereign, through its law-making body, Sovereignty
raises revenue to defray the necessary
expenses of the government. It is a way of The power of taxation is based upon
apportioning the cost of government among necessity. Without this power, no sovereign
those who, in some measure, are privileged State can exist nor endure without the
to enjoy its benefits and must bear its means to pay its expenses. Its basis is the
burdens. (51 Am. Jur 34) Lifeblood Doctrine.
Taxation is a symbiotic relationship whereby
 The power of taxation is an inherent
in exchange for the protection that the
attribute of sovereignty; the government
citizens get from the Government, taxes are
chiefly relies on taxation to obtain the
paid. (CIR vs. Algue, Inc., G.R. No. L-28896,
means to carry on its operations. Taxes are
February 17, 1988)
essential to its very existence; hence, the
dictum that taxes are the lifeblood of the
 Taxation refers to both the power to tax and
government. (Commissioner of Internal
the act or process by which the taxing
Revenue vs. Eastern Telecommunications Phils.,
power is exercised. Inc., G.R. No. 163835, July 7, 2010)

Nature, and Characteristics of Taxes 2. Taxation as Legislative in Character

Nature Taxation is an inherent power of the State.

Thus, the State is free to select the object of
The nature of the State‘s power to tax is taxation through the Legislature, except
two-fold. It is both an inherent power and a where the Constitution provides otherwise.
legislative power. (Article VI, Sec 28 [2]; Art X, Sec 5)

 The power of taxation is sometimes called The power of taxation is inherently

also the power to destroy. Therefore, it legislative and may be imposed or revoked
should be exercised with caution to only by the legislature. Moreover, this
minimize injury to the proprietary rights of a plenary power of taxation cannot be
taxpayer. It must be exercised fairly, equally delegated by Congress to any other branch
and uniformly, lest the tax collector kill the of government or private persons, unless its
"hen that lays the golden egg". And, in delegation is authorized by the Constitution
order to maintain the general public's trust itself. Hence, the discretion to ascertain the
and confidence in the Government this following — (a) basis, amount, or rate of
power must be used justly and not tax; (b) person or property that is subject
treacherously. It does not conform with our to tax; (c) exemptions and exclusions from
sense of justice in the instant case for the tax; and (d) manner of collecting the tax —
Government to persuade the taxpayer to may not be delegated away by Congress.
lend it a helping hand and later on to (La Suerte Cigarette Factory vs. CIR,G.R. No.
penalize him for duly answering the urgent 125346, November 11, 2014, penned by J.
call. (Roxas vs. CTA, G.R. No. L-25043 April 26, Leonen)
1968)

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 Purple Notes
Taxation Law
Characteristics of Taxation (CUPS) 8. The power to specify or 2018 provide for
administrative and judicial remedies.
1. Comprehensive – It reaches to every 9. The power to grant tax exemptions and
trade or occupation; to every object of condonations. (Philippine Petroleum
industry, use, or enjoyment; to every Corporation vs. Municipality of Pililia, G.R. No.
species of possession; and it imposes a 85318, June 3, 1991)
burden which, in case of failure to discharge
it, may be followed by seizure and sale or 2. Purpose of Taxation
confiscation of property.
1. Revenue-Raising
2. Unlimited - It is so unlimited in force and
searching in extent that courts scarcely To provide funds with which the state
venture to declare that it is subject to any delivers the basic services to the people.
restrictions, except those that such rests (ABAN, Law of Basic Taxation,2001 ,p.5)
into the discretion of the authority which
exercises it. (Tio vs. Videogram Regulatory 2. Non-Revenue / Special or Regulatory
Board, G.R. No. L-75697, June 18, 1987) (P2R2E)

3. Plenary – It operates on all persons and Regulation – Taxation has a regulatory

property belonging to the body politic. This purpose as in the case of taxes levied on
is an original principle, which has its excises or privileges like those imposed on
foundation in society itself. It is granted by tobacco and alcoholic products, or
all for the benefit of all. amusement places like night clubs, cabarets,
cockpits, etc.(Caltex Philippines vs. Commission
4. Supreme – No attribute of sovereignty is on Audit, G.R. 92585, May 8,1992)
more pervading, and at no point does the
power of the Government affect more Taxation is no longer envisioned as a
constantly and intimately all the relations of measure merely to raise revenue to support
life than through the exactions made under the existence of government; taxes may be
it(Tio vs. Videogram Regulatory Board, G.R. No. levied with a regulatory purpose to provide
L-75697, June 18, 1987) means for the rehabilitation and stabilization
of a threatened industry which is affected
Scope of Legislative Power to Tax with public interest as to be within the police
(PS2KA4T) power of the State.

1. The determination of purposes for which a. Promotion of General Welfare –

taxes shall be levied, provided it is for the Taxation can be used to implement police
benefit of the public. power in order to promote the general
2. The determination of subjects of taxation welfare of the people.
such as the person, property or occupation
within its jurisdiction.  The SC upheld the validity of the Sugar
3. The determination as to the amount or rate Adjustment Act, which imposed a tax on
of tax, unless constitutionally prohibited. milled sugar since the purpose of the law
4. The determination as to the kind of tax to was to strengthen an industry that is
be collected (i.e. property tax, income tax, undeniably vital to the economy- the sugar
inheritance tax, etc.). industry. (Lutz vs. Araneta, G.R. No. L-7859,
5. The determination of method, manner, December 22, 1955)
means, and agencies to collect the taxes.
6. The determination of the apportionment  While the funds collected under the OPSF
of tax (whether for general application or are referred to as taxes, they are extracted
limited to a particular locality). in the exercise of the police power of the
7. The determination of the situs of taxation. State. From such fund, amounts are drawn
to reimburse oil companies when

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 Purple Notes
Taxation Law
appropriate situations arise for increases in, Limitations
as well as under recovery of, cost of crude Inherent and Limited to costs of
oil importation. (Osmena vs. Orbos, G.R. No. constitutional limitations issuing the license;
99886, March 31, 1993).
Necessary inspection or
police surveillance.
b. Reduction of Social Inequity – This is
made possible through the progressive Effect of Non-payment
system of taxation where the objective is to Does not make the Makes the business
prevent the undue concentration of wealth business illegal illegal
in the hands of few individuals. Progressivity (Mamalateo, Reviewer on Taxation, 2014, p. 17)
is keystoned on the principle that those who
are able to pay should shoulder the bigger If the purpose is primarily revenue or if revenue
portion of the tax burden. Incidentally, the is at least one of the real and substantial
present rates of income, estate and donor‘s purposes, then the exaction is a tax. Hence, the
taxes show a good example of progressivity. motor vehicle registration fees are taxes
(ABAN, Law of Basic Taxation,2001,p.6) because the legislative intent is mainly to raise
funds for the construction and maintenance of
c. Encourage Economic Growth – In order highways and, to a much a lesser degree, to pay
to promote the country‘s economic growth, for the expenses of the Land Transportation
the law, at times, grants incentives or tax Office. (PAL v. Edu, et al. GR No. L-41383, August
exemptions to encourage investments(ABAN, 15, 1988)
Law of Basic Taxation,2001,p.6).
An ordinance imposing fees based on project
d. Protectionism – It protects local industries cost whose purpose is to regulate certain
from foreign competition i.e. protective construction activities of the identified special
tariffs and custom duties(ABAN, Law of Basic projects, which includes "cell sites" or
Taxation,2001,p.6-7). telecommunications towers, is not a tax because
the fees imposed in the said ordinance are
3. Tax as distinguished from other forms primarily regulatory in nature, and not primarily
of exactions revenue-raising. (Smart vs. Municipality of Malvar,
Batangas, GR No. 204429 dated February 18, 2014)
TAX TARIFF
All embracing term to A kind of tax imposed TAX SPECIAL
include various kinds of on articles which are ASSESSMENT
enforced contributions traded internationally Imposed on persons, Levied only on land
upon persons for the property and excises
attainment of public Personal liability Cannot be made a
purposes attaches on the person personal liability of the
TAX TOLL assessed in case of non- person assessed
A demand of A demand of payment
sovereignty for the proprietorship. A sum of
purpose of raising money for the use of Note: An exception
public revenue something, a may be provided in the
consideration which is case of real property tax
paid for the use of (RPT) which attaches to
property which is of the property subject to
public nature, e.g. road, RPT
bridge Not based on any Based wholly on benefit
(Mamalateo, Reviewer on Taxation, 2014, p. 16) special or direct benefit

TAX LICENSE FEE

Basis
Power of Taxation Police power
Purpose
To generate revenue Regulatory
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 Purple Notes
Taxation Law
Exemption granted is Exemption does not 2018
No special No direct Direct benefit results
applicable (Section apply. or direct benefits are in the form of just
28(3), Article VI, 1987 benefit is received but compensation.
Constitution) Note: If property is received a healthy
exempt from Real other than economic
Note: The exemption Property Tax, it is also the standard of
under the Constitution exempt from Special government society is
is with respect only to Assessment. (See secures that attained
RPT Article 234(B) LGC) general known
benefit as―damnum
TAX DEBT resulting absque
An obligation imposed A sum of money due from the injuria‖.
by law. Tax is not a upon contract or one protection of
debt because it is not which is evidenced by taxpayer‘s
an obligation created by judgment. person and
contracts, express or property and
implied. Thus, if a welfare of all
taxpayer fails or refuses Non-Impairment of Contracts
to pay a local tax, he is
The non- Contracts Contracts may be
liable for criminal
impairment may be impaired.
prosecution.
rule impaired.
Not assignable. Assignable.
subsists.
Due to the sovereign Due to the government
government. acting in its corporate Transfer of Property of Rights
facility. Taxes paid Allows only Property is taken by
Mamalateo, Reviewer on Taxation, 2014, p. 16) become part restraints on the government upon
of public the exercise payment of just
B. Power of Taxation as distinguished from funds of property compensation.
Police Power and Power of Eminent rights exist.
Domain
Scope
Affects all Affects all Affects only a
TAXATION POLICE EMINENT DOMAIN
persons, persons, particular property.
POWER OR
property and property,
EXPROPRIATION
excises. privileges,
Purpose
and rights.
Levied for Exercised to Taking of private
the purpose promote property for public Basis
of raising public welfare use.
Public Public Necessity of the
revenue. through
necessity. necessity and public for private
regulations.
the right of property.
the State and
Amount of Exaction the public to
There is no Limited to No exaction; self-
limit. cover the cost compensation is paid protection
of regulation, by the government. and self-
issuance of preservation.
the license or
surveillance. (Mamalateo, Reviewer on Taxation, 2014, p. 13-14)

What is the determining factor in

Benefits Received by the Taxpayer distinguishing tax and regulation as a
form of police power?

In distinguishing tax and regulation as a form of

police power, the determining factor is the

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 Purple Notes
Taxation Law
purpose of the implemented measure. If the that the modes adopted to enforce the
purpose is primarily to raise revenue, then it will collection of taxes levied should be summary
be deemed a tax even though the measure and interfered with as little as possible.
results in some form of regulation. On the other (Philippine Bank of Communications v. CIR, et al.,
GR No. 119024, January 28, 1999)
hand, if the purpose is primarily to regulate,
then it is deemed a regulation and an exercise  But even as we concede the inevitability
of the police power of the state, even though and indispensability of taxation, it is a
incidentally, revenue is generated. (Angeles requirement in all democratic regimes that
University vs. City of Angeles, G.R. No. 189999, July it be exercised reasonably and in
27,2012) accordance with the prescribed procedure.
If it is not, then the taxpayer has a right to
C. Theory and Basis of Taxation complain and the courts will then come to
his succor. For all the awesome power of
a. Lifeblood Theory – The government can the tax collector, he may still be stopped in
neither exist nor endure without taxation. his tracks if the taxpayer can demonstrate
Taxes are the lifeblood of the ... that the law has not been observed. (CIR
government and their prompt and certain vs. Avon Products Manufacturing, G.R. Nos.
availability is an imperious need (Bull vs. 201398-99, October 03, 2018,penned by J.
United States, 295 U.S. 247, 1935). Leonen)

Taxes are important because they are the c. Benefits-Protection Theory (Symbiotic
lifeblood of the Government and so should Relationship) – In exchange for the
be calculated without unnecessary protection that State gives to its citizens,
hindrance. (CIR vs. Algue, Inc., et al., G.R. No. taxes must be correspondingly paid to it.
L-28896, February 17, 1988)
Reciprocal duties of protection between
b. Necessity Theory – The State cannot the State and its inhabitants.
continue without the means to pay its
expenses; and that for those means, it has Taxes are what we pay for civilization society.
the right to compel all citizens and property Without taxes, the government would be
within its limit to contribute. paralyzed for lack of the motive power to
activate and operate it. Hence, despite the
 The power to tax is an attribute of natural reluctance to surrender part of one's
sovereignty. It is a power emanating from hard earned income to the taxing authorities,
necessity. It is a necessary burden to every person who is able to must contribute his
preserve the State's sovereignty and a share in the running of the government. The
means to give the citizenry an army to resist government for its part, is expected to respond
an aggression, a navy to defend its shores in the form of tangible and intangible benefits
from invasion, a corps of civil servants to intended to improve the lives of the people and
serve, public improvement designed for the enhance their moral and material values. This
enjoyment of the citizenry and those which symbiotic relationship is the rationale of
come within the State's territory, and taxation and should dispel the erroneous notion
facilities and protection which a government that it is an arbitrary method of exaction by
is supposed to provide. (Phil. Guaranty Co., those in the seat of power. (CIR vs. Algue, Inc., et
Inc. vs. CIR, GR No. L-22074, April 30, 1965). al., G.R. No. L-28896, February 17, 1988)

 Due process of law under the Constitution D. Jurisdiction over subject and objects
does not require judicial proceedings in tax The limited powers of sovereignty are limited to
cases. This must necessarily be so because objects within the respective spheres of
it is upon taxation that the Government governmental control. These objects are the
chiefly relies to obtain the means to carry on proper subjects of taxation and nothing else.
its operations and it is of utmost importance
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 Purple Notes
Taxation Law
E. Principles of A Sound Tax System (FAT) 2018
F. Inherent and Constitutional
1. Fiscal Adequacy Limitations on Taxation

 It simply means that the sources of 1. Inherent Limitations

revenues must be adequate to meet
government expenditures and their The following are the inherent limitations of
variations. (AbakadaGuro Party List vs. Ermita, taxation:(PI2TE)
G.R. No. 168056, September 1, 2005)
a) Public Purpose;
2. Theoretical Justice b) Inherently Legislative;
c) Territorial;
The tax should be collected on the basis of d) International Comity; and
ability to pay through a progressive system e) Exemption of Government Entities,
of taxation. Thus, the incidence or burden of Agencies, and Instrumentalities.
taxation should fall more on those who
could afford. a. Public Purpose

The rule of taxation shall be uniform and A revenue measure must be laid for public
equitable. The Congress shall evolve a purpose. It is the legislature who determines
progressive system of taxation. (Section ―public purpose‖. (Dimaampao, Basic Approach
28(1), Article VI, 1987 Constitution) to Income Taxation; Tax Principles and
Remedies, p. 37)
3. Administrative Feasibility
 It is a general rule that the legislature is
Tax laws must be capable of effective and without power to appropriate public revenue
efficient enforcement. They must not for anything but a public purpose. It is the
obstruct business growth and economic essential character of the direct object of
development. They must also be convenient expenditure which must determine its
as to the place and manner of payment. validity as justifying a tax, and not the
(Diaz vs. Sec. of Finance, GR. No. 193007,July magnitude of the interest to be affected nor
19,2011) the degree to which the general advantage
of the community, and thus the public
―VAT law is Not Violative of Administrative welfare, may be ultimately benefited by
Feasibility‖ their promotion. Incidental to the public or
to the state, which results from the
 The VAT law cannot be considered as promotion of private interest and the
violative of the Administrative Feasibility prosperity of private enterprises or business,
principle because it is principally aimed to does not justify their aid by the use of public
rationalize the system on taxing goods and money. (Pascual vs Secretary of Public Works
services;. simplify tax administration, and and Communication, G.R. No. L-10405,
make the system more equitable, to enable December 29, 1960)
the country to attain economic recovery.
(Kapatiran ng Mga Naglilingkod sa Pamahalaan The proceeds of the tax must be used for:
vs. Tan, G.R. No. 81311, June 30, 1988)
1. The support of the State; or
Note: Non-observance of Fiscal Adequacy and 2. Some recognized object of government; or
Administrative Feasibility will not render the tax 3. Directly to promote the welfare of the
imposition invalid. It will be an unsound tax but community.
legal. However, non-observance of the Principle
of Theoretical Justice is invalid because the
Constitution itself requires that taxation must be
equitable. (Diaz vs. Sec. of Finance, ibid.)

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Taxation Law
Test in Determining Public Purpose in Tax duties or imposts. (Section 28(2), Article VI,
1987 Constitution)
1. Duty Test – whether the thing to be
threatened by the appropriation of public c. Delegation of Emergency Powers to
revenue is something which is the duty of the President
the State, as a government.
Delegation to the President to enter into
2. Promotion of General Welfare Test – executive agreements, and to ratify treaties
whether the law providing the tax directly which may contain tax exemption provisions
promotes the welfare of the community in subject to the concurrence by the majority
equal measure. members of the Congress in the ratification
made by the President. (Section 28(4), Article
 Public purpose is not destroyed by the fact VI, 1987 Constitution)
that the tax law may not be beneficial to
one group. The fact that one sector is c. Territorial
benefited and in the process another sector
is being in a way prejudiced would not The power to tax is limited to the territorial
diminish the public character of the tax. (Tio jurisdiction of the State (INGLES, Tax Made
vs. Videogram Regulatory Board, G.R. No. 75697, Less Taxing, 2018, p.9).
June, 1987)
d. International Comity
 The fact that it was donated after, does not
cure the defect that the tax was not for a Posits that the property of a foreign state or
public purpose at the time the tax law was government may not be taxed by another.
passed. The public purpose must exist at States find it mutually advantageous for
the time of the enactment of the tax themselves to create self-imposed restraints
legislation. (Pascual vs. Sec of Public Works, on their taxing powers especially with
G.R. No. L-10405, December,29 1960) reference to the properties of foreign
governments within their territorial domain.
b. Inherently Legislative
e. Exemption of Government Entities,
(i) General Rule Agencies, and Instrumentalities

Congress could not re-delegate this General Rule: Agencies performing

delegated power, since the power of governmental functions are tax-exempt.
taxation is a power that is exercised by the
Congress as delegates of the People. Exemption:
1. Agencies performing proprietary
(ii) Exceptions functions.
2. When expressly provided by law or their
a. Delegation to Local Governments charter subjects them to tax

The Constitution grants each LGU the power Government-owned and controlled corporations
to create its own sources of revenue and to which perform proprietary functions are subject
levy taxes, fees and charges which shall to tax. However, certain corporations have been
accrue exclusively to the LGU. (Section 5, granted exemption under Section 27(c) of R.A.
Article X, 1987 Constitution) 8424 as amended by R.A. 9337 which took
effect on July 1, 2005 and R. A. 10026 which
b. Delegation to the President lapsed into law in March 11, 2010 due to
absence of signature of the President, to wit:
Delegation by Congress to the President to
fix tariff rates, import and export quotas, 1. Government Service Insurance System
tonnage and wharfage dues; and other (GSIS)
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 Purple Notes
Taxation Law
2. Social Security System (SSS) (v) Appropriation, revenue, tariff2018
bill must
3. Philippine Health Insurance Corporation exclusively originate in the House of
(PHIC) Representatives
4. Local water districts (vi) Prohibition Against Taxation of
Religious, Charitable Entities, and
However, pursuant to Section 7 of R.A. 10963, Educational Entities
otherwise known as Tax Reform for Acceleration (vii) Prohibition Against Taxation of Non-
and Inclusion (TRAIN) Law, PCSO is no longer Stock, Non-Profit Institutions
exempted from tax. Also, PAGCOR is removed (viii) Majority Vote of Congress for Grant of
from income tax exemption under Sec. 1 of R.A. Tax Exemption
9337, amending the 1997 NIRC. (ix) Prohibition on Use of Tax Levied for
Special Purpose
 However, since PAGCOR is exempt from (x) President‘s Veto Power on
VAT under RA 9337, the BIR exceeded its Appropriation, Revenue or Tariff
authority in subjecting PAGCOR to VAT. Bills
(PAGCOR vs. BIR, G.R. No. 172087, March 15, (xi) Non-Impairment of Jurisdiction of the
2011) Supreme Court
(xii) Grant of Power to the Local
 The exemption of PAL was expressly Government Units to Create its Own
removed by R.A. No. 7716. (PAL vs. Secretary Sources of Revenue
of Finance, G.R. No. 115852, October 30, 1995). (xiii) No Appropriation or Use of Public
Money for Religious Purposes
 Moreover, taxes are financial burdens
imposed for the purpose of raising revenues (i) Prohibition Against Imprisonment for
to defray the cost of the operation of the Non-Payment of Poll Tax
Government, and a tax on property of the
Government, whether national or local, No person shall be imprisoned for debt or
would merely have the effect of taking non-payment of a poll tax.‖ (Section 20,
money from one pocket to put it in another Article III, 1987 Constitution)
pocket. (Board of Assessment of Appeals of
Laguna vs. CTA, G.R. No. L-35683, May 7, 1987) Poll Tax, defined

 Notwithstanding the immunity of the A tax of fixed amount on individuals residing

government from taxes, the principle is also within a specified territory, whether citizens or
well recognized that the Government may not, without regard to their property. One
tax itself. In one case, the SC held that cannot be imprisoned for non-payment of poll
there is no constitutional limitation on the tax because payment thereof is not mandatory,
power of the Congress to tax the AFP if it it is merely permissive.
wishes to do so. (Bisaya Land Transportation
Co., Inc. vs. CIR, G.R. No. L-10114, November While a person may not be imprisoned for non-
26, 1957).\ payment of poll tax, he may be imprisoned for
non-payment of other kinds of taxes where the
2. Constitutional Limitations law expressly so provides.

a) Provisions Directly Affecting Taxation: (ii) Uniformity and Equality of Taxation

These are(PUPTONTSV):
―The rule of taxation shall be uniform and
(i) Prohibition Against Imprisonment for equitable.‖ (Section 28(1), Article VI, 1987
Non – Payment of Poll Tax Constitution)
(ii) Uniformity and Equality of Taxation
(iii) Progressive System of Taxation Uniformity means that all taxable articles or
(iv) Grant by Congress of Authority to the kinds of property of the same classes shall be
President to Impose Tariff Rates taxed at the same rate. (Mamalateo, Reviewer in

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Taxation Law
Taxation, 2014, p. 58) A tax is uniform when it
operates with the same force and effect in every Note: Inequalities resulting from singling out of
place where the subject of it is found. one particular class for taxation or exemption
infringe no constitutional limitation. (Sison vs.
 A local tax on tenement houses does not Ancheta, G.R. No. L-59431, July 25, 1984)
violate the rule of uniformity and equality of
taxation even if the tax in question is not (iii)Progressive system of taxation
also levied on other classes of buildings in
the locality where such tax is imposed. ―The Congress shall evolve a progressive
(Villanueva vs. City of Iloilo, G.R. No. L-26521, system of taxation.‖ (Section 28(1), Article VI,
December 28, 1968) 1987 Constitution)

 Uniformity is not disregarded if a tax is Progressivity – Tax rate increases as the tax
levied on admission to cinema, theaters, base increases.
vaudeville companies, theatrical shows and
boxing exhibitions but does not tax other  Progressivity of taxation is also mandated by
places of amusement such as race tracks, the Constitution. Our income tax system is
cockpits, cabarets, concert halls, circuses one good example of such progressivity
and other places of amusement. (Eastern because it is built on the principle of the
Theatrical Co. vs. Alfonso, G.R. No. L-1104, May taxpayer‘s ability to pay. Taxation is
31, 1949) progressive when its rate goes up
depending on the resources of the person
 It must be stressed that the rule of uniform affected (Reyes vs. Almanzor, G.R. Nos. 49839-
taxation does not deprive Congress of the 46, April 26, 1991).
power to classify subjects of taxation, and
only demands uniformity within the  The Constitution does not really prohibit the
particular class. (Abakada Guro Party List vs. imposition of indirect taxes which, like the
Ermita, G.R. No. 168056, September 1, 2005) VAT, are regressive. What it simply provides
is that Congress shall "evolve a progressive
Uniformity vs. Equitability vs. Equality system of taxation." The constitutional
provision has been interpreted to mean
Uniformity – All taxable property shall be alike simply that "direct taxes are to be preferred
to be subjected to tax. [and] as much as possible, indirect taxes
should be minimized.‖ (Tolentino vs. Secretary
Equitability – The burden of taxation falls to of Finance, GR No. 115455, October 30, 1995;
those better able to pay. Abakada Guro Partylist vs. Ermita GR No.
168056, September 1, 2005)
Equality – When the burden of the tax falls
equally and impartially upon all persons and
property subject to it. (iv)Appropriation, revenue, tariff bill must
exclusively originate in the House of
 The law is also equitable even if it is Representatives
equipped with a threshold margin. The VAT
rate of 0% or 10% (now 12%) does not ―All appropriation, revenue or tariff bills, bills
apply to sales of goods or services with authorizing the increase of public debts, bills
gross annual sales or receipts not exceeding of local application and private bills, shall
P1,500,000.00 (now P3,000,000). Also, originate exclusively in the House of
basic marine and agricultural food products Representatives, but the Senate may
in their original state are still not subject to propose or concur with amendments.‖
tax, thus ensuring that prices at the (Section 24, Article VI, 1987 Constitution)
grassroots level will remain accessible
(Abakada Guro Party List vs. Ermita, G.R. No.  Indeed, what the Constitution simply means
168056, September 1, 2005) is that the initiative for filing revenue, tariff

9
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 Purple Notes
Taxation Law
or tax bills, bills authorizing an increase of only. ―Exclusive‖ is defined as2018 possessed
the public debt, private bills and bills of local and enjoyed to the exclusion of others;
application must come from the House of debarred from participation or enjoyment;
Representatives on the theory that, elected and ―exclusively‖ is defined, in a manner to
as they are from the districts, the members exclude; as enjoying a privilege exclusively.
of the House can be expected to be more If real property is used for one or more
sensitive to the local needs and problems. commercial purposes, it is not exclusively
On the other hand, the senators, who are used for the exempted purposes but is
elected at large, are expected to approach subject to taxation. The words ―dominant
the same problems from the national use‖ or ―principal use‖ cannot be substituted
perspective. Both views are thereby made to for the words ―used exclusively‖ without
bear on the enactment of such laws doing violence to the Constitution and the
(Abakada Guro Party List vs. Ermita, G.R. No. law. (Lung Center of the Phil. vs. Quezon City,
168056, September 1, 2005). G.R. No. 144104, June 29, 2004)

(v) Grant by Congress of Authority to the  What is meant by actual, direct and
President to Impose Tariff Rates exclusive use of the property for charitable
purposes is the direct and immediate and
The Congress may, by law, authorize the actual application of the property itself to
President to fix within specified limits and the purposes for which the charitable
subject to such limitations and restrictions institution is organized. It is not the use of
as it may impose, tariff rates, import and the income from the real property that is
export quotas, tonnage and wharfage dues, determinative of whether the property is
and other duties or imports within the used for tax-exempt purposes. (Id.)
framework of the national development
program of the government. (Section 28 par.  Actual use is necessary. To be exempt
2, Article VI, 1987 Constitution) – Flexible from tax, the lands, buildings and
Tariff Clause improvements must not only be exclusively
but also actually and directly used for
Requisites of a valid imposition of tariff religious and charitable purposes. (Province of
rates by the President: (DCF) Abra vs. Hernando, G.R. No. L-49336, August 31,
1981)
1. Delegated by Congress through a law;
2. Subject to Congressional limits and Note: USE overrides OWNERSHIP that if
restrictions; and property, although actually owned by a religious,
3. Within the framework of the national charitable or educational institution, is actually
development program (Ibid.) used for a non-exempt purpose, the exemption
from tax of said property vanishes.
(vi)Prohibition Against Taxation of
Religious, Charitable Entities, and  While the use of the second floor of the
Educational Entities main building for residential purposes of the
Director and his family may find justification
―Charitable institutions, churches and under the concept of incidental use, which is
parsonages or convents appurtenant complimentary to the main or primary
thereto, mosques, non-profit cemeteries, purpose, i.e., educational, the lease of the
and all lands, buildings and improvements, first floor to the Northern Marketing
actually, directly and exclusively used for Corporation cannot be considered incidental
religious, charitable, or educational purposes to the purpose of education. Since only a
shall be exempt from taxation.‖ (Section portion is used for the purpose of
28(3), Article VI of the 1987 Constitution) commerce, it is only fair that half of the
assessed tax be returned to the school
 The tax exemption under this constitutional involved. (Abra Valley vs. Aquino, G.R. No. L-
provision covers REAL PROPERTY taxes 39086, June 15, 1988)

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Taxation Law
Rule on Gifts in Favor of Charitable and regardless of the source, which were used
other Institutions actually, directly and exclusively for
educational purposes shall be exempt from
General Rule: The constitutional exemption income tax. However, the income derived by
applies only to property tax. Gifts are subject to it from unrelated trade, business or activities
donor‘s tax. (Rev. Casimiro Lladoc vs. CIR, G.R. No. which were not used actually, directly and
L-19201, June 16, 1965) exclusively for educational purposes shall be
subject to the preferential income tax rate
Exemption: Gifts made in favor of charitable of 10% of its taxable income pursuant to
and other institutions may also be exempt from Sec. 27(B) of the Tax Code. (CIR vs. DLSU,
Donor‘s tax, not under the Constitution, but G.R. No. 196596, November 9, 2016)
under the NIRC, provided certain conditions are
met. (Sections 101(A)(2) & 101(B)(2), NIRC as  The crucial point of inquiry then is on the
amended by TRAIN Law) use of the assets or on the use of the
revenues. These are two things that must
(vii)Prohibition Against Taxation of Non- be viewed and treated separately. But so
Stock, Non-Profit Institutions long as the assets or revenues are used
actually, directly and exclusively for
―All revenues and assets of non-stock, non- educational purposes, they are exempt from
profit educational institutions used actually, duties and taxes.
directly and exclusively used for educational
purposes shall be exempt from taxes and That the Constitution treats non-stock, non-
duties.‖(Section 4(3), Article XIV, 1987 profit educational institutions differently
Constitution) from proprietary educational institutions
cannot be doubted. The privilege granted to
 For a non-stock non-profit hospital to be the former (non – stock, non – profit
completely exempt from income tax, Sec. educational institution) is conditioned only
30(E) and (G) of the Tax Code requires that on the actual, direct and exclusive use of
said institution should operate exclusively for their revenues and assets for educational
charitable or social welfare purposes. But in purposes. In clear contrast, the tax privilege
case that non-stock non-profit hospital earns granted to the latter may be subject to
income from its for-profit activities, the limitations imposed by law. Thus, it is
subject hospital shall only be subject to declaredthat the last paragraph of Section
income tax insofar as the income derived 30 of the Tax Code without force and effect
from its profit activities, but only at the for being contrary to the Constitution insofar
preferential income tax rate of 10% based on as it subject to tax the income and revenues
its taxable income, regardless of the of non-stock, non-profit educational
disposition made of such income, pursuant to institutions used actually, directly and
Sec. 27(B), in relation to the last paragraph exclusively for educational purpose.
of Sec. 30 of the Tax Code. (CIR vs. St. Luke‘s
Medical Center, G.R. No. 20-3514, February. 13,
The income tax exemption pertains only to
2017)
non-stock, non-profit educational institutions
and does not cover the other exempt
 Revenues derived from assets used in
organizations under Section 30 of the Tax
operations of cafeterias, canteens and
Code.(DLSU vs. CIR, G.R. No. 196596,
bookstores are also exempt if they are also
November 9, 2016)
owned and operated by the educational
institution as ancillary activities and the
Proprietary educational institutions, including
same are located in the school premises
those cooperatively owned may likewise be
(RMC 76-2003)
entitled to such exemptions, subject to the
limitations provided by law, xxx‖ (Section 4(3),
 The income derived by it for being a non-
Article XIV, 1987 Constitution)
stock non-profit educational institution,
11
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 Purple Notes
Taxation Law
Proprietary educational institutions are, 2018
the veto shall not affect the item or items
however, taxable under Section 27 (B) of the which he does not object.‖ (Section 27 (2),
Tax Code. -See in -depth discussion in Income Tax Article VI , 1987 Constitution)
on Corporation Chapter
(xi)Non-Impairment of Jurisdiction of the
 By the Tax Code's clear terms, a proprietary Supreme Court
educational institution is entitled only to the
reduced rate of 10% corporate income tax. ―The Congress shall have the power to
The reduced rate is applicable only if: (1) define, prescribe, and apportion the
the proprietary educational institution is jurisdiction of the various courts but may
nonprofit and (2) its gross income from not deprive the Supreme Court of its
unrelated trade, business or activity does jurisdiction over cases enumerated in
not exceed 50% of its total gross income. Section 5 hereof.‖ (Section 2, Article VIII, 1987
(DLSU vs. CIR, G.R. No. 196596, November 9, Constitution)
2016)
The Supreme Court shall have, among
(viii) Majority Vote of Congress for Grant others, the following powers:
of Tax Exemption
a. Review, revise, reverse, modify, or
―No law granting any tax exemption shall be affirm on appeal or certiorari, as the law
passed without the concurrence of a or the Rules of Court may provide, final
majority of all the Members of the judgments and orders of lower courts;
Congress.‖ (Section 28 (4), Article VI, 1987 b. All cases involving the legality of any
Constitution) tax, impost, assessment, or toll, or any
penalty
Reason: To prevent indiscriminate grant of tax imposed in relation thereto.‖ (Section 5,
exemptions. Article VIII, 1987 Constitution)

In granting tax exemptions, an absolute majority Under the principle of judicial non –
of the members of the Congress is required, interference, the courts cannot inquire into
while in cases of withdrawal of such tax the wisdom of the taxing act unless there is
exemption, a relative minority is sufficient. a violation of the Constitutional limitations or
(Dimaampao, Tax Principles and Remedies, 2015) restrictions. (CIR v. Lingayen Gulf Electric Power
Co., Inc. GR L 237771, August 4, 1968)
(ix) Prohibition on Use of Tax Levied for
Special Purpose (xii) Grant of Power to the Local
Government Units to Create its Own
―All money collected or any tax levied for Sources of Revenue
special purposes shall be treated as special
fund and paid out for such purpose only. If ―Each local government unit shall have the
power to create its own sources of revenues
the purpose for which a special fund was and to levy taxes, fees and charges subject
created has been fulfilled or abandoned, the to such guidelines and limitations as the
balance, if any, shall be transferred to the Congress may provide, consistent with the
general funds of the government.‖ (Section basic policy of local autonomy. Such taxes,
29(3), Article VI of the 1987 Constitution) fees, and charges shall accrue exclusively to
the local governments.‖(Section 5, Article X,
(x) President‘s Veto Power on 1987 Constitution)
Appropriation, Revenue or Tariff Bills
 When local governments invoke the power
―The President shall have the power to veto to tax on national government
any particular item or items in an instrumentalities, the exercise of the power
appropriation, revenue or tariff bill but is construed strictly against local

12 Center for Legal Education and Research

 Purple Notes
Taxation Law
governments. The rule is that a tax is never greater than what the law [Link] do so
presumed and there must be a clear would amount to a deprivation of property
language in the law imposing the tax. (MIAA without due process of law. (National Power
v. CA, G.R. No. 155650, July 20, 2006) Corporation vs. City of Cabanatuan,G.R. No. 177332,
October 01, 2014,penned by J. Leonen).
(xiii) No Appropriation or Use of Public
Money for Religious Purposes Requisites:

No public money or property shall be 1. Procedural (N2PA)

appropriated applied, paid or employed,
directly or indirectly, for the use, benefit or  The interest of the public generally as
support of any sect, church, denomination, distinguished from those of a particular
sectarian institution or system of religion, or class require the intervention of the
of any priest, preacher, minister, other State
religious teacher, or dignitary as such,  Assessment and Collection must not be
except when such priest, preacher, minister, arbitrary
or dignitary is assigned to the armed forces,  Right to notice and hearing
or to any penal institution, or government
orphanage or leprosarium. (Section 29(2), 2. Substantive (RnHVT)
Article VI, 1987 Constitution)
 The means employed must be
Exception to the limitation: Except if the reasonably necessary to the
priest, preacher, minister or dignitary is accomplishment of the purpose and not
assigned to: (LAPG) unduly oppressive
1. The Armed Forces  Assessment should not be harsh,
2. Any penal institution oppressive and confiscatory
3. Government orphanage or  It must be by authority of a valid law
4. Leprosarium  It must be imposed within territorial
jurisdiction
b) Provisions Indirectly Affecting
Taxation  There is a denial of due process on account
of the passage of an ordinance in the City of
These are (DENR): Manila which imposes a permit fee of P50.00
(i) Due Process on aliens as a condition to employment or
(ii) Equal Protection engaging in any business or occupation,
(iii) Religious Freedom where it appears that under said ordinance,
(iv) Non – impairment of obligations of contracts the City Mayor of Manila could withhold or
refuse issuance of such permit at will.
(i) Due Process Aliens, once admitted in the Philippines,
cannot be deprived of life without due
―No person shall be deprived of life, liberty process of law and this guarantee includes
or property without due process of law.‖ the means of livelihood. (Villegas vs. Hiu
(Section 1, Article III ,1987 Constitution) Chiong Tsai Pao Ho, G.R. No. L-29646, November
10, 1978)
Generally, tax statutes are construed strictly
against the government and in favor of the  Due process was not observed when the
taxpayer. "Statutes levying taxes or duties are trial court, in an action for declaratory relief,
not to extend their provisions beyond the clear declared that certain property owned by the
import of the language used"; and "tax burdens Roman Catholic Church in Bangued, Abra
are not to be imposed, nor presumed to be was tax-exempt under the 1973
imposed beyond what the statute[s] expressly Constitution, it appearing that no court
and clearly [import]. . . ." Similarly, we cannot hearing was conducted. (Province of Abra vs.
impose a penalty for non-payment of a tax Hernando, G.R. No. L-49336, August 31, 1981)
13
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 Purple Notes
Taxation Law
to treat them the same or alike2018may offend
 Due process was not violated when the VAT the Constitution. What the Constitution
Law (EO 273) was promulgated because prohibits is class legislation which
there was no grave abuse of discretion discriminates against some and favors
incident to its promulgation. Further, others. As long as there are rational or
petitioners failed to show that EO 273 was reasonable grounds for so doing, Congress
issued capriciously and whimsically or in may, therefore, group the persons or
arbitrary or despotic manner by passion or properties to be taxed and it is sufficient ―if
personal hostility since it appears that a all of the same class is subject to the same
comprehensive study of the VAT was made rate and the tax is administered impartially
before EO 273 was issued. (Kapatiran vs. CIR, upon them.‖ (1 Cooley 608).
G.R. No. L-81311, June 30, 1988)
Requisites for a Valid Classification:
 The modified schedular income tax whereby (GEPS)
individual income was classified into three
different classes under different tax rates 1. Must be based upon substantial
(compensation, business/other income and distinctions;
passive investment income) is not a denial 2. Must be germane to the purpose of law;
of due process because there is no proof of 3. Must apply to both present and future
arbitrariness in the imposition of tax rates. conditions; and
(Sison vs. Ancheta, G.R. No. 59431, July 25, 4. Must apply equally to all members of a
1984) class.

 Section 112(B) allows a VAT-registered Two ways of violating Equal Protection

person to apply for the refund for any
unused input taxes, to the extent that such 1. When classification is made when there
input taxes have not been applied against should be none
output taxes. Such unused input tax may be 2. When classification is not made when called
used in payment of his other internal for
revenue taxes. The input tax is not a
property or property right within the  If the ordinance is intended to apply to a
constitutional purview of the due process specific taxpayer and to no one else
clause. A VAT-registered person‘s regardless of whether or not other entities
entitlement to the creditable input tax is belonging to the same class are established
merely a statutory privilege. (Abakada Guro in the future, it is a violation of the equal
Party List vs. Ermita, [Link]. 168056, September protection clause, but if intended to apply
1, 2005)
also to similar entities which may be
established in the future, then the tax
(ii) Equal Protection
ordinance is valid. (Ormoc Sugar Central vs.
CIR, G.R. No. L-23794, February 17, 1968)
―Nor shall any person be denied the equal
protection of laws.‖ (Section 1, Article III, 1987  The fact that the taxpayer is the only sugar
Constitution)
central or refinery in the municipality where
the tax ordinance is enacted does not make
 All persons subject to legislation shall be
said ordinance discriminatory. The reason is
treated alike under similar circumstances
that since other refineries to be established
and conditions both in the privileges
in the future would also be taxable, no
conferred and liabilities imposed. (1 Cooley
singling out of the taxpayer to its
824-825; Sison vs. Ancheta, G.R. No. L-59431,
July 25, 1984) disadvantage has ever taken place. (Victorias
Milling Co., Inc. vs. Municipality of Victoria, G.R.
No. L-21183, September 27, 1968)
The doctrine does not require that persons
or properties different in fact be treated in
laws as though they were the same. Indeed,

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 Purple Notes
Taxation Law
 The remission of taxes due and payable to withholding tax. It applies to all those who
the exclusion of taxes already collected does deal with the government. (AbakadaGuro
not constitute unfair discrimination. Each set Party List vs. Ermita, [Link]. 168056, September
of taxes is a class by itself, and the law 1, 2005)
would be open to attack as class legislation
only if all taxpayers belonging to one class (iii)Religious Freedom
were not treated alike. (Juan Luna Subd. vs.
Sarmiento, G.R. No. L-3538, May 28, 1952) ―No law shall be made respecting an
establishment of religion, or prohibiting the
 It is true that the uniformity essential to the free exercise thereof. The free exercise and
valid exercise of power of taxation does not enjoyment of religious profession and
require identity or equality under all worship, without discrimination or
circumstances, or negate the authority to preference, shall forever be allowed. No
classify the objects of taxation. religious test shall be required for the
exercise of civil or political rights.‖ (Section 5,
 A local ordinance which levies an ad valorem Article III , 1987 Constitution)
tax on motor vehicles registered in Manila
without also taxing those which are  Activities simply and purely for propagation
registered outside the city but which enters of faith are exempt (i.e., sale of bibles and
the city and uses its streets occasionally religious articles by non-stock, non-profit
violates the rule on the equality of taxation organizations at minimal profit). A license
(Assoc. of Customs Brokers vs. Municipality Board tax, which, unlike an ordinary tax, is mainly
of Manila, G.R. No. L-4375, May 22, 1953). for regulation. Its imposition on the press is
unconstitutional because it lays a prior
 There is no discrimination or class legislation restraint on the exercise of its right. Hence,
if a statute authorizes the City of Manila to although its application to others is valid, its
levy occupation taxes whereas that same application to the press or to religious
authority is withheld from other cities or groups, such as the Jehovah‘s Witnesses, in
municipalities. It is not for the courts to connection with the latter‘s sale of religious
decide what cities or municipalities should books and pamphlets, is unconstitutional
be so authorized for that is a matter for the (American Bible Society vs. City of Manila, G.R. L-
legislature to decide. (Punsalan vs. The 9637, April 1957).
Municipal Board of Manila, G.R. No. L-4817, May
26, 1954)
 Taxpayers may be classified into different (iv) Non-Impairment of Obligations of
categories. It is enough that the Contracts
classification must rest upon substantial
distinctions that make real differences ―No law impairing the obligation of contracts
(Antero M. Sison, Jr. vs. Ruben B. Ancheta, G.R. shall be passed.‖ (Section 10, Article III, 1987
No. L-59431, July 25, 1984). Constitution)

 With regard to the 5% creditable The power of taxation cannot be exercised

withholding tax imposed on payments made in a manner that would impair the obligation
by the government for taxable transactions, of contracts. What is prohibited is that a
Section 114(C) merely provides a method of taxing statute to be passed would alter the
collection, or as stated by respondents, a relative rights of the parties with each other.
more simplified VAT withholding system. The mere fact that a tax makes the conduct
Since it has not been shown that the class of a business more expensive or makes an
subject to the 5% final withholding tax has activity more difficult does not result in the
been unreasonably narrowed, there is no impairment of the obligations of contract.
reason to invalidate the provision. Contract is impaired only if the relative
Petitioners, as petroleum dealers, are not position of the parties to a contract is
the only ones subjected to the 5% final disturbed by the operation of a taxing
15
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 Purple Notes
Taxation Law
statute (Mamalateo, Reviewer in Taxation, 2014, The recovery of any tax alleged 2018 to be
page 63 - 64). erroneously or illegally collected, or of any
penalty claimed to have been collected
G. Stages or Aspects of Taxation (LAPR) without authority or any sum alleged to
have been excessively or in any manner
1. Levy or Imposition wrongfully collected.
It pertains to the enactment of tax laws and
statute by Congress. These tax laws of H. Requisites of a Valid Tax (PUWLN)
statutes determined the subject and object
of taxation, how much is to be collected, as 1. It must be for a public purpose;
well as the rate and base of tax. 2. It must be uniform;
3. The party being taxed must be within the
Note: This is NOT the ―Levy‖ under Sec. 207 of jurisdiction of the taxing authority;
NIRC, which refers to the remedy of the 4. The tax must not impugn on the inherent
Government to collect taxes. and constitutional limitations on the power
of taxation; and
2. Assessment and Collection 5. Assessment and collection of certain kinds of
It refers to the acts of administration and taxes guarantee against injustice to
implementation of the tax law by the individuals, especially by providing notice
executive department through its and opportunity for hearing.
administrative agencies(Bureau of Internal
Revenue or Bureau of Custom) I. Kinds of Taxes
An assessment "refers to the determination
of amounts due from a person obligated to 1. As to Object
make payments. "In the context of national
internal revenue collection, it refers to the a) Personal tax – also known as
determination of the taxes due from a ―capitalization‖ or ―poll taxes‖. These are
taxpayer under the National Internal taxes of fixed amount upon all persons of a
Revenue Code of 1997. (CIR v. Fitness by certain class within the jurisdiction of the
Design,G.R. No. 215957, November 09, taxing power without regard to the amount
2016,penned by [Link]) of their property or their occupations or
businesses in which they may be engaged.
Rules governing assessment and
collection of taxes to prevent its abuse b) Property tax – taxes assessed on all
property or all property of a certain class
1. The tax law must designate which within the jurisdiction of the taxing power.
agency will collect the taxes
2. The circulars or regulations issued by c) Privilege tax – imposed on the
the Secretary of Finance or the performance of an act, the engaging in an
Commissioner of the Internal Revenue occupation, or the enjoyment of a privilege.
must be in accordance with the tax
measures imposed by Congress 2. As to Burden or Incidence

 Collection is the final stage and goal of a) Direct tax– demanded from the very
tax administration. person who, as intended, should pay the tax
which he cannot shift to another. (e.g.
3. Payment income tax, estate tax, donor‘s tax)
The act of compliance by the taxpayer,
including such options, schemes or remedies b) Indirect tax – demanded in the first
as may be legally open or available to him. instance from one person with the
expectation that he can shift the burden to
4. Refund someone else, not as a tax but as part of
the purchase price. (e.g. VAT)

16 Center for Legal Education and Research

 Purple Notes
Taxation Law
(ii) Local - Levied by the Local Government
Indirect tax is imposed upon goods BEFORE (e.g. real property tax, municipal tax,
reaching the consumer who ultimately pays business tax)
for it, not as a tax, but as a part of the
purchase price. (Maceda vs. Macaraig, G.R. No. 6. As to Graduation
88291, June 8, 1993)
a) Progressive - whereby the rate or amount
3. As to Tax Rates of tax increases as the amount of the
income or earning to be taxed increases.
a) Specific tax – imposed and based on a
physical unit of measurement, as by head or b) Regressive - whereby the tax rate
number, weight, or length or volume (e.g. decreases as the amount of income or
taxes on distilled spirits and wines). earning to be taxed increases.
(Tan vs. Mun. of Pagbilao, G.R. L-14264, April
30, 1963) c) Proportionate - Tax rate is based on a
fixed percentage of the amount of the
b) Ad Valorem Tax – imposed on a fixed property, receipts or other bases to be
portion of the value of property with respect taxed.
to which the tax is assessed; Needs an
independent appraiser to determine its Indirect Tax vs. Withholding Tax
value. Indirect Tax Withholding Tax
(VAT and Excise Tax)
c) Mixed– partially specific and partly ad The incidenceof taxation The incidence and
valorem. An example would be the excise falls only in one person but burden of taxation fall
tax on fermented liquors which has a the burden of paying can on the same entity, the
separate specific tax rate based on the be shifted. statutory taxpayer
selling price of the article. (LG Electronics vs. Philippines, Inc. vs. CIR,G.R. No.
165451, December 3, 2014, penned by J. Leonen)
4. As to Purpose
Sources of Tax Laws
a) General tax– levied for ordinary or general
purpose of the government, to raise [Link]
revenue for governmental needs (e.g. motor
vehicle registration fees) (PAL vs. Edu, G.R. [Link] passed by Congress
No. 4138, August 15, 1988).
 National Internal Revenue Code of 1997,
b) Special tax – levied for a special purpose, as amended
to achieve some social or economic ends i.e.
for regulation or the exercise of police 3. Administrative Rulings and Regulations
power, irrespective of whether revenue is
actually raised. Example is Margin Fees,  Administrative rulings refer to less general
which is a form of exchange control or interpretation of tax laws issued on a
restriction designed to discourage imports timely basis by the Commissioner of the
and encourage exports (ESSO Std Eastern vs. Internal Revenue (CIR).
CIR, G.R. No. 28608-9, July 1989), and Oil Price
Stabilization Fund. (Lozano vs. ERB, G.R. No.  Administrative Regulations are intended to
95119-21, December 1990) clarify or explain the law and carry into
effect its general provisions by providing
5. As to Scope or Authority to Impose details of administration and procedure.
Such are issued by the Secretary of
(i) National - Levied by the National Finance upon recommendation of the CIR.
Government (e.g. internal revenue taxes)

17
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 Purple Notes
Taxation Law
Kinds of Administrative Issuances Revenue Audit Memorandum 2018Orders
(RAMOs) are orders issued specifically stating
a. Legislative Rule. A legislative rule is in the the audit programs of the BIR for a particular
nature of subordinate legislation, designed taxable year.
to implement a primary legislation by
providing the details thereof. In the same Revenue Memorandum Rulings (RMRs) are
way that laws must have the benefit of rulings, opinions and interpretations of the CIR
public hearing, it is generally required that with respect to the provisions of the Tax Code
before a legislative rule is adopted, there and other tax laws, as applied to a specific set
must be hearing. (CIR vs. CA, G.R. No. 119761, of facts, with or without established precedents,
August 29, 1996) and which the CIR may issue from time to time
for the purpose of providing taxpayers guidance
b. Interpretative Rule. When an on the tax consequences in specific situations.
administrative rule is merely interpretative in BIR Rulings cannot contravene duly issued
nature, its applicability needs nothing RMRs.
further than its bare issuance for it gives no
real consequence more than what the law Revenue Bulletins are periodic issuances,
itself has already prescribed. When, upon notices and official announcements of the CIR
the other hand, the administrative rule goes that consolidate the BIR‘s position on certain
beyond merely providing for the means that specific issues of law or administration in
can facilitate or render least cumbersome relation to the provision of the Tax Code,
the implementation of the law but relevant tax laws and other issuances for the
substantially adds to or increases the burden guidance of the public. (Reviewer on Taxation,
of those governed, it behooves the agency 2014 Edition, Atty. Victorino C. Mamalateo)
to accord at least to those directly affected a
chance to be heard, and thereafter to be Kinds of Rulings
duly informed, before that new issuance is
given the force and effect of law. (CIR vs. CA, Rulings of First Impression - These refer to
G.R. No. 119761, August 29, 1996) the rulings, opinions and interpretations of the
CIR with respect to the provisions of the Tax
Revenue Regulations (RR) are issuances Code and other tax laws without established
signed by the Secretary of Finance, upon precedent, and which are issued in response to
recommendation of the CIR, that the specific request for ruling filed by a taxpayer
specify,prescribe or define rules and regulations with the BIR. Provided, however, that the term
for the effective enforcement of the provisions shall include reversal, modification or revocation
of the National Internal Revenue Code (NIRC) of any existing ruling. (Revenue Administrative
and related statutes. Order No. 2-2001, issued October 22, 2001)

Revenue Memorandum Circular (RMCs) are Rulings of Established Precedents - These

issuances that publish pertinent and applicable are reiterations of previous rulings, opinions or
portions, as well as amplifications, of laws, rules, interpretations of the CIR. This power may be
regulations and precedents issued by the BIR delegated. (e.g. requests for rulings with the
and other agencies/offices. BIR, Tax Treaty Relief Application with BIR
International Tax Affairs Division)
Revenue Memorandum Orders (RMOs) are
issuances that provide directives or instructions; 4. Judicial Decisions
prescribe guidelines; and outline processes,  Decisions by the Supreme Court and Court
operations, activities, workflows, methods and of Tax Appeals
procedures necessary in the implementation of
stated policies, goals, objectives, plans and J. General Concepts in Taxation
programs of the Bureau in all areas of
operations, except auditing. 1. Prospectivity of Tax Laws

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 Purple Notes
Taxation Law
General Rule: Tax Laws are prospective in doctrine of Lex rei sitae or
application. Lex situs.
Personal Property Where it was actually kept
Exceptions: or located, following the
doctrine of
a. Where no vested right will be impaired;
mobiliasequunturpersona
b. Where the law allows retroactive m (Movables follow the
application; and person)
c. If there is bad faith on the part of the Excise Tax On the place where the
taxpayer(Sec.246,NIRC) act is performed, or
occupation engaged in.
Note: Section 246 of the NIRC states that tax Value Added Tax The place where the
rulings or any revocation, modification, or transaction is made. If the
reversal of any of the rules and regulations transaction is made
promulgated by the Commissioner or any rulings (perfected and
consummated) outside of
or circulars promulgated by him shall not be
the Philippines, then we
given retroactive application if such revocation, can no longer tax such
modifications, or reversal is prejudicial to the transaction.
taxpayers except: Income Tax
Resident citizen Sources of income derived
1. When the taxpayer deliberately misstated or Domestic corporation from within and outside
omitted from his return certain facts or the Philippines
documents required by him by the BIR; Non-resident alien Sources of income derived
2. When the facts subsequently gathered are Non-resident foreign from within the Philippines
different from the facts on which the tax corporation
ruling was based; and Non-resident citizen
3. When the taxpayer is in bad faith. Resident alien
Resident foreign
corporation
2. Imprescriptibility of Taxes Estate and Donor‘s Tax
Resident/Non-resident Properties wherever
General Rule: Taxes are imprescriptible. citizen situated
Exceptions: When provided otherwise by the Resident alien
tax law itself. Non-resident Alien Properties situated within
the Philippines
Example: NIRC provides for statutes of limitation
on the assessment and collection of taxes f. International Comity
therein imposed (i.e. 3 year period to assess,
and 5 year period under Sec.222). Posits that the property of a foreign state or
government may not be taxed by another.
3. Situs of Taxation States find it mutually advantageous for
themselves to create self-imposed restraints
a. Meaning – the place or authority that has on their taxing powers especially with
the right to impose and collect taxes. reference to the properties of foreign
governments within their territorial domain.
Summary – Situs of Tax
4. Double Taxation
KIND OF TAX SITUS
Poll/Capitalization/ Residence of the taxpayer, It means taxing the same person for the same
Community Tax regardless of the source of tax period and the same activity twice, by the
income or location of the same jurisdiction.
property of the taxpayer.
Property Tax
Real Property Where the real property is
located, following the

19
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 Purple Notes
Taxation Law
KINDS OF DOUBLE TAXATION jurisdiction; 1968) 2018
5. During the same i.e. VAT and LBT
a) Double Taxation in Strict Sense – same taxing period; imposed on same
property is taxed twice when it should be 6. Covering the same revenue
taxed only once; and that both taxes are kind or character
imposed on the same property or subject of tax.
matter for the same purpose, by the same
State, Government or taxing authority within Exception: Double taxation will not be allowed
the same jurisdiction or taxing district during if it results in a violation of the equal protection
the same taxing period and covering the clause.
same kind of character of tax. It violates the
equal protection clause of the constitution. There is no double taxation in the following
(Villanueva vs. City of Iloilo, G.R. No. L-26521, instances:
December 28, 1968) 1. By taxing the corporation income tax and
the stockholders‘ dividends from the same
Requisites: corporation;
1. Both taxes are imposed on the same 2. Tax imposed by the State and the local
property or subject matter; government upon the same occupation,
2. For the same purpose; calling or activity;
3. Imposed by the same taxing authority; 3. Real estate tax and income tax collected on
4. Within the same jurisdiction; the same real property leased for earning
5. During the same taxing period; purposes.(Villanueva vs. City of Iloilo,G.R. No. L-
6. Covering the same kind or character of 26521 December 28, 1968)
tax. 4. Taxes are imposed on taxpayer‘s final
product and the storage of raw materials
b) Double Taxation in Broad Sense – is the used in the production of the final product.
opposite of direct double taxation and is not (Procter and Gamble Philippines vs. Municipality
legally objectionable. The absence of one or of Jagna, G.R. No. L-24265, December 8,1979)
more of the foregoing requisites of
obnoxious direct tax makes it indirect. c) Modes of Eliminating Double Taxation

Constitutionality of Double Taxation (i) Tax Deduction – a subtraction from gross

Double taxation in its stricter sense is income in arriving at the taxable income:
unconstitutional, but that in the broader sense is
not necessarily so.  Section 4(a) of the Expanded Senior Citizens
Act of 2003, which provides that the 20%
General Rule: Our Constitution does not discount given to senior citizens shall be
prohibit double taxation, in broad sense. Hence, considered a tax deduction, rather than a
it may not be invoked as a defense against the tax credit on the part of the establishment
validity of tax laws. granting the same, is not unconstitutional.
While the Constitution protects property
DIRECT DOUBLE INDIRECT DOUBLE rights, the State, in the exercise of the
TAXATION TAXATION (Allowed) police power, can intervene in the
(Prohibited) operations of a business which may result in
1. Both taxes Extends to all cases in an impairment of property rights in the
areimposed on the which there are two or process.(Carlos Super Drug Corp. vs. DSWD,
same property or more pecuniary G.R. No. 166494, June 29, 2007)
subject matter; impositions but one or
2. For the more of the (ii) Tax Credit - an amount subtracted from an
samepurpose; requisites of direct individual‘s or entity‘s tax liability (tax due)
3. Imposed by the double taxation is
to arrive at the total tax liability.
same taxing missing. (Villanueva vs.
authority; City of Iloilo, G.R. No. L-
4. Within the same 26521, December 28,

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 Purple Notes
Taxation Law
 A deduction differs from a tax credit, in income or capital. (CIR vs. SC Johnson and Son,
that a deduction reduces taxable income G.R. No. 127105, June 25, 1999)
while a credit reduces tax liability.
[Link] Method-the tax paid in the estate of
 Under the Expanded Seniors Citizens Act source is credited against the tax levied in the
of 2003, the 20% discount shall be state of residence. (Id.)
considered as a tax deduction not as a
tax credit. The difference between exemption method and
credit method is that the former focuses on
Tax Deduction Tax Credit income or capital itself, while the latter focuses
An amount deducted An amount DIRECTLY on tax. (Id.)
from GROSS thus DEDUCTED from TAX
reduces TAXABLE BASE LIABILITY Note: The BIR issued RMO No. 1-2000, as
and reducing TAX DUE amended by RMO No. 72-2010, requiring
Example: Creditable
taxpayers to file for a Tax Treaty Relief
Example: Itemized Withholding Tax
Deductions/ Cost of
Application on or before the transaction date
Sales -Deducted first to before availing of the provisions of a tax treaty.
arrive at the TAXABLE
INCOME ―Failure to comply with the requirements
of RMO No. 1-2000, as amended by RMO
A tax deduction is used A tax credit is used by No. 72-2010, is not fatal to the availment
BEFORE tax is private establishment of tax treaty relief‖
computed only AFTER the tax has
(CIR v. Central Drug been computed  Tax treaties are entered into to minimize, if
Corporation, GR
not eliminate, the harshness of international
159647,April 15, 2005)
juridical double taxation, which is why they
are also known as double tax treaty or
double tax agreements.
(iii)Treaties with other states
Laws and issuances must ensure that the
 A tax treaty sets out the respective rights to
reliefs granted under tax treaties are
tax of the state of source (situs) and the
accorded to the parties entitled thereto. The
state of residence with regard to certain
BIR must not impose additional
cases, an exclusive right to tax is conferred
requirements that would negate the
on one of the contracting states; however,
availment of the reliefs provided for under
for other items of income or capital, both
international agreements more so, when the
states are given the right to tax, although
Tax Treaty does not provide for any pre-
the amount of tax that may be imposed by
requisite for the availment of the benefits
the state of source is limited.
under said agreement.
 It applies whenever the state of source is
given full or limited right to tax. The treaty
The obligation to comply with a tax treaty
makes it incumbent upon the state of
must take precedence over the objective of
residence to allow relief in order to avoid
RMO No. 1-2000. Logically, noncompliance
double taxation.
with tax treaties has negative implications
on international relations, and unduly
Two Methods of Relief
discourages foreign investors. While the
consequences sought to be prevented by
[Link] Method- the income or capital
RMO No. 1-2000 involve an administrative
which is taxable in the state of source or situs is
procedure, these may be remedied through
exempted in the state of residence, although it
other system management processes, e.g.,
may be taken into account in determining the
the imposition of a fine or penalty. But we
tax rate applicable to the taxpayer‘s remaining
cannot totally deprive those who are entitled
to the benefit of a treaty for failure to
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 Purple Notes
Taxation Law
strictly comply with an administrative capitalized value of future taxes2018which the
issuance requiring prior application for tax purchaser expects to be called upon to pay.
treaty relief. (Deutsche Bank AG Manila Branch
vs. CIR, GR No. 188550, August 19, 2013) A special form of backward shifting except that
while the latter involves the shifting back of a
(iv)Tax Exemption - grant of immunity to single tax, the former involves the throwing
particular persons or entities from the back of a whole series of taxes and taxes place
obligation to pay taxes. before any of them, with the exemption of the
first is paid.( Valencia & Roxas, Income Taxation,
(v)Reduction – Tax sparring rule on dividends 2016, p.35)
received by Non – Resident Foreign
Corporations (NRFCs) of 15% from Transformation – it is the method whereby
30%(Sec.28[B][5][b],NIRC) the manufacturer or producer upon whom the
tax has been imposed, fearing the loss of his
5. Escape From Taxation market if he should add the tax to the price,
pays the tax and endeavors to recoup himself by
a. Shifting of Tax Burden improving his process of product at a lower
cost.(Valencia & Roxas, Income Taxation, p.35)
The transfer of the burden of tax by the original
payer or the one on whom the tax was assessed b. Distinguish: tax avoidance and tax
or imposed to another. evasion

(i) Ways of Shifting Tax Burden Tax avoidance/ Tax minimization

It is the use by the taxpayer of legally
1. Forward shifting- transfer of the tax permissible alternative tax rates or methods of
burden from a factor of production assessing taxable property or income in order to
through the factors of distribution until avoid or reduce tax liability (e.g. termination of
finally rests on the consumer. deposits subject to 20% final tax and re-
2. Backward shifting- transfer of the tax investing it in tax-exempt government bonds). It
burden from the consumer through the is a saving device within the means sanctioned
factors of distribution to the factor of by law and should be used by the taxpayer in
production. good faith and at arms length.(CIR vs. Estate of
3. Onward shifting- transfer of the tax Benigno Toda, GR 147188, September 14,2004)
burden two or more times either
forward or backward(Valencia & Roxas, Tax evasion/ Tax Dodging
Income Taxation, 2016, p.34) It is the use of taxpayer of illegal or fraudulent
means to evade or lessen the payment of a tax
(ii) Taxes That Can Be Shifted - Indirect (e.g. deliberate non-reporting or under-reporting
taxes e.g., Value Added Tax of an income). (Id.)

(iii) Meaning of Impact and Incidence of Indicia of Fraud in Tax Evasion

Taxation
a) Failure to declare for taxation purposes true
Impact of Taxation - The point on which and actual income derived from business for
a tax is originally imposed. 2 consecutive years; or
b) Substantial under declaration of revenues in
Incidence of Taxation – the point on the income tax returns of the taxpayer for 4
which a tax burden finally rest or settle consecutive years coupled with intentional
down overstatement of deductions. (see Sec.
248[B], NIRC)
Tax capitalization – it means the reduction in
the price of the taxed object equal to the Connotes the integration of 3 Factors:
(ESC)

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 Purple Notes
Taxation Law

1. The end to be achieved, i.e. the payment of People v. Kintanar People v. Judy Ann
less than that known by the taxpayer to be Santos
legally due; All elements of tax The element of willfulness
2. An accompanying state of mind which is evasion are present absent
described as being ―evil‖, in ―bad faith‖, Involved non – filing of Involved failure to supply
returns correct and accurate tax
―willful‖, or ―deliberate and not merely
return
accidental‖, and Kintanar was known to Judy Anne relied on her
3. A course of action or failure of action which be a businesswoman to manager ever since she
is unlawful.(CIR [Link] of Benigno Toda, GR which the Court found was a child to handle her
147188, September 14,2004) she should have known finances.
her obligations
Note: See also Section 248(B) of NIRC
providing for prima facie evidence of filing a 6. Exemption From Taxation
false or fraudulent return.
a) Meaning of Exemption from Taxation
TAX AVOIDANCE TAX EVASION /TAX A grant of immunity, express or implied, to
/TAX DODGING particular persons or corporations from the
MINIMIZATION obligation to pay taxes.
The tax saving device A scheme used outside of
within the means those lawful means and
sanctioned by law. This when availed of, it usually
Basis of the Grant of Exemption: ―No law
method should be used subjects the taxpayer to granting any tax exemption should be passed
by the taxpayer in good further or additional civil or without the concurrence of a majority of all the
faith and at arm‘s criminal liabilities. Tax members of Congress (Section 28(4), Article VI,
length. evasion connotes (CIR vs. 1987 Constitution).
Estate of Toda, Jr., G.R.
No. 147188, September 14, b) Nature of Tax Exemption
2004) 1. It is a personal privilege of the grantee.
Legal Illegal 2. It is generally revocable by the
government unless the exemption is
Doctrine of Willful Blindness
founded on a contract, which is
protected from impairment, but the
Mere reliance on a representative or agent is not
contract must contain the other
a valid ground to justify any noncompliance in
essential elements of contracts.
tax obligations. The taxpayer must inquire,
 It implies a waiver on the part of the
check and validate whether or not his
government to collect what otherwise
representative or agent has complied with the
would be due, and in this sense is
taxpayer‘s tax responsibilities. (People vs.
prejudicial thereto.
Kintanar, CTA EB Crim. No. 006, December 3, 2010)
3. It is not necessarily discriminatory so
long as the exemption has a reasonable
However in the case of People v. Judy Ann
foundation or rationale basis.
Santos (CTA Case No. 012, 2013) affirmed by the
Supreme Court (G.R. No. 206001, April
Basic Principles Regarding Tax Exemption
17,2013)where the CTA Division acquitted
Santos despite the same circumstances as
 Exemptions are highly disfavored by law and
Kintanar. Santos was charged with failure to
he who claims an exemption must be able
supply correct and accurate information in her
to justify his claim by the clearest grant of
income tax return. She claimed that by virtue of
law. An exemption from the common
trust, respect and confidence, she entrusted her
burden cannot be permitted to exist upon
finances to her manager since she was a child.
vague implication. (Asiatic Petroleum Co. vs.
Here the CTA Division found that the element of
Llanes, G.R. No. 25386, October 20, 1926)
wilfiullness and motive to commit fraud were
wanting and that Santos was merely negligent.
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 Purple Notes
Taxation Law
Notes: As to Extent: 2018

1. He who claims exemption should prove his (i) Total Exemption – connotes absolute
factual and legal basis for exemption. immunity.
(Commissioner of Internal Revenue vs. Acesite (ii) Partial Exemption – one where a
Philippines Hotel Corporation, G.R. No. 147295, collection of a part of the tax is dispensed
February 16, 2007) with.
2. Tax exemptions are strictly construed
against the person claiming it. (Esso Standard d) Rationale/Grounds for Exemption
Eastern, Inc. vs. Acting Commissioner of
Customs, GR No. L-21841, October 28, 1966)
Being a waiver from its power to tax, the
government, in granting tax exemption,
 Constitutional grant of exemptions is
should justify that the grant of such
self-executing.
exemption will benefit the body of people,
 In the same way that taxes are
which is sufficient to offset the loss of
personal, tax exemptions are also
revenue occasioned thereby.
personal.
Grounds for Tax Exemption
 Deductions from income tax purposes
partake of the nature of tax exemptions,
(i) Contract – the grant of tax exemption is
therefore should also be construed strictly
usually contained in the charter of the
against the taxpayer. (Commissioner of
corporation to which the exemption is
Internal Revenue vs. General Foods Phil., Inc.,
GR No. 143672, April 24, 2003) granted.
(ii) Public policy -to encourage new and
 The same is true with regards tax refunds. necessary industries, or to foster charitable
(Commissioner of Internal Revenue vs. Eastern institutions.
Telecommunications Phil., Inc., G.R. No. 163835, (iii)Reciprocity – to reduce the rigors of
July 7, 2010) international double or multiple taxation, tax
exemptions maybe granted in treaties. A tax
c) Kinds of Tax Exemption exemption is a personal privilege of the
grantee and therefore not assignable; it is
As to Form: generally revocable by the government,
unless founded on contract and must not be
(i) Express - Expressly granted by the discriminatory.
Constitution, statutes, treaties, franchises or
similar legislative acts. e) Revocation of Tax Exemption
(ii) Implied - When particular persons,
properties, or exercise are deemed exempt If the grant of an exemption does not constitute
as they fall outside the scope of the taxing a contract, but merely ―a spontaneous
provision itself. concession by the legislature, not connected
(iii)Contractual - Are those agreed to by the with any service or duty imposed‖ it is
taxing authority in contract lawfully entered REVOCABLE by the power which made the
into by them under enabling laws. grant.

As to Basis: Thus, if the basis of the tax exemptions is by

virtue of a franchise granted by Congress, the
(i) Constitutional Exemptions – Immunities exemption may be revoked. However, if the tax
from taxation which originate from the exemption constitutes a binding contract and for
Constitution. a valuable consideration, the government cannot
(ii) Statutory Exemptions – those which unilaterally revoke the tax exemption.
emanate from legislation.

24 Center for Legal Education and Research

 Purple Notes
Taxation Law
Q: IS TAX EXEMPTION REVOCABLE? Rules:

A:It depends. A law which changes the terms of a. When the exemption is unilaterally granted
the contract by making new conditions, or by law and the same is withdrawn by virtue
changing those in the contract, or dispenses of another law, there is no violation.
with those expressed, impairs the obligation. b. When the exemption is bilaterally agreed
However, the non-impairment rule does not upon between the government and the
apply to public utility franchises since a franchise taxpayer, it cannot be withdrawn without
is subject to amendment, alteration or repeal by impairing the contract.
the Congress when the public interest so c. When the exemption is granted under a
requires (Section 11, Article XII, 1987 Constitution). franchise, it may be revoked because a
franchise is subject to amendment,
 While the Court has, not too infrequently, alteration, or repeal by Congress.
referred to tax exemptions contained in
special franchises as being in the nature of 7. Doctrine of Equitable Recoupment
contracts and a part of the inducement for
carrying on the franchise, these exemptions,  Where the refund of a tax illegally or
nevertheless, are far from being strictly erroneously collected or overpaid by a
contractual in nature. Contractual tax taxpayer is barred by prescription, a tax
exemptions, in the real sense of the term being assessed against a taxpayer may be
and where the non-impairment clause of the recouped or set-off against the tax whose
Constitution can rightly be invoked, are refund is now barred by prescription.
those agreed to by the taxing authority in (Collector of Internal Revenue vs. University of
contracts, such as those contained in Santo Tomas and the Court of Tax Appeals, G.R.
government bonds or debentures, lawfully No. L-11274, November 28, 1958)
entered into by them under enabling laws in
which the government, acting in its private  Note: This is NOT followed in the
capacity, sheds its cloak of authority and Philippines. (Id.)
waives its governmental immunity. Truly,
tax exemptions of this kind may not be 8. Compensation and Set-off
revoked without impairing the obligations of
contracts. General Rule: Taxes cannot be the subject of
compensation or set-off.
These contractual tax exemptions, however,
are not to be confused with tax exemptions Reasons:
granted under franchises. A franchise
partakes the nature of a grant which is 1. Lifeblood Doctrine;
beyond the purview of the non-impairment 2. Taxes are not contractual obligation but
clause of the Constitution. Indeed, Article arise out of duty to the government;
XII, Section 11, of the 1987 Constitution, 3. The government and the taxpayer are not
like its precursor provisions in the 1935 and mutually creditors and debtors of each
the 1973 Constitutions, is explicit that no other. (Francia vs. IAC, G.R. No. L-67649, June
franchise for the operation of a public utility 28, 1988)
shall be granted except under the condition
that such privilege shall be subject to Exception: Where both claims already became
amendment, alteration or repeal by overdue and demandable as well as fully
Congress as and when the common good so liquidated, or where the government and the
requires. (Meralco vs. Province of Laguna, G.R. taxpayer are in their own right reciprocally
No. 131359 May 5, 1999) debtors and creditors of each other,
compensation takes place by operation of law.

25
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 Purple Notes
Taxation Law
 Thus, a tax presently being assessed against 2018
end to one already commenced (Article 2028, New
a taxpayer may not be recouped or set-off Civil Code).
against an overpaid tax the refund of which
is already barred by prescription a) Requisites:
(DOMONDON, 11th ed, p. 46)
1. The taxpayer must have a tax liability.
 A tax is not an obligation that is created by 2. There must be an offer (of the amount to
contracts express or implied. It is an be paid by the taxpayer)
obligation imposed by law. Inasmuch as 3. There must be an acceptance (by the
taxes are not debt, it follows that the two Commissioner or taxpayer as the case
obligations are not subject of set-off or maybe) of the offer in the settlement of the
compensation under Art. 1279 of the New original claim.
Civil Code. (Domingo vs. Garlitos, G.R. No. L-
18994, June 29, 1963) b) Persons Allowed to Enter into
Compromise of Tax Obligations:
 Taxes could not be set-off against the
taxpayer‘s claim of refund for reforestation 1. BIR Commissioner – as expressly
charges it initially shouldered which should authorized by the NIRC subject to the
have been the obligation of the government. following conditions.
(Republic vs. Mambulao Lumber, G.R. No. L- a) When a reasonable doubt as to validity
17725, February 28, 1962) of the claim against the taxpayer exist;
OR
 The obligation to pay real estate tax b) The financial position of the taxpayer
delinquency could not be set-off by the demonstrates a clear inability to pay the
amount which the government is indebted assessed tax.
to the former by way of expropriation that
was effected by the national government. 2. Collector of Customs- with respect to
(Francia vs. IAC, G.R. No. L-67649, June 28,
custom duties limited to cases where the
1988)
legitimate authority is specifically granted
 There can be no offsetting of taxes against such in remission of duties.
the claims that a taxpayer may have against
the government, such as reimbursement 3. Customs Commissioner- subject to the
from the Oil Price Stabilization Fund (OPSF). approval of the Secretary of Finance, in
(Caltex Phils. vs. COA, G.R. No. 92585, May 8, cases involving the imposition of fines,
1992) surcharges, and forfeitures.

 Philex cannot refuse the payment of its tax [Link] Amnesty

liabilities on the ground that it has pending
claims for VAT input credit/refund. A Definition
taxpayer cannot refuse to pay his taxes
when they fall due simply because he has a Tax amnesty is a general pardon or intentional
claim against the government or that the overlooking by the State of its authority to
collection of the tax is contingent on the impose
result of the lawsuit it filed against the
government. (Philex Mining vs. Commissioner, penalties on persons otherwise guilty of evasion
G.R. No. 125704, August 28, 1998) or violation of a revenue or tax law. It partakes
of an absolute forgiveness or waiver by the
9. Compromise and Tax Amnesty government of its right to collect what is due it
and to give tax evaders who wish to relent a
Compromise chance to start with a clean slate. A tax
amnesty, much like a tax exemption, is never
A contract whereby the parties, by making favored nor presumed in law. The grant of a tax
reciprocal concessions, avoid litigation or put an amnesty, similar to a tax exemption, must be

26 Center for Legal Education and Research

 Purple Notes
Taxation Law
construed strictly against the taxpayer and K. Construction and Interpretation of
liberally in favor of the taxing authority. (CIR vs.
Philippine-Aluminum Wheels, Inc., G.R. No. 216161, 1. Tax Laws
August 9, 2017)
Tax laws must be construed reasonably to
Effect of submission of documentary carry out the purpose, the intent, and the
requirements for availment of tax amnesty objective of the law.
The Court explained that the documentary
requirements and payment of the amnesty tax General Rule: If the tax law is clear and
operate as a suspensive condition, such that unambiguous, apply the law strictly against the
completion of these requirements entitles the taxpayer and in favor of the government. (CIR v.
taxpayer-applicant to immediately enjoy the CA, CTA and Ateneo de Manila, GR 115349, April 18,
immunities and privileges under Republic Act 1997)
No. 9480.
Exception: If the law is doubtful and
However, the Court further stated that Section 6 ambiguous, then the law must be construed
of the law contains a resolutory condition. strictly against the Government and liberally in
Immunities and privileges will cease to apply to favor of the taxpayer.
taxpayers who, in their SALN, were proven to
have understated their net worth by 30% or Burdens are not to be imposed nor presumed to
[Link] Act No. 9480 provides that the be imposed beyond the plain and express terms
proceeding to challenge the SALN must be of the law. "The general rule of requiring
initiated within one year following the date of adherence to the letter in construing statutes
filing of the Tax Amnesty documents.50 applies with peculiar strictness to tax laws and
Respondent asserts that it availed of the tax the provisions of a taxing act are not to be
amnesty program on January 25, 2008. Hence, extended by implication. (CIR vs. San Miguel
petitioner's challenge, made only in April 2009, Corporation,G.R. No. 205045, January
was already time-barred(CIR vs. Apo Cement 25,2017,penned by J. Leonen)
Corp.,G.R. No. 193381, February 8, 2017,penned by
J. Leonen) 2. Tax Exemption and Exclusion

Distinguish from tax exemption General Rule: Must be construed strictly

against the grantee and liberally in favor of the
TAX AMNESTY TAX EXEMPTION taxing authority.
Tax amnesty is an Tax exemption is an
immunity from all immunity or privilege, a  Taxation is a destructive power which
criminal, civil and freedom from a charge or interferes with the personal and property
administrative liabilities burden to which others rights of the people and takes from them a
arising from non- are subjected. portion of their property for the support of
payment of taxes. the government. And since taxes are what
Granted to all taxpayers. Granted only to taxpayers we pay for civilized society, or are the
covered by the specific tax
lifeblood of the nation, the law frowns
exemption statute.
against exemptions from taxation and
It is retroactive in It is generally prospective
application. in application. statutes granting tax exemptions are thus
There is a revenue loss There is no revenue loss construed strictissimi juris against the
since there were because there were no taxpayer and liberally in favor of the taxing
actually taxes due but actual taxes due as the authority. A claim of refund or exemption
the collection was just person or transaction is from tax payments must be clearly shown
waived by the protected by tax and be based on language in the law too
Government. exemption. plain to be mistaken. Elsewise stated,
taxation is the rule, exemption therefrom is
the exception. (Paseo Realty & Development

27
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 Purple Notes
Taxation Law
Corporation vs. Court of Appeals, G.R. No. entitled to ITH incentive, it is 2018
my humble
119286, October 13, 2004) view that the income received by PPI from
respondent is subject to regular corporate
 Tax Exemptions are not favored and are income tax imposed under Section 27(A) of
construed strictissimi juris against the the NIRC as amended. Tax incentives
taxpayer and liberally in favor of the taxing partake of the nature of tax exemptions.
authority. (Smart Communications Inc. vs City They are a privilege to which the rule that
of Davao, G.R. No. 155491, July 21, 2009) tax exemptions must be strictly construed
against the taxpayer apply. One who seeks
 Taxation is the rule and exemption the an exemption must justify it by words "too
exception, and therefore, he who claims plain to be mistaken and too categorical to
exemption must be able to justify his claim be misinterpreted. (Commissioner of Internal
or right thereto, by a grant expressed in Revenue v. J.P. Morgan Chase Bank, N.A.-
terms ―too plain to be mistaken and too Philippine Customer Care Center,G.R. No.
categorical to be misinterpreted.‖(CIR vs. P.J. 210528, November 28, 2018,penned by
Kiener Co., Ltd., G.R. No. L-24754, July 18, 1975) [Link])

Exceptions: 3. Tax Rules and Regulations

1. Where the statute granting exemption The general principles in the construction of
expressly provides for a liberal tax laws applies in the interpretation of tax
interpretation; rules and regulations. To be valid, the tax
2. Special taxes relating to special cases and rules must be consistent with the provisions
affecting only special classes of persons (DE of the tax law which they seek to
LEON, Fundamentals of Taxation,2004,p.69); implement.
3. Property held in public ownership
(DIMAAMPAO, Tax Principles and Remedies, Requisites for valid tax regulation: (PEG)
p.121);
4. Traditionalexemptees, such as those in a) Publication;
favor of religious and charitable institutions b) Germane to the public purpose embodied in
(ABAN, Law of Basic Taxation,2001,p.119); the governing statute; and
5. In favor of the government, its political c) Exercised within the authority.
subdivisions or instruments (Maceda vs.
Macaraig, G.R.88291,May 31,1991); and 4. Penal Provisions of Tax Laws
6. By clear legislative intent (CIR vs. Arnoldus
Carpentry Shop, G.R. No.7112,March 25,1988). Strict construction of penal statutes, so as
not to extend the plain terms thereof that
Implication of ―strictly construed‖ might create offenses by mere implication
not so intended by the legislative
i. Tax exemptions must never be presumed. It body(People vs. Martin,G.R. No. L-38019, May
must be established and proved by the 16, 1980)
taxpayer.
ii. The law must be limited to what it says. It PART II. NATIONAL TAXATION
must be confined to the statutory language. (National Internal Revenue Code of 1997,
iii. Should be personal to the exemptee, or as amended by R.A. No. 10963 or the Tax
personal to the tax beneficiary. Reform for Acceleration and Inclusion
Law)
 Considering that respondent failed to
establish that [People Support] is registered A. Taxing Authority
with PEZA as a facility-provider and that
[People Support]'s income from the lease of 1. Jurisdiction, Power and Functions of
physical plant space, infrastructure[,] and the Commissioner of Internal Revenue
other transmission facilities to respondent is

28 Center for Legal Education and Research

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Taxation Law
a) Powers and Duties of the Bureau of Finance. A taxpayer who receives an
Internal Revenue (E3A) adverse ruling from the CIR may, within
thirty (30) days from the date of receipt of
 The assessment and collection of all such ruling, seek its review by the Secretary
internal revenue taxes, fees, and of Finance. The Secretary of Finance may
charges; also review the rulings motu proprio. (DOF
 The enforcement of all forfeitures, Order 7-02)
penalties, and fines connected
therewith; 2. Power to decide tax cases
 The execution of judgments in all  The CIR shall also have the power to
cases in its favor by the CTA and decide the following tax cases but
ordinary courts; subject to the exclusive appellate
 Giving effect to and administering the jurisdiction of the CTA:(DROP)
supervisory and police powers conferred i. Disputed assessments,
to it by the Tax Code or other laws.(Sec. ii. Refunds of internal revenue taxes, fees
2, NIRC) or other charges,
iii. The penalties imposed in relation
b) Powers of the Commissioner of thereto, or
Internal Revenue: iv. Other matters arising under the Tax
Code, other tax laws or portions thereof
These are: (IDIOM ASAP -D) administered by the BIR. (Sec. 4, NIRC)
1. Interpret tax laws (Sec. 4[1], NIRC).
2. Decide Tax Cases(Sec. 4[2], NIRC) In any case, even if this Court were to
3. Obtain information and to summon disregard the Collection Letter as a final
examine and take testimony of persons decision of the Commissioner on Avon's
(Sec. 5, NIRC as amended by TRAIN) protest, the Collection Letter constitutes
4. Make assessments and prescribe an act of the Commissioner on "other
additional requirements for tax matters" arising under the National
administration and enforcement(Sec. Internal Revenue Code, which, pursuant
6[A], NIRC, as amended by TRAIN) to Philippine Journalists, Inc. v. CIR, may
5. Prescribe Real Property Values(Sec. be the subject of an appropriate appeal
6[E], NIRC,as amended by TRAIN) before the Court of Tax Appeals(CIR vs.
6. Make arrest and seizures(Sec. 15, NIRC,) Avon Products Manufacturing,G.R. Nos.
7. Delegate powers(Sec. 7, NIRC,) 201398-99, October 03, 2018,penned by J.
8. Assign or reassign internal revenue Leonen).
officers to establishments where articles
3. Powerto Obtain Information, and to
subject to excise tax are produced or
Summon, Examine, and Take
kept(Secs.95 &97 , NIRC)
9. Impose duties on certain officers Testimony of Persons. - In ascertaining
10. Suspend business operations(Sec. 115, the correctness of any return, or inmaking a
NIRC) return when none has been made, or in
determining the liability of any person for
1. Power to interpret tax laws any internal revenue tax, or in collecting any
 The CIR shall have the exclusive and suchliability, or in evaluating tax compliance,
original jurisdiction to interpret the the Commissioner is authorized:(E-COST)
provisions of the Tax Code and other
special tax laws, subject for review by (i) To examine any book, paper, record, or
the Secretary of Finance.(Sec. 4, NIRC) other data which may be relevant or
material to such inquiry;
NOTE: A ruling by the CIR that interpret
provisions of the NIRC and other tax laws (ii) To obtain on a regular basis from any
shall be presumed valid unless modified, person other than the person whose internal
reversed or superseded by the Secretary of revenue tax liability is subject to audit or
29
Bar Operations C ommissions 29
 Purple Notes
Taxation Law
investigation, or from any office or officer of (v) To cause revenue officers and2018
employees
the national and local governments, to make a canvass from time to time of
government agencies and instrumentalities, any revenue district or region and inquire
including the BangkoSentral ng Pilipinas and after and concerning all persons therein
government-owned or -controlled who may be liable to pay any internal
corporations, any information such as, but revenue tax, and all persons owning or
not limited to, costs and volume of having the care, management or
production, receipts or sales and gross possession of any object with respect to
incomes of taxpayers, and the names, which a tax is imposed.
addresses, and financial statements of
corporations, mutual fund companies, The provisions of the foregoing paragraphs
insurance companies, regional operating notwithstanding, nothing in this Section shall be
headquarters of multinational companies, construed as granting the Commissioner the
joint accounts, associations, joint ventures authority to inquire into bank deposits other
of consortia and registered partnerships, than as provided for in Section 6(F) of the NIRC.
and their members; (Sec. 5, NIRC)

Provided, That the Cooperative It is the power to hear and determine questions
Development Authority shall submit to the of fact to which the legislative policy is to apply
Bureau a tax incentive report, which shall and to decide in accordance with the standards
include information on the income tax, laid down by the law itself in enforcing and
value-added tax, and other tax incentives administering the same law. The administrative
availed of by cooperatives registered and body exercises its quasi-judicial power when it
enjoying incentives under Republic Act No. performs in a judicial manner an act which is
6938, as amended: Provided, further, That essentially of an executive or administrative
the information submitted by the nature, where the power to act in such manner
Cooperative Development Authority to the is incidental to or reasonably necessary for the
Bureau shall be submitted to the performance of the executive or administrative
Department of Finance and shall be included duty entrusted to it(CIR vs. Avon Products
in the database created under Republic Act Manufacturing, G.R. Nos. 201398-99, October 03,
No. 10708, otherwise known as ‗The Tax 2018,penned by J. Leonen).
Incentives Management and Transparency In carrying out these quasi-judicial functions,
Act (TIMTA)‘.(Sec. 5(B) of NIRC, amended by the Commissioner is required to "investigate
TRAIN Law) facts or ascertain the existence of facts, hold
hearings, weigh evidence, and draw conclusions
(iii) To summon the person liable for tax or from them as basis for their official action and
required to file a return, or any officer or exercise of discretion in a judicial nature." Tax
employee of such person, or any person investigation and assessment necessarily
having possession, custody, or care of the demand the observance of due process because
books of accounts and other accounting they affect the proprietary rights of specific
records containing entries relating to the persons.
business of the person liable for tax, or any
other person, to appear before the 4. Power Make Assessments and
Commissioner or his duly authorized Prescribe Additional Requirements for
representative at a time and place specified Tax Administration and Enforcement
in the summons and to produce such (Sec.6, NIRC)
books, papers, records, or other data, and
to give testimony;  BIR Commissioner Caesar Dulay in 2018
thru a Tax Advisory made use of this
(iv) To take such testimony of the person section when he obligated the taxpayer
concerned, under oath, as may be relevant to pay monthly withholding taxes rather
or material to such inquiry; and than quarter as per TRAIN Law.

30 Center for Legal Education and Research

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Taxation Law
(i) Examination of Returns and public sectors, and with prior notice to
Determination of Tax Due - After a affected taxpayers, determine the fair
return has been filed as required under market value of real properties located
the provisions of the NIRC, the in each zone or area, subject to
Commissioner or his duly authorized automatic adjustment once every three
representative may authorize the (3) years through rules and regulations
examination of any taxpayer and the issued by the Secretary of Finance
assessment of the correct amount of based on the current Philippine
tax, notwithstanding any law requiring valuation standards: Provided, That no
the prior authorization of any adjustment in zonal valuation shall be
government agency or instrumentality: valid unless published in a newspaper of
Provided, however, That failure to file a general circulation in the province, city
return shall not prevent the or municipality concerned, or in the
Commissioner from authorizing the absence thereof, shall be posted in the
examination of any taxpayer.(Sec. 6(A) of provincial capitol, city or municipal hall
NIRC, as amended by TRAIN Law) and in two (2) other conspicuous public
places therein: Provided, further, That
(ii) Failure to Submit Required the basis of any valuation, including the
Returns, Statements, Reports and records of consultations done, shall be
other Documents. - When a report public records open to the inquiry of any
required by law as a basis for the taxpayer. (Sec. 6(E) of NIRC, amended by
assessment of any national internal TRAIN Law)
revenue tax shall not be forthcoming
within the time fixed by laws or rules To summarize: (PNP-MZ)
and regulations or when there is reason 1. Mandatory consultation with both private
to believe that any such report is false, and public competent appraisers before
incomplete or erroneous, the division of the Philippines into zones.
Commissioner shall assess the proper 2. Prior Notice to affected taxpayers before the
tax on the best evidence obtainable. determination of fair market values of the of
(Best Evidence Obtainable Rule) real properties.
3. Publication or posting of adjustments in
zonal value in newspaper of general
The law is specific and clear. The rule
circulation in the province, city or
on the "best evidence obtainable"
municipality concerned.
applies when a tax report required by
4. The basis of valuation and records of
law for the purpose of assessment is not
consultation shall be public records open to
available or when the tax report is
the inquiry of the taxpayer.
incomplete or fraudulent(Bonifacio Sy Po
vs CA, G.R. NO. 81446, August 18, 1988) 5. Zonal valuations shall be automatically
adjusted every three years.
(iii) Authority to Conduct Inventory-
taking, Surveillance and to For purposes of computing any internal
Prescribe Presumptive Gross Sales revenue tax, the value of the property
and Receipts; shall be, whichever is the higher of:
(iv) Authority to Terminate Taxable
1. The fair market value as determined by the
Period;
Commissioner; or
(v) Power to Prescribe Real Property
2. The fair market value as shown in the
Values
schedule of values of the Provincial and City
The Commissioner is hereby authorized
Assessors.‖
to divide the Philippines into different
zones or areas and shall, upon
(vi)Authority of the Commissioner to
mandatory consultation with competent
Inquire into Bank Deposit Accounts
appraisers both from the private and
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 Purple Notes
Taxation Law
and Other Related information held by Bureau of Internal Revenue2018for tax
Financial Institutions. - Notwithstanding assessment, verification, audit and
any contrary provision of Republic Act No. enforcement purposes. (Sec. 6[F], NIRC,
1405, Republic Act No. 6426, otherwise as amended)
known as the Foreign Currency Deposit Act
of the Philippines, and other general or
special laws, the Commissioner is hereby Contents of the Request
authorized to inquire into the bank deposits
and other related information held by (1) The identity of the person under
financial institutions of: examination or investigation;
(2) A statement of the information being
Q: May the CIR inquire in bank deposits of sought, including its nature and the form in
taxpayers in relation to an on – going audit which the said foreign tax authority prefers
investigation? to receive the information from the
Commissioner;
General Rule: No. (3) The tax purpose for which the information is
being sought;
Exceptions:
(4) Grounds for believing that the information
a) A decedent to determine his gross requested is held in the Philippines or is in
the possession or control of a person within
estate;
the jurisdiction of the Philippines;
b) Any taxpayer who has filed an (5) To the extent known, the name and address
application for compromise of his tax of any person believed to be in possession
liability under Section 204(A)(2) of this of the requested information;
Code by reason of financial incapacity to (6) A statement that the request is in conformity
pay his tax liability. with the law and administrative practices of
the said foreign tax authority, such that if
In case a taxpayer files an application to
the requested information was within the
compromise the payment of his tax
jurisdiction of the said foreign tax authority
liabilities on his claim that his financial
then it would be able to obtain the
position demonstrates a clear inability to
information under its laws or in the normal
pay the tax assessed, his application
course of administrative practice and that it
shall not be considered unless and until
is in conformity with a convention or
he waives in writing his privilege under
international agreement; and
Republic Act No. 1405, Republic Act No.
(7) A statement that the requesting foreign tax
6426, otherwise known as the Foreign
authority has exhausted all means available
Currency Deposit Act of the Philippines,
in its own territory to obtain the information,
or under other general or special laws,
except those that would give rise to
and such waiver shall constitute the
disproportionate difficulties. (Sec. 7, RR 10-
authority of the Commissioner to inquire
2010)
into the bank deposits of the taxpayer;
and
The term "foreign tax authority," as used
c) A specific taxpayer or taxpayers subject
herein, shall refer to the tax authority or tax
of a request for the supply of tax administration of the requesting State under
information from a foreign tax authority the tax treaty or convention to which the
pursuant to an international convention Philippines is a signatory or a party of. (Sec.
or agreement on tax matters to which 6, NIRC, as amended by R.A. 10021)
the Philippines is a signatory or a party
(vi) Authority to Accredit and Register Tax
of: Provided, That the information Agents;
obtained from the banks and other
financial institutions may be used by the

32 Center for Legal Education and Research

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Taxation Law
(viii) Authority of the Commissioner to may be compromised by a regional
Prescribe Additional Procedural or evaluation board which shall be composed
Documentary Requirements. (Sec. 6, of the Regional Director as Chairman, the
NIRC, as amended) Assistant Regional Director, the heads of the
Legal, Assessment and Collection Divisions
6. Authority of Internal Revenue Officers and the Revenue District Officer having
to Make Arrests and Seizures. jurisdiction over the taxpayer, as members;
and
The Commissioner, the Deputy
Commissioners, the Revenue Regional (d) The power to assign or reassign internal
Directors, the Revenue District Officers and revenue officers to establishments where
other internal revenue officers shall have articles subject to excise tax are produced or
authority to make arrests and seizures for kept.
the violation of any penal law, rule or
regulation administered by the Bureau of Organizational Chart
Internal Revenue. Any person so arrested
shall be forthwith brought before a court,
there to be dealt with according to law.

7. Authority of the Commissioner to

Delegate Power.
The Commissioner may delegate the powers
vested in him under the pertinent provisions of
this Code to any or such subordinate officials
with the rank equivalent to a division chief or
higher, subject to such limitations and
restrictions as may be imposed under rules and
regulations to be promulgated by the Secretary Can be
of Finance, upon recommendation of the delegated
Commissioner. CIR powers

However, the following powers of the

Commissioner shall not be delegated:
(a) The power to recommend the promulgation
of rules and regulations by the Secretary
of Finance;

(b) The power to issue rulings of first

impression or to reverse, revoke or modify
any existing ruling of the Bureau.

(c) The power to compromise or abate, under

Sec. 204 (A) and (B) of this Code, any tax
liability: Provided, however, That
assessments issued by the regional offices
involving basic deficiency taxes of Five
hundred thousand pesos (P500,000) or less,
and minor criminal violations, as may be
determined by rules and regulations to be
promulgated by the Secretary of finance,
upon recommendation of the Commissioner,
discovered by regional and district officials,
33
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 Purple Notes
Taxation Law
Q: Whether said demand letter indeed creditor, unless the certification 2018of the
attained finality despite the fact that it Commissioner that the tax fixed in this
was issued and signed by the Chief of Chapter had been paid is shown; but he
the Accounts Receivable and Billing may pay the executor or judicial
Division instead of the BIR administrator without said certification if the
Commissioner? credit is included in the inventory of the estate
of the deceased.(Sec. 95, NIRC)
A: It is clear from the above provision (Sec. 7
of NIRC) that the act of issuance of the Payment of Tax Antecedent to the
demand letter by the Chief of the Accounts Transfer of Shares, Bonds or Rights. -
Receivable and Billing Division does not fall There shall not be transferred to any new owner
under any of the exceptions that have been in the books of any corporation, sociedad
mentioned as non-delegable.(Oceanic anonima, partnership, business, or industry
Wireless Network v. CIR, G.R.148380, December organized or established in the Philippines any
9,2005) share, obligation, bond or right by way of gift
inter vivos or mortis causa, legacy or
8. The power to assign or reassign inheritance, unless a certification from the
internal revenue officers to Commissioner that the taxes fixed in this Title
establishments where articles subject and due thereon have been paid is shown.
(Sec. 97, NIRC)
to excise tax are produced or kept.(Sec.
16, NIRC)
10. Power of the Commissioner to Suspend
9. Duties of Certain Officers and Debtors. the Business Operations of a Taxpayer.
- Registers of Deeds shall not register in the - The Commissioner or his authorized
Registry of Property any document representative is hereby empowered to
transferring real property or real rights suspend the business operations and
therein or any chattel mortgage, by way of temporarily close the business establishment
gifts inter vivos or mortis causa, legacy or of any person for any of the following
inheritance, unless a certification from the violations:
Commissioner that the tax fixed in this Title
and actually due thereon had been paid is (a) In the case of a VAT-registered Person. -
show, and they shall immediately notify the
Commissioner, Regional Director, Revenue (1) Failure to issue receipts or invoices;
District Officer, or Revenue Collection Officer
or Treasurer of the city or municipality (2) Failure to file a value-added tax return
where their offices are located, of the as required under Section 114; or
nonpayment of the tax discovered by them.
Any lawyer, notary public, or any (3) Understatement of taxable sales or
government officer who, by reason of his receipts by thirty percent (30%) or
official duties, intervenes in the preparation more of his correct taxable sales or
or acknowledgment of documents regarding receipts for the taxable quarter.
partition or disposal of donation inter vivos
or mortis causa, legacy or inheritance, shall
(b) Failure of any Person to Register as
have the duty of furnishing the
Required under Section 236.
Commissioner, Regional Director, Revenue
District Officer or Revenue Collection Officer
of the place where he may have his principal The temporary closure of the establishment shall
office, with copies of such documents and be for the duration of not less than five (5) days
any information whatsoever which may and shall be lifted only upon compliance with
facilitate the collection of the whatever requirements prescribed by the
aforementioned tax. Neither shall a debtor Commissioner in the closure order.
of the deceased pay his debts to the heirs,
legatee, executor or administrator of his

34 Center for Legal Education and Research

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Taxation Law
2. Rule-making authority of the Secretary (3) when there are circumstances indicating the
of Finance urgency of judicial intervention – impending
maturity of the PEACe Bonds. (BDO vs. Republic,
a) Authority of the Secretary of Finance GR No. 198756 dated January 13, 2015,penned by J.
to Promulgate Rules and Regulations Leonen)

Upon recommendation of the CIR, the Secretary

of Finance shall promulgate all needful rules and b) Specific Provisions to be Contained in
regulations for the effective enforcement of the Rules and Regulations
provisions of the NIRC.(Sec. 244, NIRC, as
amended) It must contain provisions specifying,
prescribing, or defining: (Sec. 245, NIRC, as
Requisites of a valid revenue regulation amended)

To be valid, a revenue regulation must be within 1. The time and manner in which Revenue
the scope of statutory authority or standard Regional Director shall canvass their
granted by the legislature. Specifically, the respective Revenue Regions to discover
regulation must (1) be germane to the object persons and property liable to national
and purpose of the law;(2) not contradict, but internal revenue taxes, and the manner
conform to, the standards the law prescribes; their lists and records of taxable persons
and (3) be issued for the sole purpose of and taxable objects shall be made and kept.
carrying into effect the general provisions of our
tax laws. (La Suerte Cigarette Factory vs. CIR,G.R. 2. The forms of labels, brands or marks to be
No. 125346, November 11, 2014, penned by J. required on goods subject to excise tax, and
Leonen) the manner how the labelling, branding or
marking shall be effected.
How to contest a ruling of the BIR?
1.a. File a request for ruling review with the 3. The condition under which and the manner
Secretary of Finance (SOF) within thirty (30) in which goods intended for export, which if
days from receipt of the CIR‘s ruling. (DOF not exported would be subject to an excise
Department Order No. 23-2001 dated October 25, tax, shall be labelled, branded or marked.
2001)
4. The conditions to be observed by revenue
Sec. 4 of the NIRC provides that the power to officers respecting the institutions and
interpret the provisions of the NIRC and other conduct of legal actions and proceedings;
tax laws is under the exclusive and original
jurisdiction of the CIR, subject to review by the 5. The conditions under which goods intended
SOF. for storage in bonded warehouses shall be
conveyed thither, their manner of storage
1.b. Appeal to the SOF is in compliance with the and method of keeping entries and records,
rule on exhaustion of administrative remedies. also the books to be kept by Revenue
Thus, appeal to the SOF may be dispensed with Inspectors and the reports to be made by
if any of the exceptions to the rule on them in connection with their supervision of
exhaustion of administrative remedies is such houses.
present. The exceptions, among others, are the
following: 6. The conditions under which denatured
alcohol may be removed and dealt in, the
(1) exhaustion would be futile – The SOF character and quantity of the denaturing
requesting a ruling from the CIR and later on material to be used, the manner in which
adopting the ruling as his own; the process of denaturing shall be effected,
(2) issue is purely legal – Tax implications of the so as to render the alcohol suitably
PEACe Bonds; and, denatured and unfit for oral intake, the
bonds to be given, the books and records to
35
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 Purple Notes
Taxation Law
be kept, the entries to be made therein, the respectively, through collection 2018
officers or
reports to be made to the CIR, and the through duly authorized agent banks:
signs to be displayed in the business or by
the person for whom such denaturing is Provided, further, That the CIR can exercise this
done or by whom, such alcohol is dealt in. power within 6 years from the approval of RA
7646 or the completion of its comprehensive
7. The manner in which revenue shall be computerization program, whichever comes
collected and paid, the instrument, earlier:
document or object to which revenue
stamps shall be affixed, the mode of Provided, finally, that separate venues for the
cancellation, the manner in which the proper Luzon, Visayas and Mindanao areas may be
books, records, invoices and other papers designated for the filing of tax returns and
shall be kept and entries therein made by payment of taxes by said large taxpayers.
the person subject to the tax, as well as the
manner in which licenses and stamps shall
be gathered up and returned after serving Provided, however, That the Secretary of
their purposes. Finance, upon recommendation of the CIR, may
modify or add to the above criteria for
8. The conditions to be observed by revenue determining a large taxpayer after considering
officers respecting the enforcement of Title such factors as inflation, volume of business,
III imposing a tax on estate of a decedent, wage and employment levels, and similar
and other transfers mortis causa, as well as economic factors.
on gifts and such other rules and regulations
which the CIR may consider suitable for the The penalties prescribed under Section 248
enforcement of the said Title III. shall be imposed on any violation of the rules
and regulations issued by the Secretary of
9. The manner in which tax returns, Finance, upon recommendation of
information and reports shall be prepared the CIR, prescribing the place of filing of returns
and reported and the tax collected and paid, and payments of taxes by large taxpayers.
as well as the conditions under which
evidence of payment shall be furnished the B. Income Tax
taxpayer, and the preparation and
publication of tax statistics. 1. Definition, Nature and General
Principles
10. The manner in which internal revenue taxes,
such as income tax, including withholding Definition
tax, estate and donor's taxes, value-added
tax, other percentage taxes, excise taxes Income Tax is a tax on all yearly profits arising
and documentary stamp taxes shall be paid from property, professions, trade or offices or as
through the collection officers of the BIR or a tax on person‘s income, emolument, profits
through duly authorized agent banks which and the like (LG Electronics Philippines, Inc. vs. CIR,
are hereby deputized to receive payments of G.R. No. 16541, December 3,2014,penned by
such taxes and the returns, papers and [Link]).
statements that may be filed by the
taxpayers in connection with the payment of Nature
the tax:
Income tax is a kind of tax levied upon the
Provided, however, that notwithstanding the privilege of receiving income or profit. It is an
other provisions of the NIRC prescribing the excise tax and not a property tax (DIMAAMPAO,
place of filing of returns and payment of taxes, 2015)
the CIR may, by rules and regulations require
a) Income Tax Systems
that the tax returns, papers and statements and
taxes of large taxpayers be filed and paid,

36 Center for Legal Education and Research

 Purple Notes
Taxation Law
(i) Global tax system (ii) Progressive: Tax rate increases as the tax
base increases.
A system employed where the tax system (iii)Comprehensive: The income tax is
views indifferently the tax base and imposed on practically all forms of income
generally treats in common all categories of irrespective of nature, whether
taxable income of the individual. compensation.
 It generally provides for uniform rules. c) Criteria in imposing Philippine Income
 It generally imposes uniform tax rate. Taxation (CRS)
 It does not generally classify income.
(i) Citizenship Principle
(ii) Schedular tax system
A citizen taxpayer is subject to income tax:
A system employed where the income tax
treatment varies and is made to depend on  On his worldwide income (income within
the kind or category of taxable income of and without the Philippines); or
the taxpayer. It itemizes the different  Only on his income from sources within
incomes and provides for varied percentages the Philippines, if he qualifies as a non-
of taxes, to be applied thereto. resident citizen.
 It classifies income.
 It provides different tax rules. (ii) Residence Principle
 It imposes different tax rates.
A resident alien is liable to pay income tax
(iii)Semi-Schedular or Semi-Global Tax on his income from sources within the
System (Others) Philippines but exempt from tax on his
This is adapted in the Philippine setting. It is income from sources outside the Philippines.
a system which provides: (iii)Source Principle

(a) Taxable Income for an individual is A non-resident alien is subject to Philippine

subjected to graduated rates; and income tax on his income from sources
(b) Taxable Income for a Corporation is within the Philippines such as dividend,
subjected to one normal corporate interest, rent or royalty.
income tax rate. (MAMALATEO, Income
Tax, p.3-7) d) General principles of income taxation

Global Schedular Under Section 23 of the NIRC, as amended, the

Rate Unitary or single Different tax following are the general principles of taxation.
rate rates The different kinds of taxpayers are taxed on
Categories No need for Different their income as follows:
of taxable classification as categories of  Citizen residing in the Philippines/
income all taxpayers are taxable income Resident Citizens (RC) - Taxable on all
subjected to a income from sources within and without
single rate
the Philippines.
Use Corporation Individuals  Non Resident Citizen (NRC) - Taxable
Rules Uniform rules Different rules only on income within the Philippines.

b) Features of Philippine Income Tax Law  An individual citizen of the Philippines

who is working and deriving income
(i) Direct Tax: Tax burden is borne by the from abroad as an overseas contract
income recipient upon whom the tax is worker or a seaman who is a citizen of
imposed. the Philippines and who receives
compensation for services rendered

37
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 Purple Notes
Taxation Law
abroad as a member of the complement (x) Capital Gains Tax (CGT) 2018
of a vessel engaged exclusively in (xi) Branch Profit Remittance Tax
international trade shall be treated as an (xii) Withholding Tax on Compensation
overseas contract worker - Taxable only
on income within the Philippines f) Kinds of Taxpayers

 An alien individual, whether a resident SUMMARY

or not of the Philippines - Taxable only Individuals Corporations Others
on income within the Philippines.
Resident Domestic Joint
Citizen (RC) corporation Venture and
 Domestic Corporations -taxable on all (DC) Consortium
income derived from sources within and
Nonresident Resident Partnership
without the Philippines
Citizen (NRC) foreign
corporation
 A foreign corporation, whether engaged (RFC)
or not in trade or business in the
Resident Alien Nonresident Estate
Philippines - taxable only on income (RA) foreign
derived from sources within the corporation
Philippines (NRFC)
Nonresident Trust
alien not
engaged in
trade or
business (NRA-
Taxable on income Taxable ONLY
NETB)
sourced within and income sourced
without within and without Nonresident
alien engaged
Citizen residing in the Non – Resident Citizens in trade or
Philippines / Resident business (NRA-
Citizens ETB)
Minimum wage
Domestic Corporations Overseas Contract earners (MWE)
Worker /Seamen Note: Detailed discussion on these can be found
aboard a vessel under Income Tax on Individuals and
engaged exclusively in Corporations
international Trade
g) Taxable Period
Aliens

Foreign Corporations (i) Calendar period: Accounting period

from January 1 to December 31.

e) Types of Philippine Income Taxes Taxable income is computed based on calendar

year if: (BONI)
(i) Income Tax
(ii) Final Income Tax  Accounting period is other than fiscal
(iii) Gross Income Tax year.
(iv) Improperly Accumulated Earnings Tax  Taxpayer has no accounting period.
(IAET)  Taxpayer does not keep books.
(v) Minimum Corporate Income Tax (MCIT)  Taxpayer is an individual.
(vi) Optional Corporate Income Tax
(vii) Fringe Benefits Tax (FBT) (ii) Fiscal period: Accounting period of 12
(viii)Creditable Withholding Tax (Expanded) months ending on the last day of any
(ix) Special Income Tax on certain corporations

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Taxation Law
month other than December. (e.g. July  An income may be defined as the gain
1, 2019-June 30, 2020) derived from capital, from labor, or from
both combined, provided it be understood to
(iii) Short period: A taxpayer may have a include profit gained through a sale or
taxable period of less than 12 months conversion of capital assets.(Eisner vs.
when: (D2NA -T) Macomber, 252 U.S., 189)

 Taxpayer dies  Income is a flow of service rendered by

 Corporation is newly organized capital by the payment of money from it or
 Corporation changes its accounting any other benefit rendered by the fund
period through a period of time. Income is the
 Corporation is dissolved ―fruit‖ of the capital or labor severed from
 Tax period has been terminated by the the ―tree‖.(Madrigal vs. Rafferty, GR 12287,
Commissioner by authority of August 7, 1918)
law(Sec.47, NIRC)
Income, Capital, Revenue, Receipts
Change of Accounting Period Distinguished

 If a taxpayer, other than an individual, Income Capital Revenue Receipts

changes his accounting period, the net As to Definition
income shall, with the approval of the it includes fund or may all funds or
flow, property constitute income
Commissioner, be computed on the basis of
service of existing capital as derived by
such new accounting period, subject to the wealth and at one well as the
provisions of Sec. 47 (Sec. 46, NIRC). fruits distinct income; government
 If the change is from fiscal year to calendar during a point of broader whether
year, a separate final or adjustment return definite time. scope than from tax or
shall be made for the period between the period of income. other
close of the last fiscal year for which the time. sources.
return was made and the following Dec. 31.
 If the change is from calendar year to fiscal b. When Income is Taxable:
year, a separate final or adjustment return
shall be made for the period between the i. Existence of income
close of the last calendar year for which ii. Realization of income
return was made and the date designated iii. Recognition of income
as the close of the fiscal year.
 If the change is from one fiscal year to i. Existence of Income
another fiscal year, a separate final or
adjustment return shall be made for the a. There must be gain or profit whether in
period between the close of the former fiscal cash or equivalent.
year and the date designated as the close of
the new fiscal year. Income tax only applies only when there is
income, gain or profit. (Mamalateo)
 BIR approval is necessary(Sec.46,NIRC).
 Case law provides that in order to constitute
2. Income "income," there must be realized "gain."
Clearly, because of the nature of
a. Definition: membership fees and assessment dues as
funds inherently dedicated for the
An income is the return in money from one's maintenance, preservation, and upkeep of
business, labor, or capital invested; gains, the clubs' general operations and facilities,
profit or private revenue. (Black‘s Law nothing is to be gained from their collection.
Dictionary) (Association of Non – Profit Clubs (ANPC) [Link],
G.R. No. 228539 , June 26, 2019)
39
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 Purple Notes
Taxation Law
3. It is not exempted by law 2018
or treaty
b. The gain must be realized or received for income tax. (CIR vs. Philippine
Daily Inquirer, Inc. G.R. No. 213943,
ii. Realization of Income March 22,2017)

Realization Test: Unless the income is deemed c. Tests in determining whether income is
―realized,‖ there is no taxable income. earned for tax purposes:

Under the realization principle, revenue is i. Realization Test: Unless the income is
generally recognized when both of the following deemed ―realized,‖ there is no taxable
conditions are met: income.
1. The earning is complete or virtually
complete; and Under the realization principle, revenue is
2. An exchange has taken place.(Manila generally recognized when both of the following
Mandarin Hotels v. CIR, CTA Case. 5046,March conditions are met:
24 1997) 1. The earning is complete or virtually
complete; and
Sec. 38, RR No. 2-40, February 10, 1940 2. An exchange has taken place. (Manila
Mandarin Hotels v. CIR, CTA Case. 5046,March
 A taxpayer is deemed to have received 24 1997)
items of gross income which have been
credited to or set apart for him without Test of Realization
restriction. On the other hand,
appreciation in value of property is not Actual Vis-À-Vis Constructive Receipt
even an accrual of income to a taxpayer
prior to the realization of such Actual receipt – is the actual and physical
appreciation through sale or conversion receipt.
of the property.
Constructive receipt – occurs when money or
iii. Recognition of Income its equivalent is placed at the control of the
person who rendered the service without
 Receipt of income for purposes of restriction by the payor
taxation may actual or constructive. (CIR
vs. BPI, G.R. No. 147375, June 25, 2006) Examples:
 Deposits in the bank which are made
 Income is received not only when it is available by the seller of service without any
actually handed to a person but also restrictions.
when it is merely constructively received  Issuance by the payor of a notice to offset
by him. (See discussion in realization of any debt or obligation and acceptance
income) thereof by the seller as payment of services
rendered.
 The gain must not be excluded by  Transfer of amounts retained by the payor
law or treaty from taxation. for the account of the seller (RR 16-2005, Sec.
4.108 -4)
An income can be exempted either by:
- Tax Code  An item of income must be included in gross
- Special law or Treaties income if it is credited to the account of or
1. Requisites for an income to be taxable set apart for the taxpayer, or otherwise
1. There must be a gain or profit; made available to the taxpayer, although
2. The gain must be realized or not yet physically received or placed to his
received whether actually or actual possession.
constructively; or

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Taxation Law
The Assignment of Income doctrine holds d. Methods of Accounting
that income is taxable to the taxpayer even if he
did not receive the amount by reason of i. Distinguish: Cash and Accrual
assigning it to another person in a form of a gift Accounting.
or donation. (see Lucas v. Earl, 281 U.S. 111)
The accrual method relies upon the taxpayer‘s
ii. Claim of Right Doctrine or Doctrine right to receive amounts or its obligation to pay
of Ownership, Command, or Control them, in opposition to actual receipt or
payment, which characterizes the cash method
 A taxable gain is conditioned upon the of accounting. Amounts of income accrue where
presence of a claim of right to the alleged the right to receive them become fixed, where
gain and the absence of a definite there is created an enforceable liability.
unconditional obligation to return or repay Similarly, liabilities are accrued when fixed and
(CIR vs. Wilcox, 286 U.S. 417, 424). This is also determinable in amount, without regard to
called Doctrine of Ownership, Command or indeterminacy merely of time of payment. (CIR
Control(CIR vs. Melchor Javier, G.R. No. 78953, vs. Isabel Cultural Corporation, G.R. No. 172231,
July 31,1991). February 12, 2007)

 This doctrine provides that if a taxpayer For a taxpayer using the accrual method, the
receives earnings under a claim of right and determinative question is, when do the facts
without restriction as to its disposition, he present themselves in such a manner that the
has received income even though one may taxpayer must recognize income or expense?
claim he is not entitled to the money. The accrual of income and expense is permitted
Should it later appear that the taxpayer was when the all-events test has been met. This test
not entitled to keep the money; the requires: (1) fixing of a right to income or
taxpayer would be entitled to a deduction in liability to pay; and (2) the availability of the
the year of repayment. (BIR Ruling (C-168) reasonable accurate determination of such
519-08, December 12, 2008) income or liability(ING Bank N.V. vs. CIR,G.R. No.
167679, July 22, 2015,penned by J. Leonen)
Two branches of ―claim of right‖ doctrine:
(1) Income; and Cash Method of Accounting
(2) Deduction
Under the cash method of accounts (cash
iii. Economic Benefit Test or Doctrine of receipts and disbursements method), income is
Proprietary Interest realized upon receipt of cash or its equivalent
including those constructively received (such as
Income is earned when the recipient could enjoy deposits to taxpayer‘s account by customers)
economic benefits over the gain that is received but not including gifts or donations.(Revenue
(BIR Ruling 029-1988). Audit Memorandum Order 1- 2000)

iv. Severance Test Accrual Method of Accounting

 There is no taxable income until there is Under the Accrual method of accounting, income
a separation from capital of something is reportable when all the events have occurred
of exchangeable value, thereby that fix taxpayer‘s right to receive the income,
supplying the realization or and the amount can be determined by
transmutation which would result in the reasonable accuracy. Thus, it is the right to
receipt of income (Eisner vs. Macomber, receive income and not the actual receipt, that
252 U.S., 189). determines when to include the amount of gross
income.

Gleanable from this notion are the following

requisites of accrual method of accounting:
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 Purple Notes
Taxation Law
1. That the right to receive the amount must The accrual of income and expense 2018
is permitted
be valid, unconditional and enforceable (i.e. when the all-events test has been met. This test
not contingent upon future time) requires:
2. The amount must be reasonably susceptible
of accurate estimate and (1) fixing of a right to income or liability to pay;
and
3. There must be reasonable expectation that (2) the availability of the reasonable accurate
the amount will be paid in due course. determination of such income or liability.
(Filipinas Synthetic Fiber Corp. vs. Court of The all-events test requires the right to income
Appeals, G.R. Nos. 118498,October 12,1999) or liability be fixed, and the amount of such
income or liability be determined with
Illustration: reasonable accuracy.
To clearly understand the difference between
cash and accrual accounting, we illustrate as Thus, if the taxpayer is on cash basis, the
follows: expense is deductible in the year it was paid,
regardless of the year it was incurred. If he is on
Mr. A, a repairman, just finished fixing Mrs. B‘s the accrual method, he can deduct the expense
aircon. Mr. A then billed Mrs. B for his services upon accrual thereof. An item that is reasonably
amounting to Php 2,000. However, Mrs. B told ascertained as to amount and acknowledged to
Mr. A she that she will pay by next month. On be due has "accrued"; actual payment is not
the same day, Mr. A received his electricity bill essential to constitute "expense."(ING BANK N.V
for the previous but due to be paid next month vs. CIR, G.R. No. 167679, July 22, 2015,penned by J.
amounting to Php 1,500. Leonen)
Q1: Under the Cash Method of accounting, how
much will be reported as income and ii. Percentage of Completion
expenses for tax purposes today?
Applicable to whom :
A1: Zero on both income and expense. The  Persons who are engaged in long term
recording of income and expenses is contracts or means building, installation
predicated on the taxpayer‘s collection and or construction contracts covering a
disbursement. He will only record the period in excess of one (1) year.
income once collected and expense once
paid which will be next month. Accounting method to be used:
 Percentage of completion
Q2: Under the Accrual Method of accounting,
how much will be reported as income and Percentage of Completion Basis is a method
expenses for tax purposes? applicable in the case of a building,
installation or construction contract covering
A2: Mr. A will record an income of Php 1,000 a period in excess of one year whereby
regardless of the fact that he has not yet gross income derived from such contract
received any payment. This is because he may be reported upon the basis of
has already the right to receive payment percentage of completion.
upon completion of his service.
In determining the percentage of completion
Mr. A will also record the expense of Php of a contract, generally one of the following
2,000 as the utility expense has already the methods is used:
right receive payment after it has provided
electricity last month. 1. The costs incurred under the contract as
of the end of the tax year are compared
For a taxpayer using the accrual method, the with the estimated total contract costs; or
determinative question is, when do the facts
present themselves in such a manner that the 2. The work performed on the contract as
taxpayer must recognize income or expense? of the end of the tax year is compared with

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 Purple Notes
Taxation Law
the estimated work to be the time of planting to the process of
performed.(Revenue Audit Memorandum Order gathering and disposal
1- 2000)
How Implemented:
What should accompany the income  Expenses paid or incurred are deductible
tax return: in the year the gross income from the sale
of the crops are realized. (Revenue Audit
 Certificate of architects or engineers Memorandum Order 1- 2000)
showing the percentage of completion
during the taxable year of the entire work The crop method recognizes that the harvesting
performed under contract. and selling of crops do not fall within the same
year that they are planted or grown. This
 There should be deducted from such method is especially relevant to farmers, or
gross income all expenditures made those engaged in the business of producing
during the taxable year on account of the crops who, pursuant to RAM No. 2-95, would
contract, account being taken of the then be able to compute their taxable income on
material and supplies on hand at the the basis of their crop year. The rule enjoins the
beginning and end of the taxable period recognition of the expense (or the deduction of
for use in connection with the work under the cost) of crop production in the year that the
the contract but not yet so applied. crops are sold (when income is realized).(CIR vs.
Lancaster Philippines, Inc. G.R. No. 183408, July 12,
 If upon completion of a contract, it is 2017)
found that the taxable [net] income
arising thereunder has not been clearly e. Situs of Taxation
reflected for any year or years, the
Commissioner may permit or require an Definition
amended return.(Sec. 48, Chapter VII-
Allowable Deductions, NIRC) The place or authority that has the right to
impose and collect taxes. (CIR vs. Marubeni, G.R.
iii. Installment Basis Method No.137377, December 18,2001)

Applicable to whom: Factors that determine Situs:

 A person who regularly sells or 1. Nature of the tax;
otherwise disposes of personal property 2. Subject matter of the tax(person,
on the installment plan property, act or activity);
3. Possible protection and benefit that may
Accounting Method to be used: accrue both to the government and the
 Installment Basis is a method taxpayer;
considered appropriate when collections 4. Citizenship of the taxpayer;
extend over relatively long periods of 5. Residence of the taxpayer;
time and there is a strong possibility 6. Source of income.
that full collection will not be made. As
customers make installment payments, Summary – Situs of Tax
the seller recognizes the gross profit on
sale in proportion to the cash collected. KIND OF TAX SITUS
(Revenue Audit Memorandum Order 1- Poll/Capitalization/ Residence of the taxpayer,
2000) Community Tax regardless of the source of
income or location of the
iv. Crop Year Basis Method property of the taxpayer.
Property Tax
Applicable to whom: Real Property Where the real property is
 Farmers engaged in the production of located, following the
doctrine of Lex rei sitae or
crops which take more than a year from
43
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 Purple Notes
Taxation Law
Lex situs. from the 2018
Personal Property Where it was actually kept Philippines
or located, following the is more
doctrine of than 50%
mobiliasequunturpersona for the
m (Movables follow the past three
person) years
Excise Tax On the place where the Service Place of Performed Performed
act is performed, or performanc in outside the
occupation engaged in. e Philippines Philippines
Value Added Tax The place where the Rental Location of Property Property
transaction is made. If the Income Property located in located
transaction is made the outside the
(perfected and Philippines Philippines
consummated) outside of Royalty Place of Used in the Used
the Philippines, then we Income use or Philippines outside the
can no longer tax such location of Philippines
transaction. intangibles
Income Tax Gain on Location of Property Property
Resident citizen Sources of income derived sale of Property located in located
Domestic corporation from within and outside real the outside the
the Philippines property Philippines Philippines
Non-resident alien Sources of income derived Gain on Always
Non-resident foreign from within the Philippines sale of within
corporation shares of
Non-resident citizen Domestic
Resident alien Corporatio
Resident foreign n
corporation
Estate and Donor‘s Tax
Resident/Non-resident Properties wherever Income Partly within and without:
citizen situated
Resident alien Income covered:
Non-resident Alien Properties situated within  Services rendered partly within and
the Philippines
without the Philippines
 Sale of personal property produced
Rules on sources of income (Section 42 A- (wholly or partly) within and sold
C, NIRC) without Philippines
 Sale of personal property produced
Income Test of Sourced
(wholly or partly) within and sold within
Source Within Without
Philippines
Interest Debtor‘s Debtor‘s Debtor‘s
Residence residence residence
is in the is outside  The place of signing of a contract is
Philippines the NEVER an issue or factor for
Philippines determining source of income. (INGLES,
Dividends Dividends Dividend Tax Made Less Taxing, 2018, p.37)
paid by from
domestic foreign In CIR vs. Marubeni, (G.R. No.137377,
corporation corporation December 18, 2001), involved were turnkey
contracts. The Supreme Court turnkey
Dividends contracts were actually divisible contracts
paid by which each had different stages, with each
foreign stage having different tax implication:
corporation
whose  For the stage involving design,
income engineering, and procurement of

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 Purple Notes
Taxation Law
equipment and supplies, these were income.(CIR vs. Philippines Airlines, Inc., G.R.
considered outside the hands of No. 160628, October 9,2005)
the Philippine taxing authority as
these were all done in Japan b) Gross Income vs. Net Income vs.
Taxable Income
 For the stages involving the actual
installation and construction, these Gross income – All income, gains, or profit
were all considered within the subject to income tax. (Sec. 32 of NIRC)
jurisdiction of the Philippine
taxing authority as the Net income – Gross income less statutory
construction and installations were deductions (Sec. 26, R.R. 02-04, Sec. 36)
all done in the Philippines
(INGLES, Tax Made Less Taxing, 2018, Taxable Income –Pertinent items of gross
p.10). income specified in this code (NIRC) less any
deductions, if any, authorized for such types of
3 .Gross Income income by this Code or another law (NIRC as
(CTIR2ADP3) amended by TRAIN Law, Sec.31)

a) Definition: For Individuals:

All income derived from whatever source, Prior 2018 – Taxable income and Net Income
including (but not limited to) the following are different for the purposes of computation of
items: income tax.

1. Compensation for services in whatever Taxable income (income tax on individuals) –

form paid, including, but not limited to fees, Net Income less exemptions namely:
salaries, wages, commissions, and similar
items;  Personal Exemption (Php 50,000)
2. Gross income derived from the conduct of  Additional Exemption (Php 25,000 per
trade of business or the exercise of a qualified dependent, if any)
profession;  Deduction on Premium on Health
3. Gains derived from dealings in property; Insurance (Php 2,400, if qualified)
4. Interests; Personal Property Income
5. Rents;
Manufacturing
6. Royalties;
Produced within and Income partly within
7. Dividends;
sold without and partly without
8. Annuities;
Produced within and Income within
9. Prizes and winnings;
sold without
10. Pensions; and,
Produced without and Income partly within
11.
sold within and partly without
12. Partner‘s distributive share from the net
income of the general professional Trading
partnership. (Sec. 32[A] of the NIRC) Purchased without Income within
and sold within
 The definition of gross income is broad Purchased within and Income without
enough to include passive income subject sold without
to specific rates or final taxes. However, Purchased within and Income within
since these passive incomes are already sold without
subjected to different rates and taxed
finally at source, they are no longer 2018 onwards
included in the computation of gross
income which determines taxable Taxable Income is equal to net income. No
more deduction for exemptions (personal,
45
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 Purple Notes
Taxation Law
additional and premium for health insurance) as iii. Professional Income 2018
it has beenrepealed by TRAIN Law.
Fees derived from engaging in an endeavor
For Corporations: requiring special training as professional as a
means of livelihood such as but limited to fees
Taxable income is equal to net income. of C.P.A.s, doctors, lawyers and engineers.(R.R.
2-98)
Gross Sales/Revenue/Receipts Xxx
Add Other income Xxx Compensation Professional
Less: Cost of Sales or Cost of Xxx Income Income
Services Fees or renumeration Fees or renumeration
Total Gross Income Xxx under employer - without employer –
Less: Allowable Deductions Xxx employee relationship employee relationship
(Itemized)
Taxable Income Xxx iv. Income from business

c) Source of Income Subject to Tax It arises from habitual engagement in any

commercial activity involving regular sales of
Sources of income subject to tax may come goods or services by an individual or a
from the following (CP3 -FB-DRA2) corporation.
i. Compensation income
ii. Fringe benefit v. Income on Dealings of Properties
iii. Professional income
iv. Income from business Income on sale of properties whether ordinary
v. Income from dealings of property or capital asset.
vi. Passive investment income
vii. Annuities and proceeds from life a .Kinds of Asset for Tax Purposes
insurance or other types of insurance
viii. Prizes and awards Assets could either be Ordinary or Capital asset:
ix. Pension, retirement benefit or
separation pay Ordinary Asset Capital Asset
x. Income from any source Definition a. Stock in trade Includes all
of the taxpayer property held by
or other the taxpayer
i. Compensation income properties of a whether or not
kind which connected in
All renumerations for services performed by an would properly trade or business
employee under an employer – employee be included in but not including
relationship, unless expressly excluded by NIRC the inventory of those enumerated
(Sec. 2,R.R. 8- 2018) the taxpayer; as ordinary assets
b. Property held
Note:See detailed discussion under Income Tax by the taxpayer
on Individuals – Tax on Compensation Income primarily for
sale to
customers in
ii. Fringe Benefit the ordinary
course of
It means any good, service or or other benefit business;
furnished in cash or in kind by an employer to c. Property used
an individual employee (except rank and file in trade or
employee).(Sec.33 (B) – NIRC) business and
subject to
Note:See detailed discussion in Income Tax on depreciation;
and
Individuals – Tax on Compensation Income
d. Real property

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Taxation Law
used in trade or Net loss Applicable only to
Applicable
business. carry over Individuals
*Real properties Capital losses can
Deductions
acquired by bank Yes be offset from
allowed
through capital gains
foreclosure sales Included in the
areconsidered as May be subject to
gross income
ordinary asset Capital Gains Tax
subject to
(Sec.2(b) of RR or may be subject
Tax effect graduated rate
No. 7-2003) to graduated or
(individuals) or
corporate income
Gain derived Ordinary gain Capital gain fixed rate
tax rates
Determinatio (corporations)
Actual Gain Presumed Gain
n of Income Those capital
Tax imposed May be subject to subject to Capital
Capital Gains Tax Gains Tax are no
Subject to
or may be subject longer reported in
graduated or
to graduated or the income tax
corporate income Reflected in
corporate income return, while the
tax the income Yes
tax rates rest are still
tax return
reported in the
Applicability income tax return
of Holding Not applicable Applicable with consideration
Period of the holding
Loss period
Limitation Not applicable Applicable
Rule
Net Capital Terminologies:
Loss Carry Not Applicable Applicable
over Net Capital Gain Net Capital Loss
Definition
The excess of the gains The excess of the losses
b. Types of Gains: Ordinary Income vis-a- from sales/exchanges of from sales or exchanges
vis Capital Gain capital assets over the of capital assets over
losses from such the gains from such
Depending on the kind of asset the gain can sales/exchanges. sales or exchanges.
could either be Ordinary or Capital:
Tax Treatment
Forms of part of the Does not form part of
taxable subject to allowable deductions –
Ordinary Gain Capital Gain
income tax because loss can be
Includes any
deducted only to the
gain from sale or
The gain derived extent of capital gain
exchange of
from the sale or
Definition property which is
exchange of Basis for Determining gain or loss in
not a capital
capital assets. exchange of properties (determination of
asset or
property. cost) as per Sec. 40B of NIRC:
Source Ordinary asset Capital asset
Some types of How the capital Basis
Holding
capital gains are asset was acquired
period, Not applicable
adjusted by the By Purchase Cost of the property
relevance
holding period By Inheritance Fair market price or
Only ordinary value as of date of
Certain types of
losses are acquisition
capital loss may
Deductibility deductible By Gift If the property was
be deducted as
against ordinary acquired by gift, the
ordinary losses
gains basis shall be the same
as if it would be in the
47
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 Purple Notes
Taxation Law
hands of the donor or ii. Loss Limitation Rule 2018
the last preceding
owner by whom it was General Rule: Capital losses are allowed only
not acquired by gift, to the extent of capital gains;
except that if such basis
is greater than the fair
market value of the Exception: If a domestic bank or trust
property at the time of company, a substantial part of whose business
the gift then, for the is the receipt of deposits, sells any bond,
purpose of determining debenture, note or certificate or other evidence
loss, the basis shall be of indebtedness issued by any corporation
such fair market value (including one issued by a government or
For less than an The basis of such political subdivision), any loss shall not be
adequate property is the amount included in determining the applicability of the
consideration in paid by the transferee
limitation. (Sec. 39 (C) of NIRC)
money or money‘s for the property
worth
iii. Net Loss Carry Over
c. Special rules pertaining to the income
If any taxpayer, other than a corporation,
or loss from dealing in property held as
sustains in any taxable year a net capital loss,
Capital Asset
such loss (in an amount not in excess of the net
a. Capital assets not subject to Capital
income for such year) shall be treated in the
Gains Tax succeeding taxable year as a loss from the sale
or exchange of a capital asset held for not more
i. Holding Period than 12 months.(Sec. 39 (D) of NIRC)

Definition  Applicable to whom: Individuals only

Holding period is the length of time that the Capital Assets subject to Capital Gains Tax
asset has been held by the taxpayer. It covers
the period from date of acquisition to the date What are the two sale of capital assets
of sale of a particular asset. subject to capital gains tax?

What are the rules on Holding Period: If the seller is If the seller is a
individual corporation
 Rules applies to whom: Individual (Domestic
Taxpayers only. Corporation Only)
 To what kind of assets:Capital Assets Sale, exchange, or Sale, exchange or
except Sale of Real Property and Sale other disposition of real disposition of lands
of Shares of Tax (since subject to Capital property located in the and/or buildings
Philippines, classified as only
Gains Tax)
capital assets, including
pacto de retro sales and The NIRC does not
If Capital asset was If Capital asset was other forms of impose the capital gains
held for more than held for less than 12 conditional sales. tax of 6% from the sale
12 months (Long months (Short Term of machineries and
Term Gain) Gain) equipment (SMI -Ed
The net capital gain or The net capital gain or Philippines Technology
loss is reported at 50% loss is reported at vs. CIR, G.R. No.
of the amount realized 100% of realized gain 175410, November 12,
gain or loss or loss 2014,)
Sale of Shares of Stock Not Listed and Traded in
 For corporations, the net capital gain or loss the Stock Exchange
is always reported at 100%, as the holding
period does not apply. (Sec. 39[B],NIRC)

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Taxation Law
Capital Gains Tax asset, the law presumes that there was a
capital gain realized.
Nature
The capital gains tax of 6% of actual
Capital gains tax is a tax on passive income, it is consideration (selling price) or the fair market of
the seller not the buyer, who generally shoulder the value at the time of sale of real property or
the tax. (Republic of the Philippines as represented land/building whichever is higher. This is called
by DPWH vs. Arlene Soriano, G.R. No. 211366, presumed gain.
February 25,2015)
Exception to the exception:
i. Sale of Real Property or Land and/or
Buildings
Does not apply to sale of shares of stock not
listed and traded thru the local stock exchange.
Applicable to: (DOMONDON, National Taxation)
 Individuals
o Resident Citizen To whom will the presumed gain on sale of
o Resident Alien real property or land and/or building
o Non – Resident Citizen apply:
o Non – Resident Alien Engaged in Trade
or Business Presumed Gain is Presumed Gain not
o Non – Resident Alien Not Engaged in applicable applicable hence
Trade or business gain must be actual
 Domestic corporation Citizens (Resident & Not
Tax Rate :6% Resident)
Non Resident Aliens
Resident Aliens
Tax Base: Domestic Corporations

Individual Corporation Sale of Real Property exempt from Capital

Sale, exchange, or Gains Tax
other disposition of
real property Exemption of certain individual from the capital
Sale, exchange or gains tax on the sale or disposition of a Principal
located in the disposition of lands
Philippines, classified Residence.
and/or buildings
as capital assets, only
including pacto de Requirements: (ON -18 -30 -CPU)
retro sales and other 1. Sale or disposition of the old principal
forms of conditional residence;
sales. 2. By natural persons – citizen or resident
alien individual taxable under Sec. 24 of the
Actual Gain v. Capital Gain Code (does not include an estate or a trust);
3. The proceeds of which is fully utilized in (a)
General Rule: acquiring or (b) constructing a new principal
residence within eighteen (18) calendar
The income tax law imposes on income when months from date of sale or disposition;
there is actual gain or profit after deducting the 4. Notify the Commissioner within thirty (30)
cost or adjusted basis of the property sold from days from the date of sale or disposition
the amount realized this is called actual through a prescribed return of his intention
gain.(Sec. 40 (A) of NIRC) to avail the tax exemption;
5. Can only be availed of only once every ten
Exception: (10) years;
6. The historical cost or adjusted basis of his
Where an individual or corporation sold a real old principal residence sold, exchanged or
property or land/ building held as capital
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 Purple Notes
Taxation Law
disposed shall be carried over to the cost Resident Alien 2018
basis of his new principal residence. Domestic Corporation
7. If there is no full utilization, the portion
of the gains presumed to have been realized Resident Foreign
shall be subject to capital gains tax. Corporation On net capital gain:
8. Subject to the release upon certification the Non -Resident
Foreign Corporation Not over Php
Revenue District Officer that the proceeds 100,000 - 5%
from sale have been utilized(Sec. 24 (D) of
NIRC) On any amount in
excess of Php
 Sale of principal residence is subject to 100,000 – 10%
CGT, if the sale is made not for the
purpose of buying a new principal Dealings in Shares of Stocks Listed and
residence. Traded in the Local Stock Exchange

 In case a real property is sold in installment Sale made by a Sale made by a

(initial payment not exceeding 25% of the person Other Than Dealer of
contract price) wherein the initial payment a Dealer of Securities (Sec.
Securities (Sec. 24)
was paid in cash and the balance in the
127)
form of interest bearing promissory notes
Taxed at
and the seller discounted the promissory Tax Stock transactions
regular income
notes in the year of sale, the entire gain on effect tax
tax rates
the sale must be reported in the year of sale Individual –
(Bañas vs. Court of Appeals, G.R. No. 102967, subject to
February 10, 2000). graduated tax
rates
 The transfer of property through Tax rate 6/10 of 1%
Corporations
expropriation proceedings is a sale or
subject to
exchange within the meaning of corporate income
Sections 24(D) and 56(A)(3) of the tax of 30%
NIRC, and profit from the transaction Tax base Gross selling price Taxable income
constitutes capital gain. Since capital Still
gains tax is a tax on passive income, it subject
is the seller, or respondents in this case, to No. Yes
who are liable to shoulder the tax. income
(Republic vs. Spouses Salvador, GR No. tax
205428 dated June 7, 2017)
Dealer in Securities
ii. Sale of Shares of Stocks not listed and
traded thru local stock exchange Means a merchant of stocks or securities,
whether an individual, partnership or
Not listed and traded thru local stock corporation, with an established place of
exchange - shares of corporations not being business, regularly engaged in the purchase of
sold in the Philippine stock exchange securities and the resale thereof to customers;
that is, one who, as a merchant, buys securities
Tax Rate applicable: and re-sells them to customers with a view to
the gains and profits that may be derived
Taxpayer Tax Rate therefrom .(Sec. 22(U) of NIRC)
Resident Citizen
Non – Resident Citizen Securities
15% of net capital
Non – Resident Alien
gain
engaged or not Shares of stock in a corporation and rights to
engaged
subscribe for or to receive such shares. The

50 Center for Legal Education and Research

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Taxation Law
term includes bonds, debentures, notes or Example:
certificates, or other evidence or indebtedness,
issued by any corporation, including those A and B are partners in a retail business who
issued by a government or political subdivision decided to incorporate their business. They went
thereof, with interest coupons or in registered to the SEC to establish A & B Co. wherein the
form.(Sec. 22(T) of NIRC) properties of their existing business were
transferred to the newly established corporation.
Changes made in TRAIN Law
 Increase the rate of capital gains tax on sale 2. Merger or Consolidation
of stock transaction that is not
listed/traded in the local stock exchange No gain or loss will be recognized if,pursuant to
from 5-10% graduated rates to a flat rate of a plan of merger or consolidation:
15% with regards to individual taxpayers
and domestic corporations only. a) A corporation, which is a party to a merger or
 While the tax rate for sale of stock consolidation, exchanges property solely for
transaction traded/listed in the local stock in a corporation, which is a party to the
stock exchange is increased from ½ of merger or consolidation; or
1% to 6/10 of 1%. b) A shareholder exchanges stock in a
corporation, which is a party to the merger or
d. Tax-Free Exchange consolidation, solely for the stock of another
corporation also a party to the merger or
General Rule: In a sale or exchange of consolidation; or
property the entire amount of gain or loss is c) A security holder of a corporation, which is a
recognized. party to the merger or consolidation, exchanges
his securities in such corporation, solely for
Exception: stock or securities in such corporation, a party to
the merger or consolidation.
Tax-free exchanges refer to those instances
enumerated in Section 40(C)(2) of the National Definition:
Internal Revenue Code (NIRC) of 1997 that are
not subject to Income Tax, Capital Gains Tax, The term ―merger‖ or ―consolidation‖, when
Documentary Stamp Tax and/or Value-added used in this Section, shall be understood to
Tax, as the case may be. mean:

Two Kinds of Tax-Free Exchanges (Secs. (i) the ordinary merger or consolidation;or
40[C][2] to 40[C][6]) (ii) the acquisition by one corporation of all or
substantially all the properties of another
1. Transfer to a controlled corporation corporation solely for stock:

No gain or loss will be recognized if: Provided, that for a transaction to be

regarded as a merger or consolidation within
a.) The transferee is a corporation; the purview of this Section, it must be
b) The transferee exchanges its shares of undertaken for a bona fide business
stock for property of the transferor; purpose and not solely for the purpose
c) The transfer is made by a person, acting of escaping the burden of taxation:
alone or together with others, not
exceeding four persons; and Provided, further, that in determining
d) As a result of the exchange, the whether a bona fide business purpose
transferor, alone or together with exists, each and every step of the
others, not exceeding four persons, transaction shall be considered and the
gains control of the transferee. whole transaction or series of transaction
shall be treated as a single unit: Provided,
finally, that in determining whether the
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 Purple Notes
Taxation Law
property transferred constitutes a 2018
No. Pursuant to Section 4.106-8(b)(3) of RR No.
substantial portion of the property of the 16-2005, as amended, no VAT shall be due on
transferor, the term ―property‖ shall be the transfer made pursuant to the Plan of
taken to include the cash assets of the Merger. Likewise, no DST is due on the transfer
transferor. in accordance with Section 199 (m) in relation to
Section 40(C)(2) of the Tax Code. However, DST
The term ―control‖, when used in this shall be imposed on the original issuance of
Section, shall mean ownership of stocks in a shares by AAA Co. to the stockholders of BBB
corporation possessing at least fifty-one Co. and CCC Co. as a consequence of the
percent (51%) of the total voting power of merger as provided under Section 174 of the
all classes of stocks entitled to vote. (Section Tax Code. (BIR Ruling No. 075-2018, January 29,
40(C)(6), NIRC) 2018)

Example: vi. Passive Investment Income

Q:AAA Co., BBB Co., and CCC Co. agreed to Passive income is income generated by the
merge, with AAA Co. as the surviving taxpayer‘s assets. These assets can be in the
corporation. Pursuant to the Plan of Merger, BBB form of real properties that return rental
Co. and CCC Co. shall transfer all their assets income, shares of stock in a corporation that
and liabilities to AAA Co. as a consequence of earn dividends or interest income received from
the merger, for which AAA Co., by way of savings. (Chamber of Real Estate and Builders'
original issue, shall issue common shares of Associations, Inc. vs. Romulo, G.R. No. 160756,
stocks to BBB Co. and CCC Co. March 9, 2010)

Is the statutory merger among AAA Co., BBB Passive income is derived from: (RRD-I)
Co., and CCC Co. a merger within the a. Interest
contemplation of Section 40 (C) (2) (a) and (b) b. Dividends
in relation to Section 40 (C) (6) (b) of the Tax c. Royalty income
Code? d. Rental Income

A:Yes. The merger of AAA Co., BBB Co., and a. Interest

CCC Co. is a merger within the contemplation of
Section 40 (C)(2)(a) and (b) in relation to Conditions to be a passive income:
Section 40 (C)(6)(b) of the Tax Code, because
AAA Co. shall acquire and assume all the assets 1. Derived from sources within the Philippines
and liabilities of BBB Co. and CCC Co. and the 2. Earned by:
same is advisable, expedient and in the best a. Citizen
interest of the merging corporations and their b. Resident Alien
respective stockholders. The merger, being c. Non Resident Alien Engaged in Trade or
undertaken for a bona fide business purpose Business
and not for the purpose of escaping the burden d. Domestic or Foreign Corporation
of taxation, qualifies for non-recognition of gain 3. Derived from:
or loss for income tax purposes in accordance a. Any currency bank deposit or
with Section 40(C)(2) of the Tax Code, where no b. Any other monetary benefit from
gain or loss shall be recognized by BBB Co. and deposit substitutes and from trust funds
CCC Co. as the transferors of all assets and and similar arrangements.
liabilities to AAA Co. pursuant to the Plan of
Merger. Interest income may be:

Is the transfer of properties subject to VAT Subject to final Tax Subject to Regular
and DST? Income Tax Rate
Interest income is Interest income is
sourced within source without

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Taxation Law

Tax on Interest Income b. From long-term deposit or investment

in the form of savings, common or
a. From any currency bank deposit, yield, individual trust funds, deposit substitutes,
or any other monetary benefit from investment management accounts and
deposit substitutes and from trust funds other investments evidenced by
and similar arrangements derived from certificates in such form prescribed by the
sources within the Philippines: BangkoSentral ng Pilipinas (BSP)

Taxpayer Rate Final tax shall be imposed on the entire

Resident Citizen income and shall be deducted and withheld by
Non Resident Citizen the depository bank from the proceeds of the
Resident Alien long-term deposit or investment certificate
Non Resident Alien based on the remaining maturity thereof:
Engaged in Trade or 20% on interest income
Business
Pre -terminated Tax Implication
Domestic Corporation
On the 5th year or thereafter Exempt
Resident Foreign
Four (4) years to less than five 5%
Corporation
(5) years
Non Resident Alien Not 25% on Gross Income
Three (3) years to less than (4) 12%
Engaged in Trade or
years
Business
Less than three (3) years 20%
Non Resident Foreign 25% on Gross Income
(Secs.24[B],25[A][2] of NIRC)
Corporation
(Secs.24[B],25[A][2],25[B],27[D][1],28[A][7],&28[B][
1] of NIRC) Tax applicable to:
 Resident Citizens
Deposit substitutes  Resident Aliens
 Non – Resident Alien engaged in Trade or
Under the 1997 National Internal Revenue Code, Business
Congress specifically defined "public" to mean
"twenty (20) or more individual or corporate Conditions to be exempt from final tax:
lenders at any one time." Hence, the number of 1. Depositor or investor is an individual citizen
lenders is determinative of whether a debt (resident or not), resident alien and non –
instrument should be considered a deposit resident alien engaged in trade or
substitute and consequently subject to the 20% profession.
final withholding tax. (BDO vs. Republic of the 2. Long Term Deposits (LTD) or investment
Philippines, G.R. No. 198756, January 13,2015 certificates under the name of the
penned by J. Leonen) individual;
3. LTD or investment in the form of:
Tax implication on the 20 – Lender rule a. Savings;
b. common or individual trust funds;
Less than 20 lenders 20 or more lenders c. deposit substitutes;
(Deposit Substitute) d. investment management accounts; and
Interest income forms Interest income is e. and other investment evidenced
part of gross income subject to final tax of prescribed by BSP;
subject to regular 20% 4. Must be issued by banks only;
income tax rates
5. LTD or investment must have a maturity of
(Id.)
five (5) years;
6. Must be in denominations of Php 10,000 and
The provision for the 20% withholding only
other denominations prescribed by BSP;
applies to interest on banks and does not cover
7. Only interest income from LTD or
interest paid by cooperatives.(Castillo, Dumaguete
Cathedral Credit Cooperative [Link], G.R. 187722,
investment certificates are covered by the
January 22, 2010) exemption;
53
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 Purple Notes
Taxation Law
8. Does not cover other income; and When taxable 2018
9. Must not be pre -terminated before the 5th
year.(Revenue Memorandum Circular No. 7- Dividend income is taxable at the time of their
2015) declaration by the corporation, and not on the
time of actual payment of dividends, since
c. Interest in foreign currency depositary dividend is taxable, whether actual or
units constructively received. (MAMALATEO, Philippine
Income Tax, 2010, p.111)
Taxpayer Rate
Resident Citizen a. Dividends from Domestic Foreign
15 % on interest*
Resident Alien Corporation /Including shares of an
income
Domestic corporation individual in the distributable net income
Resident foreign after tax of a taxable partnership where
7.5% on interest income
corporation
the individual is a partner
Non Resident Alien
Engaged in Trade or
Business
Non Resident Alien NOT
engaged in trade or Exempt
business Taxpayer Rate
Non Resident Citizen Resident Citizen
Non Resident foreign Non – Resident Citizen 10%
corporation Resident Alien
Non Resident Alien
*Changes made by the TRAIN Law Engaged in Trade or 20%
Business
Non Resident Foreign
Increase the final tax on interest in foreign 30%*
Corporation
currency depositary units from 7.5% to 15% (Secs.24[B],25[A][2],25[B],&28[B][1] of NIRC)

b. Dividends *Subject to tax sparring rate of 15% or

applicable tax treaty rates.
Definition
Tax sparring rule
It refers to any distribution made by a
corporation to its shareholder out of its earnings A final withholding tax at the rate of fifteen
or profits and payable to its shareholders, percent (15%) is hereby imposed on the
whether in money or other property (Sec. 73[A] amount of cash and/or property dividends
of NIRC)
received from a domestic corporation, which
shall be collected and paid as provided in
Dividend income may be:
Section 57 (A) of this Code, subject to the
condition that the country in which the
Subject to final Tax Subject to Regular
Income Tax Rate
nonresident foreign corporation is domiciled,
Dividends came from shall allow a credit against the tax due from the
domestic corporation or nonresident foreign corporation taxes deemed to
partnership where the have been paid in the Philippines(Sec. 28(B)(5),
partner is an income NIRC; CIR vs. Procter and Gamble, G.R. No. 66838,
recipient. December 2, 1991)
Dividends from foreign
Dividend from foreign
corporation
corporation which earns b. Dividends from foreign corporation
more than 50% of its
income in the Since it is sourced outside the Philippines it
Philippine for the past will be subject to regular income tax rates
three years
for resident citizens and domestic
corporations only. (Sec. 23, NIRC)

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Taxation Law
When is dividend foreign corporation 2. The recipient is other than the shareholder
considered source from within? (Brachrach vs. Seifert, G.R. No. L-2659, October
12, 1950).
From a foreign corporation, unless less than 3. Change in the stockholder‘s equity results by
fifty percent (50%) of the gross income of virtue of the stock dividend issuance.
such foreign corporation for the three-year
period ending with the close of its taxable b. Property dividend
year preceding the declaration of such
dividends or for such part of such period as Dividends given other than cash shall be
the corporation has been in existence) was subject to final tax similar to cash
derived from sources within the Philippines dividends, i.e., 10%. (Sec. 24 [B][2] of the
as determined under the provisions of this NIRC)
Section; but only in an amount which bears
the same ratio to such dividends as the c. Liquidating dividend
gross income of the corporation for such
period derived from sources within the When a corporation distributes all of its
Philippines bears to its gross income from all assets in complete liquidation or
sources.(Sec. 42 (2) (b) of NIRC) dissolution, the gain realized or loss
sustained by the stockholder, whether
individual or corporation, is taxable income
Example: or deductible loss, as the case may
A Chinese corporation derives more than be.(Section 73[A], NIRC)
50% of its gross income from the Philippines
from the sale of rubber shoes for the past 3 A liquidating dividend is not a
years. If it declares dividend income, it will dividend income. The transaction is
be considered sourced within the considered a sale or exchange of
Philippines. property between the corporation and
the stockholder.(Sec. 256, R.R. 2-1940)
a. Stock dividend
d. Royalty income
General Rule
Definition
Not subject to tax because it does not
constitute income; it represents transfer of It is the payment for the use and exhaustion of
surplus to capital account. (Sec. 73[B] of the property such as earnings from copyrights,
NIRC) patents, trademarks, formulas and natural
resources under lease.(Sec.42[4],NIRC)
Exceptions:
How taxed:
1. Under Sec. 73(B) when the following
concur: (RST) Subject to final Tax Subject to Regular
Income Tax Rate
a. There is redemption or cancellation Payment for use of When sale of royalty is
intellectual property on a regular basis.
of shares of stock;
(Passive income) (Active Income)
b. The transaction involves stock
Royalty income sourced Royalty source without
dividends; and within
c. The ―time and manner‖ of the
transaction makes it ―essentially Tax Rates:
equivalent to a distribution of taxable
dividends‖.(CIR vs. CA, CTA & ANSCOR, a. From literary works and musical
G.R. No. 108576, January 30, 1999)
compositions (Individuals Only )

55
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 Purple Notes
Taxation Law
Taxpayer Rate In the If owned by a 2018 by a
If owned
Resident Citizen Philippines non – resident citizen, resident
Non – Resident alien not alien, non – resident
Citizen engaged in alien engaged in
Resident Alien 10% trade or non – trade or business,
Non Resident Alien resident foreign domestic
Engaged in Trade or corporation on corporation or
Business resident foreign
Non Resident Alien corporation
Not Engaged in Trade 25%
or Business
Outside the If owned by resident
b. Royalties, in general (passive income) Philippines citizen or domestic
corporation
Taxpayer Rate
Resident Citizen
Non – Resident Tax rates:
Citizen
Resident Alien 20%
a. On properties, in located in the
Domestic Corporation
Resident Foreign
Philippines:
Corporation
Non Resident Alien Taxpayer Rate
NOT Engaged in 25% Non Resident Alien
Trade or Business Engaged in Trade or 25%
Non Resident Foreign Business
30% Non Resident Foreign
Corporation 30%
(Secs.24[B],25[A][2],25[B],27[D][1],28[A][7],&28[B][ Corporation
1] of NIRC)

iv. Rental Income

b. On specific properties rented owned by
Definition non -resident foreign corporation:

It refers to the amount or compensation paid for Lease on Rate on Gross

the use or enjoyment of a thing or a right and income
implies a fixed sum or property amounting to be Cinematographic
25%
Films
paid at a stated time for the use of the
Foreign vessels 4.5%
property.(MAMALATEO, Philippine Income Taxation,
Aircraft machineries
2010, p.139) 7.5%
and equipment

How taxed:
Tax treatment on Leasehold Improvement
Location Subject to Subject to
of the final Tax Regular Income
(i) Leasehold Improvements by Lessee
Property Tax Rate
Method of reporting the value of permanent
improvements introduced by the lessee:

 Outright method – recognized as income

to lessor at the time when such buildings
improvements are completed at fair market
value.

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Taxation Law
 Spread-out method – the lessor spread excess of premiums return OF capital
over the life (or remaining period) of the paid -return ON capital
lease, the estimated depreciated value of
such buildings or improvements at the (See detailed discussion on exclusions)
termination of the lease and report as an
income for each year of the lease, an aliquot viii. Prizes or Winnings
part thereof(Sec.49, R.R. 2-40)
Definition
(ii) VAT Added to Rental/Paid by the
Lessee Prizes refer to those obtained as a result of
effort while winnings are products of chance or
The amount of the VAT in a vatable lease luck. (De Leon, NIRC Annotated)
which the lessor passed on to the lessee
does not form part of the rental income of Refers to the amount of money in cash or in
the lessor, since such amount is to be paid kind received by chance or luck. Prizes and
by the lessor as output VAT on the sale of awards are generally taxable except specifically
leasing services to the BIR. mentioned under the exclusions from the
computation of gross income under (Sec. 32[B] of
the NIRC)
(iii)Advance Rental/Long Term Lease
How Taxed:
General rule: Accrual method will apply; thus,
it is taxable when earned and not when the Subject to Final Subject to regular
payment is received.(CASASOLA, NIRC, Annotated) Income Tax of 20% income tax rates

Prizes derived from Prizes derived from

Exception: when it isreceived under a claim of sources WITHIN and sources WITHIN
right and without restriction as to its use MORE than Php 10,000 amounting to Php
(taxed on a per 10,000 or less
 Security deposit applied to the rental of the transaction basis)
terminal month or period of contract must Other winnings derived Prizes and winning from
be recognized as income at the time it is MORE than Php 10,000 sources WITHOUT the
applied and not at the time paid. derived from sources PH by a RESIDENT
 If security deposit is to ensure contract within CITIZEN
compliance, it is not income to the lessor Philippine Charity Prizes and winnings of
Sweepstakes and Lotto corporations from
until the lessee violates any provision of the
winnings in EXCESS of whatever source
contract.(CASASOLA, NIRC, Annotated) Php 10,000

vii. Annuities proceeds from life insurance *Change made by the TRAIN Law
or other types of insurance
Winnings from PCSO of above Php 10,000 are
Annuity refers to the periodic installment now subject to final tax of 20%
payments of income or pension by insurance
companies during the lifetime of a person or for ix. Pension, Retirement Benefit or
a guaranteed fixed period of time, whichever is Separation Pay
longer, in consideration of capital paid by him. It
is paid annually, monthly or periodically, Pension in general – amount of money received
computed upon the amount paid yearly but in lump sum or staggered basis in consideration
necessarily of life. (Peralta vs. Auditor General, G.R. of service rendered given after an individual
No.. L-8480, March 29, 1957)
reaches the age of retirement.(Peralta vs. Auditor,
G.R. No. L – 8480, March 29, 1957)
Taxable Not Taxable
Pension, retirement benefits, gratuities are
Portion that represents Portion of the proceeds
generally taxable to the extent of the amount
interest or amounts in representing premium -
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 Purple Notes
Taxation Law
received, except if there is a BIR approved 2018
year, he realizes taxable income and must
pension plan and the requisites for exemption be included in his income tax return in the
have been met. (Sec. 32 (B)(6) of NIRC) year of receipt.

Separation Pay may or may not be taxable This principle does not apply to tax credits
depending on the voluntariness or or refunds of:
involuntariness of the cause of separation (Sec.
32 (B)(6) of NIRC) 1. Erroneously paid income tax,
2. Estate tax,
x. Income from any source 3. Donor‘s tax, and
4. Special assessments since they are not
a. Forgiveness/Condonationof deductible form gross income.
Indebtedness 5. Final Taxes in the nature of income tax
Income Tax imposed by authority of any
Forgiveness or condonation of one‘s foreign countries (except when the
indebtedness has the following effects: taxpayer signifies his desire to avail of
tax credit of foreign tax(Sec.34[C], NIRC)
Consideration Tax Implication d) Exclusions
Consideration of the services
performed by the debtor to Taxable (Income) Definition
the creditor
Without any consideration Taxable (Gift) Income received or earned but is not taxable as
Corporation forgives the debt income because it is exempted by law or
Taxable (Dividends)
of its stockholder
treaty.(De Leon, NIRC Annotated)
b. Recovery of Accounts Previously
i. Rationale
Written Off
 They represent return of capital or are not
The recovery of bad debts previously income, gain or profit. – (e.g. life insurance
allowed as deduction in the preceding year proceeds paid to the heirs or beneficiaries
or years shall be included as part of the upon death of insured)
taxpayer‘s gross income in the year of such  They are subject to another kind of
recovery to the extent of the income tax internal revenue tax (e.g. passive income
benefit of the said deduction, this is subject to final tax)
otherwise known as the Tax Benefit Rule.  They are income, gain or profit that is
expressly exempt from income
Bad Debts tax(MAMALATEO, Income Tax)

Refer to those debts resulting to from ii. Who may avail

worthlessness or uncollectibility in whole or
in part, of amounts due to the taxpayer by All kinds of taxpayers may avail of exclusions
others arising from money lent or from gross income
uncollectible accounts of income from goods
or services (R.R. 5 – 09, Sec. 2 [a] ) iii. Distinguish exclusion, deductions and
tax credits
c. Receipt of Tax Refunds or Credit
Exclusion vs. Deductions
If a taxpayer received a tax credit certificate
or refund for erroneously paid tax which Exclusion Deduction
was claimed as deduction from his gross
income that resulted in a lower net taxable Flow of wealth Amounts which the law
income or a higher net operating loss that (Income) to the allows to be subtracted
was carried over to the succeeding taxable taxpayer which is not from gross income in
treated as part of gross order to arrive at the

58 Center for Legal Education and Research

 Purple Notes
Taxation Law
income due to its net income o Prizes and awards in sports corporation
exemption by law or o 13th month pay
does not come within o GSIS, SSS, Medicare and other
the definition of income contributions
Pertains to the Pertains to the
o Gain from sale of bonds, debentures
computation of GROSS computation of
INCOME TAXABLE INCOME
with maturity of 5 years or more
o Gain on redemption of shares in mutual
Something received or Something spent or funds
earned by the taxpayer paid in earning gross
but do not form part of income (i.e. expenses) a. Proceeds of Life Insurance Policies
gross income
Proceeds are excluded if:
Exclusion vs. Tax Credits  Paid by reason by death of the insured
 To heirs or beneficiaries
Exclusion Tax Credits
 Whether lump sum or otherwise (Sec. 32B of
Amount received as an Amount representing a NIRC)
income or gain but tax previously paid
does not form part of which may be deducted Reason: Indemnity rather as gain or profit.
gross income from a tax liability to What are taxable portions:
arrive at the tax still  Payments for reasons other than death
due  Interest paid on life insurance

iv. Exclusions Under the Constitution: Instances where life insurance policies are not
excluded when
-(see discussion on General Principles,  Life insurance policy is used to secure
Constitutional Limitations) money obligation
 ―All revenues and assets of non-stock,  Life insurance was transferred for a valuable
non-profit educational institutions used consideration
actually, directly and exclusively used  Recipient is a business partner of the
for educational purposes shall be deceased. Insurance was taken to
exempt from taxes and duties.‖ (Section compensate the partnership that may cause
4(3), Article XIV, 1987 Constitution) the dissolution of the partnership
 Recipient is a corporation where the
v. Exclusions Under the Tax Code (LPG insured was employee or officer.(R.R.
CRIM) No. 02 -40)

Under the Tax Code the following are excluded b. Return of Premium Paid
from gross income:
Excluded if:
 Proceeds from life insurance policies  The amount received by the insured, as a
 Amounts received by insured as return of return of premiums paid by him
premium paid  Under life insurance, endowment, or
 Value of property acquired thru gift, annuity contracts,
bequest, devise or descent  Received during the term or at the
 Compensation from injuries and sickness maturity of the term mentioned in the
 Income Exempt under tax treaties contract or upon surrender of the contract.
 Retirement benefits, pensions, gratuities  No death occurs in this case only a maturity
or separation pay of the term.
 Miscellaneous Items  Only the amount of premium paid is
o Income derived by foreign government excluded. Any income on top of the said
o Income derived by government or its premiums which are given to the
political subdivisions insured is taxable. ( DOMONDON, Taxation)
o Prizes and awards
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Taxation Law
Reason: Return of the premium is only a return  Premised on adherence to the 2018generally
of capital and is not considered income. accepted principles of International Law.

c. Amounts Received under Life Note: Not all countries have a tax treaty with
Insurance, Endowment or Annuity the Philippines.
Contracts
g. Retirement Benefits, Pensions,
1. Amounts received through accident or Gratuities, Etc.
health insurance or under workmen‘s
compensation acts, as compensation for i. Retirement Benefits under R.A. No. 7641
personal injuries or sickness, plus the -An Act Amending Article 287 of P.D. No.
amounts of any damages received, whether 442 as amended, otherwise known as
by suit or agreement, on account of such Labor Code of the Philippines, by providing
injuries or sickness. for Retirement Pay to Qualified Sector in
2. Compensations for damages to personal or the Absence of any Retirement Plan in the
family rights, damages for slander and libel, Establishment:
award for loss of life, damages for injuries
to the goodwill of a taxpayer‘s business When excluded:
unless they exceeded its cost are not i. Where the retirement plan is established in
taxable. the Collective Bargaining Agreement (CBA)
3. Damages received for patent infringement, or other applicable employment contract.
breach of contract or fiduciary duty and a. Any employee may be retired upon
recoveries (except punitive damages) under reaching the retirement age established
the Clayton act for antitrust violations are in the CBA or other applicable
excluded from the gross income to the employment contract
extent that the losses to which the damages
relate did not give rise to a tax benefit either ii. In the absence of a retirement plan or
in recovery year or earlier tax years. agreement providing for retirement benefits
of employees in the establishment. Any
d. Value of Property Acquired by Gift, employee may be retired under the
Bequest, Devise or Descent following:
a. Optional retirement the conditions are:
Gifts, Bequests, and Devises are donations i. Any employee upon reaching the age
because it is given gratuitously. of 60 or more;
ii. Who has served at least 5 years in the
Reason: These are not the product of capital or said establishment; and
industry. iii. May retire and shall be entitled to
retirement pay equivalent of ½ month
However, the income received by the donee salary for every year of service, a
from the said property/item is subject to income fraction of at least 6 months being
tax. considered as one whole year.
b. Mandatory Requirement the conditions
e. Amount Received Through Accident or are:
Health Insurance Compensation for i. Any employee upon reaching the
Injuries or Sickness Refers to: age of 65 which is compulsory
retirement age;
(see discussion in Taxation on compensation ii. Who has served at least 5 years;
income – Exclusion) and
iii. May retire and shall be entitled to
f. Income Exempt Under Tax Treaty retirement pay equivalent of ½ of
month salary for every year of
 Income exempt under tax treaty with service, a fraction of 6 months being
foreign countries. considered as one whole year

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Taxation Law
Refers to the voluntary retirement account
ii. Retirement Benefits under R.A. No. established by and for the exclusive use and
4917 – An Act Providing that benefit of the contributor for the purpose of
Retirement Benefits of Employees of being invested solely in the Personal Equity and
Private Firms Shall not be Subject to Retirement Account investment products in the
Attachment, Levy, Execution or any Philippines (R.A. 9505, Personal Equity and
Tax Whatsoever and those received by Retirement Account Act of 2008).
officials and employees of private
firms, whether individual or corporate, All income earned from the investments and re-
in accordance with a reasonable investments of PERA assets in PERA investment
private benefit plan maintained by the products shall be exempt from income taxes
employer provided the said PERA investment products
have been duly accredited by the concerned
When excluded: Regulatory Authority. Moreover, income from
i. Retiree is employed by the same investments and re-investments of PERA assets
employer for at least 10 years; in government securities is likewise exempt from
ii. Retiree is at least 50 years old; income taxes. (RMC No. 30-2017 in relation to RR
iii. Retiree avails of the benefit only ONCE No. 17-2011)
iv. Benefit are given under a BIR approved
private benefit plan f. Winnings, Prizes, and Awards,
Including Those in Sports Competition
Reasonable benefit plan:
1. Those made primarily in recognition of
A pension, gratuity, stock bonus or profit- Scientific, Charitable, Artistic, Religious,
sharing plan maintained by an employer for Civic, Educational or Literary
the benefit of some or all of his officials or achievement but only if the
employees, wherein contributions are made recipient:(SCAR-CEL)
by such employer for the officials or
employees, or both, for the purpose of a. Was selected without any action on his
distributing to such officials and employees part to enter the contest or proceeding;
the earnings and principal of the fund thus and
accumulated, and wherein its is provided in b. Is not required to render any substantial
said plan that at no time shall any part of future service as a condition to receiving
the corpus or income of the fund be used the prize or award.
for, or be diverted to, any purpose other
than for the exclusive benefit of the said 2. Those granted to athletes in local and
officials and employees. (Sec.32 [B] [6][a] of international sports competitions and
NIRC) tournaments whether held in the Philippines
or abroad provided sanctioned by their
Retirement under R.A. 4917 v. R.A. 7641 national sports associations.

R.A. 7641 iii. Exclusions Under Special Law

R.A. 4917
Optional Mandatory
Age Requirement a. Under R.A. No. 7916 (Philippine Export Zone
50 years old 60 years old 65 years old Authority Law), PEZA–registered enterprises
Years of Service are given income tax holidays of six or four
10 years 5 years years from the date of commercial
BIR approval required
operation, depending on whether their
Yes Not required
activities are considered as pioneer or non-
pioneer; after enjoying income tax holidays,
iii. Personal and Equity Retirement
they are subject to the 5% gross income tax
Account (PERA)
on their gross income earned, in lieu of all
national and local taxes.
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 Purple Notes
Taxation Law
b. Under R.A. No. 6657 (Comprehensive 1. It must be ordinary and 2018
necessary
Agrarian Reform Package Law), gain arising Expenses.
from the transfer of the agricultural property
covered under the law shall be exempt from Ordinary Expenses – normal or usual in the
capital gains tax for ten (10) years. line of business and surrounding circumstances
c. Under R.A. No. 7653 (New Central Bank (Atlas Mining Consolidated & Devt. Corp vs. CIR, G.R.
Act), No. L-26911, January 27,1981).
d. the BangkoSentral ng Pilipinas is exempt
from all national, provincial, municipal and Necessary Expenses – appropriate and
city taxes for five (5) years. helpful in the development of taxpayer‘s
e. Under R.A. No. 7279 (Urban Development business(General Electric Inc. vs. CIR, CTA Case
Housing Act of 1992), the National Housing No..1117, July 14, 1963)
Authority is exempt from all fees and
charges of any kind, whether local or  It must be reasonable.
national, such as income and realty taxes.  Not contrary against law, public policy or
public morals
4. Deductions
2. Paid or incurred within the taxable
Aside from exclusions which are not part of year.
income to be taxed, the Tax Code also allows
the taxpayer certain amounts to be deducted  Cash Basis Method – deducts expenses in
from the gross income in arriving at the net the year in which they are paid
income which will be the basis for the taxable  Accrual Basis Method – recognizes
income to be taxed either at graduated tax table expenses in the year they accrue or when
or corporate income taxes. incurred not when paid.

Deductions from gross income refer to items 3. Paid or incurred in carrying on a trade
which the law allows to be subtracted from or business.
pertinent items of gross income to arrive at the
taxable income. 4. Directly attributable to the
development, management, operation
Types of deductions: and/or conduct of business or exercise
of profession, including the following
1. Itemized deductions in Section 34(A) to reasonable allowance.
(J) and (M);
2. Optional Standard Deductions (40%) 5. Substantiated with sufficient evidence,
under Sec. 34(L); such as official receipts or other
3. Special deductions in Sections 37 and 38 of adequate records.
the NIRC, and in special laws like the BOI
law (E.O. 226). Cohan Rule
If there is a showing that expenses have been
Who are NOT allowed to claim deductions incurred but the exact amount cannot be
from gross income ascertained due to lack of documentary
evidence, it is the duty of the BIR to make an
1. NRA-NETB and NRFC are subject to final tax estimate of deduction that may be allowed.
from their gross income from sources within the (RMC 23-2000).
Philippines.
2. RC, RA and NRC earning purely compensation
income 6. If subject to withholding taxes, proof
of payment to BIR
a) General Rules in Claiming Deductions
 Any amount paid or payable which is
otherwise deductible from, or taken into

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Taxation Law
account in computing gross income or for For a Manufacturing Concern:
which depreciation or amortization may Cost of Goods Manufactured and Sold = All
be allowed under this Section, shall be costs of production of finished goods, such as
allowed as a deduction only if it is shown
that the tax required to be deducted and 1. Raw material used;
withheld therefrom has been paid to the 2. Direct labor;
BIR. (Sec. 34[K] of the NIRC) 3. Manufacturing overhead;
4. Freight cost;
 The provision under RR No. 12-2013 stating 5. Insurance premiums;
that no deduction will be allowed 6. Other costs incurred to bring the raw
notwithstanding the payments of materials to the factory or warehouse.
withholding tax at the time of audit
investigation or reinvestigation / For trading or merchandising concern, the Cost
reconsideration in cases where no of Goods Sold shall include:
withholding tax was made. Hence, the
provisions under RR No. 14-2002 as 1. Invoice cost of the goods sold;
amended by RR No. 17-2003 were 2. Import duties;
reinstated wherein any income payment 3. Freight in transporting the goods to the place
which is otherwise deductible under the where the goods are actually sold including
Code shall be allowed as a deduction from insurance while the goods are in transit.
the payor's gross income only if it is shown
that the income tax required to be withheld Sale of stock in trade by a real estate
has been paid to the Bureau in accordance dealer and dealer in securities – generally,
with Secs. 57 and 58 of the Code (RR No. 6- the return of capital is not allowed to be
2018, January 19, 2018) deducted from the gross sales. Taxpayers are
required to deduct the total cost specifically
b) Return of capital (cost of sales or identifiable to the real property or shares of
services) stocks sold or exchanged
Sale of Services - means the performance of all
Income tax is levied by law only on income, kinds of services in the Philippines for other for a
which maybe gross income or net income; fee, remuneration, or consideration. (Section 108,
hence amount representing return of capital NIRC)
should be deducted from the proceeds of sales
of assets and should not be subject to income Cost of Services - All direct costs and expenses
tax.(Sec. 65 of R.R. No. 02-40) necessarily incurred to provide the services
required by the customers and clients including:
Items that are closely related to the business or
profession that without which the sale would a. Salaries and employee benefits of personnel,
have not occurred. consultants and specialists directly rendering
the service;
These items are deducted from the gross sales b. Cost of facilities directly utilized in providing
or receipts to arrive at the gross income. the service. It shall not include interest
expense except for banks and other financial
Gross Sales/Revenue/Receipts Xxx institutions.
Less: Cost of Sales or Cost of Xxx
Services  Gross income excludes passive income
Gross income Xxx subject to final tax.
Add Other income Xxx  Other income and Extraordinary Income are
Total Gross Income Xxx included since RR 9-98 provides that gross
sales include sales contributory to income
Sale of Inventory of Goods by taxable under the regular corporate tax.
Manufacturers and Dealers of Properties

63
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 Purple Notes
Taxation Law
These are items that are deductible from the tax imposed has been 2018 paid. The
gross income which are incidental in carrying relatedfringe benefit tax paid on such, if
out a business. applicable, are likewise deductible.

Gross Sales/Revenue/Receipts xxx Requisites: (TOP – RPS)

Less: Cost of Sales or Cost of xxx
Services 1. Ordinary and necessary;
Gross income xxx 2. Paid or incurred within the taxable year;
Add Other income Xxx 3. Must be incurred in carrying on a trade or
Total Gross Income Xxx business;
Less: Allowable Deductions Xxx 4. Must be in fact for salaries and wages;
(Itemized) 5. Must be for personal services actually
Taxable Income Xxx rendered;
6. Reasonable in amount(MAMALATEO, Income
Taxation)
c. Distinguish : Itemized Deduction vs.
Optional Standard Deduction (See
(2) Traveling/Transportation expenses
discussion at the end of this section [4.
Deductions])
It includes:
d. Requisites to be Deductible – Itemized
 Meals and lodging;
Deductions:
 Expenses from main office to branch or
branch to main office;(Secs. 65-66, RR 2-
Itemized Deductions
40)
(1) Salaries, wages and other forms of
Requisites:
compensation for personal services
actually rendered, including the
1. Incurred or paid while away from home;
grossed-up monetary value of the
2. Made in the pursuit of trade or business;
fringe benefit subjected to fringe
3. Reasonable and
benefit tax which tax should have been
necessary(Sec.34[A][1][a][iii])
paid.
(3) Cost of materials
It includes:
 Deductible only to the amount actually
 Salaries, wages, commissions,
consumed or used in operation during the
professional fees, vacation leave pay,
year.
retirement pay and other compensation.
 Bonus are deductible expenses if paid in
(4) Rentals and/or other payments for use
good faith as additional compensation
or possession of property
for services rendered and subjected to
withholding tax
Includes:
 Aliquot part of the amount to acquire
 In Aguinaldo vs. CIR, G.R. No. L-29790,
leasehold over the number of years
February 25, 1982, the bonus given to
 Taxes and other obligations of the lessor
corporate officers was disallowed as a
paid by the lessee
deduction.
 Annual depreciation of leasehold
improvements introduced by the lessee of
 Pensions and compensations for injuries,
the remaining term of the lease or over the
if not compensated for by insurance or
life the improvements, whichever is
otherwise.
shorter(Sec. 74, R.R. 2-40)
 Grossed-up monetary value of fringe
benefit provided for, as long as the final

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Taxation Law
Requisites of deductibility: (WT2C) 2. Expenses paid in the operation and repair of
transportation equipment used in making
1. Made as a condition to the continued professional calls,
use or possession of property. 3. Dues in professional societies and
2. Taxpayer has not taken or is not taking subscription to professional journals, t
title to the property or has no equity 4. Rent paid for office rooms,
other than that of a lessee, user or 5. Expenses of the fuels, light, water,
possessor. telephone, etc., used in such offices, and
3. Property must be used in trade or the hire of office assistant.
business.
4. Subjected to withholding tax of 5% Amounts currently expended for books,
otherwise it shall be disallowed as a furniture, and professional instruments and
deduction (Sec. 2.57.2[B] &[C], R.R. 2-98). equipment, the use of which is short, maybe
deducted but the amounts expended for books,
(5) Repairs and maintenance furniture and professional instruments and
equipment of a permanent character are not
Includes: allowable as deduction. (Sec. 69, RR No. 2)
 Cost of incidental repairs which neither
materially add to the value of the property (8) Entertainment/ Representation
nor prolong its life but keep it in an expenses
ordinarily efficient operating condition, may For entertainment or recreation connected to
be deductible PROVIDED the property, plant the trade, business or profession or directly
and equipment is not increased by the related to or in furtherance of the conduct of the
amount of such expenditure (Sec.68, R.R. 2- business, PROVIDED however that expense
40). incurred contrary to law, morals, public policy or
public order shall not be deductible.
(6) Expenses under lease agreements
Presence of the client is required.
For the lessor
It includes: Limitation on the amount deductible:
 All ordinary and necessary expenses paid or
incurred during the taxable year which are Under Sec. 5 of RR No. 10-02, there shall be
attributable to the earning of income allowed a deduction from gross income for
 Cost of repairs and maintenance entertainment, amusement and recreation
 Salaries and wages of attendants to the expense in an amount equivalent to the actual
leased property entertainment, amusement and recreation
 Interest and expense paid or incurred within the taxable year
 Property taxes(Sec.2.01, R.R. 19-86) by the taxpayer, but in no case shall such
deduction exceed:
For the lesseee
It includes: 1. 0.50 percent (%) of net sales (i.e., gross
sales less sales returns/allowances andsales
 Rent paid or accrued including all expenses discounts) for taxpayers engaged in sale of
which under the terms of agreement the goods or properties; or
lessee is required to pay to or for the 2. 1.00 percent (%) of net revenue (i.e., gross
account of the lessor. (Sec.3.01,R.R.. 19-86) revenue less discounts) for taxpayers
engaged in sale of services, including
(7) Expenses for professionals exercise of profession and use or lease of
properties
A professional may claim as deductions:
1. Cost of supplies used by him in the practice Requisites:
of his profession, 1. Directly connected to the development,
management and operation of the trade,
65
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 Purple Notes
Taxation Law
business or profession of the taxpayer or Specific Itemized Deductions: 2018
directly related to or in furtherance of the
conduct trade, business, or profession (Sec. (a) Interest
4[B], R.R. 10-02);
2. Reasonable; (1) Requisites for deductibility
3. Not contrary to laws, morals, policy or
public order(Sec. 4[C], R.R. 10-02); 1. There must be indebtedness
4. Does not constitute bribe, kickback, or 2. Taxpayer is the debtor.
other similar payments (Sec. 4[D], R.R. 10- 3. Interest expense was paid or incurred
02); upon such indebtedness
5. Substantiated with adequate proof. The official 4. Debt must be related to the business
receipt or invoices or bills or statements of or
accounts should be in the name of the taxpayer
profession of the taxpayer.
claiming the deduction (Sec. 4[E], R.R. 10-02);
5. Interest is stipulated in writing
6. Must be paid or incurred during the taxable
6. Interest should be legally due.
year(Sec. 4[A], R.R. 10-02);
7. Interest paid or accrued during the
7. Withholding of appropriate withholding tax, if
applicable(Sec. 4[F], R.R. 10-02); taxable year(Sec.3 ,R.R. 13-2000).
8. Does not exceed the arbitrage limit of .50% of
net sales or 1% of net revenues or if the (2) Non-deductible interest expense
taxpayer is engaged in both in the sale of goods
or services it must use the apportionment Interest expense not allowed as deduction:
formula .(Sec. 5, R.R. 10-02);
(9) Political campaign expenses 1. Individual taxpayer on the cash basis
paying interest in advance through
Applicable only to: Political parties and discount or otherwise. But interest is
candidates of local and national election. allowed as deduction in the year the
indebtedness is paid; if payable in
Only contributions spent and utilized during amortization then an aliquot portion of
the campaign period. Any contributions or the interest corresponding to the ratio of
donations before or after the campaign the principal paid is allowed as
period set by the Commission on Elections deduction.(Sec.34[B][2][a], NIRC)
are subject to both donor‘s tax or income 2. Interest in the form of dividends paid to
tax. preferred shareholders (Sec.78, R.R. 02-
40; R.M.C. 17-71)
Political contribution for campaign expenses 3. Interest on indebtedness incurred to
made by political parties and candidates of financepetroleum
local and national election are deductible exploration(Sec.34[B][2][c], NIRC).
provided they are subject to the applicable 4. Interest in Cost keeping on account of
withholding tax rate of 5% whether goods or capital or surplus invested in business
services (Sec VI, RMC 30-2016) which does not represent charges
arising under interest bearing
Exception: obligations (Sec. 79,R.R. 2-40)
5. When there was no stipulation (CIR vs.
 No corporation, domestic or foreign, shall Prieto, G.R. No. L 13912, September
give donations in aid of any political party 30,1960)
or candidate or for purposes of partisan 6. Interest on unclaimed
political activity. (Sec. 35[i], Revised salary(Kuenzelle&Streiff, Inc. vs. CIR, G.R.
Corporation Code) Nos. L-12010, October 20,1959)
7. Interest paid on indebtedness on
(10) Training expenses purchase securities by one who is not a
dealer in securities (Sec.34[B][2][b],
Constitute ordinary and necessary expenses of a NIRC).
taxpayer.

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Taxation Law
8. Interests on loans between related Individual taxpayer on the cash basis paying
parties referred in Section 36 (B). interest in advance through discount or
otherwise. But interest is allowed as
Capitalized Interest/ Borrowing Cost deduction in the year the indebtedness is
paid; if payable in amortization then an
At the option of the taxpayer, interest incurred aliquot portion of the interest corresponding
maybe allowed on acquisition of property used to the ratio of the principal paid is allowed
in trade, business or profession: as deduction.
1. Outright deduction in gross income or
2. Treated as capital expenditure (b) Interest periodically amortized

Should the taxpayer elect to deduct the interest General Rule: The interest period
payments at its gross income the taxpayer commences at the date of the indebtedness
cannot at the same time capitalize the interest arises.
payments (Paper Industries Corp. vs. Court of
Appeals, G.R. No.106949-50, December 1, 1950) Exception: With respect to business
interests earned out of sales, lease or
Who are considered related parties supply or goods and services which are
considered as trade accounts or receivables
1. Between members of a family, i.e. brother or payables.
and sister(whether by the whole or half-blood,
spouse, ancestor, and lineal descendants; or (c) Interest expense incurred to
acquire property for use in trade,
2. Except in case of distributions in liquidation, business or exercise or a
between anindividual and corporation, where profession.
the individual owns directly or indirectly more
than 50% of the outstanding stock of the It may be allowed as a deduction or treated
corporation. as a capital expenditure.

3. Except in the case of distribution in

liquidation, between two corporations where: (d) Interest arbitrage rule

Either one is a personal holding company with Taxpayer‘s allowable deduction for interest
respect to the taxable year preceding the date expense shall be reduced by 33% of the
of the sale or exchange; and interest income subject to final tax.

More than 50% of the outstanding stock of each Thus, if a taxpayer incurred P5,000 interest
is owned, directly or indirectly, by or for the expense and earned P10,000 interest
same individual; or income form bank deposits subject to final
tax, his deduction for interest expense shall
4. Between parties to a trust- Grantor and only be P1,700 (P5,000 reduced by P3,300
Fiduciary [33% of P10,000]) and not the whole
5. Between fiduciary of trust and fiduciary of P5,000.
another trust if the same person is a grantor
with respect to each trust (b) Taxes
6. Between fiduciary and beneficiary .(Sec.36[b]
of NIRC) a. Requisites for deductibility

(3) Interest subject to special rules 1. Related to the business of the taxpayer.

(a) Interest paid in advance 2. Imposed by law on, and payable by,
3. taxpayer.
4. Paid or accrued during the taxable year.
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distinction between tax and 2018ordinary
Examples of deductible taxes: obligation in this respect.
1. Local business tax;  Interest on deficiency income tax can also
2. Real property tax; be claimed as deductible interest expense
3. Documentary stamp tax; because taxes here are considered ordinary
4. Fringe Benefit tax obligations.
5. Excise tax (Sec. 80,R.R. 2-40)
d. Tax credit vis-à-vis deduction
b. Non-deductible taxes
 Taxes as deductions maybe claimed as
1. Income tax. allowable deductions from gross income.
2. Income tax paid or incurred to any  Tax credit is a deduction from income tax
foreign country, if the taxpayer is due.
claiming a tax credit for such foreign  Tax as a deduction includes those taxes
tax. which are paid or incurred in connection
3. Estate or donor‘s tax. with the trade, business or profession of the
4. Taxes assessed against local benefits of taxpayer. On the other hand, the sources of
a kind tending to increase the value of a tax credit include foreign income tax paid,
the property assessed (special war profit tax, excess profit tax paid to the
assessment). foreign country.
5. Final taxes being in the nature of  The foreign income tax paid to the foreign
income tax; country is not always the amount that
6. Stock transaction tax maybe claimed as tax credit. Under Sec.
7. Capital Gains Tax (DOMONDON, Taxation) 34(C)(4),the tax credit must not be more
than the ratio of foreign income to the total
VAT is not among the deductible taxes for income multiplied by the Phil. income tax.
income tax purposes. However, the portion of
the input VAT paid in relation to VAT-exempt (c) Losses
sales may be deducted as part of the expense to
which they relate. Kinds of Losses
a. Ordinary loss/Casualty Loss
c. Treatment of surcharges/ b. Capital Loss – related to income from
interests/fines for delinquency dealings of property
c. Losses resulting to securities becoming
General Rule: Surcharges and other penalties worthless
are not deductible. But interest related to d. Special losses
delinquency are. (Sec. 80 of RR No. 2-40) a. Wash sales
b. Wagering loss
Exception: Interest on Deficiency Taxes. c. Abandonment of losses
e. Net Operating Loss Carry Over
However, under Sec. 4(C) of RR No. 13-00,
interest incurred or paid by the taxpayer on all a. Ordinary Loss/ Casualty Loss
unpaid business-related taxes shall be fully
deductible from gross income and shall not be (1) Requisites for deductibility – Ordinary
subject to the limitation on deduction of interest Loss
expense. Thus, such interest expense incurred
or paid shall not be diminished by the 1. Loss of the taxpayer
percentage of interest income earned which had 2. Must be actual; nature of the loss must
been subjected to final withholding tax. be ―sudden‖;
 The interest on deficiency donor‘s tax is 3. Sustained in a close and completed
deductible. The SC explained that taxes here transaction;
are considered obligation or indebtedness 4. Not be compensated for by insurance
and ruled that we have to relax the or otherwise;

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5. Must be liquidated and charged-off The net operating loss of the business or
during the taxable year. enterprise for any taxable year immediately
6. Not claimed as a deduction for estate preceding the current taxable year, which has
tax purposes; and not yet been previously offset as deduction from
7. If due to casualty, robbery, theft or gross income shall be carried over as a
embezzlement, must be reported to the deduction from gross income for the next three
BIR within 45 days from date of consecutive taxable years immediately
discovery. following the year of such loss

b. Capital losses ―Net operating loss‖ means the excess of

allowable deduction over gross income of the
Capital loss can never be deducted from an business in a taxable year.
ordinary gain. Capital loss can only be deducted
from capital gain in accordance Section 39 (c) of To illustrate:
the NIRC.
For the year 2019, Company AAA showed the
1. Losses from sale or exchange of capital following results of operation:
assets
2. Losses resulting from securities becoming Sale 1,000,000
worthless and which are capital assets Less: Cost of sales (850,000)
3. Losses from short sales of property Gross Income 150,000
4. Losses due to failure to exercise privilege or Less: Itemized Deductions (250,000)
option to buy or sell property. Net Operating Loss (100,000)

c. Securities becoming worthless The above net operating loss can be carried
over as part of the itemized deduction within 3
Requisites: years provided the corporation is not liable to
d. Special Losses pay the Minimum Corporate Income Tax (MCIT).
(a) Losses on wash sales of stocks or
securities A corporation cannot enjoy the benefit of
NOLCO for as long as it is subject to MCIT in
Wash sales, defined any taxable year. The running of the three-year
period for the expiry of NOLCO is not
It is a sale or disposition of stock or securities interrupted by the fact that such corporation is
where substantially identical securities are subject to MCIT in any taxable year during such
acquired or purchased within a 61-day period three-year period (Section 6.5, RR No. 14-2001).
beginning 30 days before the sale and ending
30 days after the sale.(see Sec. 38(A), NIRC, as Applicable to:
amended) a. Individuals engaged in trade or business or
profession
Wash sales are NOT deductible because these b. Domestic corporations subject to normal tax
are considered to be artificial loss. c. Resident foreign corporations subject to
normal tax
(b) Wagering losses d. Special Corporations subject to preferential
tax
Deductible only to the extent of gain or e. Estates and Trust (Sec. 4, R.R. 13, -2001)
winnings; deemed to apply only to individuals.
A wager is made when the outcome depends Said deduction, however, is subject to some
upon the CHANCE(Sec.34[D][6], NIRC) limitations, to wit:

e. Net Operating Loss Carry-over (NOLCO) 1. It is necessary that the loss had not been
previously offset as deduction from gross
income;
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Taxation Law
2. Any net loss incurred in a taxable year BOI-registered activity enjoying2018
the income
during which the taxpayer was exempt from Tax Holiday incentive. Its accumulated net
income tax (as in the case of tax holiday) operating losses incurred or sustained
shall not be allowed as a deduction; during the period of such income Tax
3. A NOLCO shall be allowed only if there had Holiday shall not qualify for purposes of the
been no substantial change in the ownership NOLCO;
of the business or enterprise. c. An enterprise registered with the Philippine
a. Can be carried over to the next 3 years Economic Zone Authority (PEZA), pursuant
after the year the net operating loss was to R.A. No. 7916, as amended, with respect
sustained. to its PEZA-registered business activity. Its
b. No substantial change in ownership accumulated net operating losses incurred
of the business or enterprise – (75% or sustained during the period of its PEZA
interest retention rule) to avoid peddling registration shall not qualify for purposes of
of losses purely for tax benefit the NOLCO;
purposes. d. An enterprise registered under R.A. No.
7227, otherwise known as the Bases
 NOLCO shall be allowed as a deduction from Conversion and Development Act of 1992,
the gross income of the same taxpayer who e.g., SBMA-registered enterprises, with
sustained and accumulated the net respect to its registered business activity. Its
operating losses regardless of the change in accumulated net operating losses incurred
its ownership. or sustained during the period of its said
registered operation shall not qualify for
This rule (no substantial change/ 75% purposes of the NOLCO;
rule) shall also apply in the case of merger e. Foreign corporations engaged in
where the taxpayer, which incurred the international shipping or air carriage
losses, is the surviving entity. business in the Philippines; and
f. In general, any person, natural or juridical,
Any individual (including estates and trusts) [who is] enjoying exemption from
engaged in trade or business or in the income tax, pursuant to the provisions of
exercise of his profession, and domestic and the Code or any special law, with respect to
resident foreign corporations subject to the its operation during the period for which the
normal income tax (e.g., manufacturers and aforesaid exemption is applicable. Its
traders) or preferential tax rates under the accumulated net operating losses incurred
Code (e.g., private educational institutions, or sustained during the said period shall not
hospitals, and regional operating qualify for purposes of the NOLCO. (Sec. 4,
headquarters) on their taxable income shall R.R. 14-2001)
be entitled to deduct from his/its gross
income for the current year his/its Net Operating Loss Carry Over (NOLCO) vs. Net
Capital Loss Carry Over (NCLO)
accumulated net operating losses for the
immediately preceding three (3) consecutive
NOLCO NCLC
taxable years (Section 4, RR No. 14-2001).
Loss can be claimed by
Individual taxpayer Individual and
The following shall not be entitled to claim ONLY Corporations
deduction of NOLCO: Kind of Loss
Capital Loss or one Losses incurred from
a. Offshore Banking Unit (OBU) of a that arose from a sale operation in the
foreign banking corporation, and Foreign of capital assets business
Currency Deposit Unit (FCDU) of a Period of Carry Over
domestic or foreign banking corporation, Can only be carried Can be carried for a
duly authorized as such by the BankoSentral forward for one year maximum of 3
ng Pilipinas (BSP); consecutive years
b. An enterprise registered with the Board of
Investments (BOI) with respect to its d. Bad Debts

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Definition: refer to those debts resulting from The total bad debts recovered will not
the worthlessness or uncollectibility, in whole or necessarily form part of the taxpayer‘s income
in part, of amounts due the taxpayer by others, but only to the extent that he was benefited.
arising from money lent or from uncollectible
amounts of income from goods sold or services e. Depreciation
rendered(Sec. 2[a],R.R. 05-99).
Definition: It is the gradual diminution in the
Requisites for deductibility service or useful value of tangible property due
from exhaustion, wear and tear and normal
1. There must be an existing indebtedness obsolescence. (Basilan Estates vs. CIR, G.R. No. L-
due to the taxpayer which must be valid and 22492, September 5, 1967)
legally demandable;
2. The same must be connected with the Requisites for deductibility
taxpayer‘s trade, business or practice of
profession; i. Must be reasonable;
3. The same must not be sustained in a ii. Must be on property used in the conduct of
transaction entered into between related the business; and
parties enumerated under Sec. 36(B) of the iii. Must be treated as expenditure for the
Tax Code of 1997; taxable year.
4. The same must be actually charged off the iv. Statement of allowance must be attached to
books of accounts of the taxpayer as of the the return. (Sec. 115, R.R. 2-40)
end of the taxable year; and
5. The same must be actually ascertained to Depreciation Deductible by Nonresident
be worthless and uncollectible as of the end Aliens Engaged in Trade or Business or
of the taxable year (Sec. 3, R.R. No. 5-1999 as Resident Foreign Corporations.–
amended by R.R. 25-2002).
In the case of a nonresident alien individual
For debts to be considered as ―worthless,‖ and engaged in trade or business or resident foreign
thereby qualify as ―bad debts‖ making them corporation, a reasonable allowance for the
deductible, the taxpayer should show that: deterioration of Property arising out of its use
or employment or its non-use in the business
1. There is a valid and subsisting debt. trade or profession shall be permitted only when
2. The debt must be actually ascertained to be such property is located in the Philippines.
worthless and uncollectible during the
taxable year; f. Depletion of oil and gas wells
3. The debt must be charged off during the
taxable year; and In the case of oil and gas wells or mines, a
4. The debt must arise from the business or reasonable allowance for depletion or
trade of the taxpayer. Additionally, before a amortization computed in accordance with the
debt can be considered worthless, the cost-depletion method shall be granted
taxpayer must also show that it is indeed under rules and regulations to be prescribed by
uncollectible even in the future.(PRC vs. CA, the Secretary of finance, upon recommendation
G.R. No. 118794, May 8, 1996) of the Commissioner.

Effect of recovery of bad debts Provided, That when the allowance for depletion
shall equal the capital invested no further
Tax Benefit Rule allowance shall be granted: Provided, further,
That after production in commercial quantities
The recovery of bad debts previously allowed as has commenced, certain intangible exploration
deduction in the preceding years shall be and development drilling costs:
included as part of the taxpayer‘s gross income
in the year of such recovery to the extent of the
income tax benefit of said deduction.
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Taxation Law
(a) shall be deductible in the year incurred if  Economic Development 2018
such expenditures are incurred for non-  Human Settlement
producing wells and/or mines, or
2. Donations to Certain Foreign Institutions or
(b) shall be deductible in full in the year paid or International Organizations.
incurred or at the election of the taxpayer, 3. Donations to Accredited Nongovernmental
may be capitalized and amortized if such Organizations whose purpose are
expenditures incurred are for producing exclusively for:(DECSHSCAR)
wells and/or mines in the same contract
area. (Sec. 34[G], NIRC) a. Scientific
b. Educational
g. Charitable and Other Contributions c. Character building and Youth and Sports
Development
a) Requisites for deductibility d. Cultural
e. Health
1. The contribution must actually be paid, or f. Research
made payable to the Philippine government g. Social Welfare
or any political subdivision thereof, or any h. Charitable and
domestic corporation or association i. Any combination of the above.
specified by the NIRC.(Sec. 34 [H][1],NIRC)
2. No part of the net income of the beneficiary Partial Deduction
must inure to the benefit of any private
stockholder or individual.(Sec. 34 10% (individual) or 5% (corporation) of the
[H][1],NIRC) taxable income of the donor, if made to the
3. It must be made within the taxable year. following donees:
4. It must not exceed 10% in case of an
individual, and 5% in case of a corporation, a. To Government of the RP or any of its
of the taxpayer‘s taxable income (except agencies / political subdivision thereof
when the donation is deductible in full) to exclusively for public purposes;
be determined without the benefit of the b. Accredited domestic corporations or
contribution.(Sec. 34 [H][1],NIRC) associations organized and operated
5. It must be evidenced by adequate records exclusively for:
or receipts.(Sec. 34 [H][4],NIRC) a. Religious;
b) Amount that may be deducted b. Charitable;
c. Scientific;
Full Deduction: d. Youth and sports development, cultural
e. Educational purposes
If made to the following: f. Rehabilitation of veterans,
g. Social welfare institutions, or
1. Donations to the Government of the h. Non-governmental organizations
Philippines and any of its agencies/political
subdivisions fully-owned government Subject to such terms and conditions as may be
corporation. prescribed by the Secretary of Finance, the term
―utilization‖ means:
The donation must be exclusively to
finance undertaking priority activities in i. Any amount in cash or in kind (including
accordance with the national priority plan administrative expenses) paid or utilized to
determined by the NEDA in the following accomplish one or more purposes for which
fields:(SEY CEH) the accredited non-government
 Science organization was created or organized.
 Education ii. Any amount paid to acquire an asset used
 Youth and Sport Development (or held for use) directly in carrying out one
 Culture or more purposes for which the accredited

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nongovernment organization was created h. Research and Development
or organized.
6. An amount set aside for a specific project A taxpayer may treat research or development
which comes within one or more purposes expenditures which are paid or incurred by him
of the accredited nongovernment during the taxable year in connection with his
organization may be treated as a utilization, trade, business or profession as ordinary and
but only if at the time such amount is set necessary expenses which are not chargeable to
aside, the accredited nongovernment capital account.
organization has established to the
satisfaction of the Commissioner that the The expenditures so treated shall be allowed
amount will be paid to be prescribed in as deduction during the taxable year when
rules and regulations to be promulgated by paid or incurred. (Sec.34[I][1],NIRC)
the Secretary of Finance, upon
recommendation of the Commissioner, but At the election of the taxpayer and in
not to exceed five (5) years, and the accordance with the rules and regulations to be
project is one which can be better prescribed by the Secretary of Finance, upon
accomplished by setting aside such amount recommendation of the Commissioner, the
than by immediate payment of funds.(Sec. following research and development
34 [H][C],NIRC) expenditures may be treated as deferred
expenses:
NOTE: No part of the net income of which inure
to the benefit of any private stockholder or (a) Paid or incurred by the taxpayer in
individual. connection with his trade, business or
profession;
Partial Deduction vs. Full Deduction on (b) Not treated as expenses under paragraph
Charitable Contributions (1) hereof; and
(c) Chargeable to capital account but not
Partial Deduction Full Deduction chargeable to property of a character which is
Allowable Deduction subject to depreciation or
Must not exceed 10% Deductible for the full depletion.(Sec.34[I][2],NIRC)
for Individual /5% for amount
corporation of Net
Income without benefit
of the contribution i. Contributions to Pension Trusts
Purpose if made to the Gov‘t
For public purpose In accordance with the (1) Requisites for deductibility
national priority plan
determined by the 1. The employer must have established a
NEDA pension or retirement plan to provide for
If made to Accredited NGO must be the payment of reasonable pensions to his
organized and operated EXCLUSIVELY for: employees.
Religious; Scientific 2. The pension plan is reasonable and
Charitable; Educational
sound.
Scientific; Character building and
Youth and sports Youth and Sports
3. It must be funded by the employer.
development, Development 4. The amount contributed must no longer be
Cultural Cultural subject to the control or dispositions of the
Educational purposes Health employer.
Rehabilitation of Research 5. The payment has not been allowed as
veterans, Social welfare Social Welfare deduction.
institutions, or Charitable and 6. The deduction is apportioned in equal parts
Non-governmental Any combination of the over a period of ten (10) consecutive
organizations above.
years beginning with the year in which
the transfer or payment was made.

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The deduction to be apportioned in equal parts 8. Non – deductible taxes 2018
over a period of 10 years pertains to the 9. Non – deductible losses and
contributions to the retirement fund pertaining 10. Losses from wash sales of sales of
to past service cost. stock or securities (Sec.38 of NIRC)

(e) Deductions under Special Laws Optional Standard Deduction

The following are institutions governed by In lieu of the above enumerated allowable
special laws that allow full deductions on deductions (expenses discussed above). Section
donations: 34(L) of the Tax Code provides for an optional
standard deduction (OSD) which is :
 National Museum, Library and Archives (P.D.
373)  For Individuals - 40% of Gross Sales/ gross
 Development Academy of the Philippines receipts
(P.D. 205)  For Corporations – 40% of Gross Income
 Intramuros Administration (P.D. 1616)
 The Cultural enter of the Philippines It is a fixed percentage deduction without to
 International Rice Research Institute regard to any actual expenditure in lieu of
 Ministry of Youth & Sports Commission itemized deduction
 Museum of Philippine Costumes Itemized Deduction vs. Optional Standard
 University of the Philippines and other state Deduction
colleges and universities
 The Integrated Bar of the Philippines (P.D. Itemized Deduction Optional Standard
81) Deduction
 Deductions under Expanded Senior Citizens Act Amount Allowable to be Deducted
of 2003 (R.A. 9257) Actual amount of 40% of Gross
expenses incurred Sales/Gross Receipts
e. Items not deductible (PN4R2-LW) (For Individual) or 40%
of Gross Income (For
The following are not – deductible in Corporation)
computing net income: Supporting Invoices/Receipts/Documents
1. Personal, living or family expenses; Yes. All expenses need No longer need to be
2. Amount paid out for new building of to be supported by supported by
invoices/receipt or other invoices/receipts
any property or estate (capital
competent supporting
expenditure); documents
3. Amount expended in restoring Audited Financial Statements
property in making good the exhaustion Individuals and No longer need to file
thereof for which an allowance has been Corporations are Audited Financial
made (major repairs); required to file audited Statements for BIR or
4. Premiums paid on any life insurance financial statements Income Tax Return
policy covering the life of any officer or filing purposes
employee, or any person financially Basis for Optional Standard Deduction
interested in any trade or business Individual Corporation
carried on by the taxpayer, individual or Basis
Gross Sales/Receipts Gross Sales/Receipts –
corporate when the taxpayer is directly
x40% = OSD Cost of Sales/Services +
or indirectly a beneficiary under such Other Income not
policy; (Sec. 36[A] of NIRC) subject to VAT= Total
5. Interest expense, bad debts and losses Gross income x40%=
from sale of property between related OSD
parties;(Sec. 36[B] of NIRC) How Applied
6. Losses from sales or exchange of Gross Sales/Receipts – Gross Sales/Receipts –
property OSD = Net Cost of Sales/Services +
7. Non – deductible interest Income/Taxable Income Other Income not
Subject to Final Tax =

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Total Gross Income – Optional Standard Neither itemized or
OSD = Net Deduction optional
Income/Taxable Income
If the partner also derives other income from
NOTES: trade, business or practice of profession apart
 Individuals availing OSD are not allowed to and distinct from the share in the net income of
deduct Cost of Sales/Services as the basis of the GPP, the deduction that can be claimed from
OSD is gross sales/receipts the other income would either be the itemized
deductions or OSD.
 While for Corporations, they are allowed to
deduct the cost of sales/services(Sec.34[L], Requirement for using OSD
NIRC)
Unless the taxpayer signifies in his return to
Who are allowed to deduct OSD? elect OSD, he is considered having availed of
 Individuals the itemized deduction.
o Allowed to all kinds of individual except
non – resident aliens Such election when made by the qualified
o Those who are under the graduated tax taxpayer, is irrevocable for the year in which the
table of 0-35% election was made; however he can choose
 General professional Partnership or its itemized deductions on the succeeding years
partners – however, they may avail of it (R.R. 16-2008, Sec.7)
only once.
 Domestic /Resident Corporations – only 5. Income Tax on Individuals
corporations whose income in whole or in
part is not exempt or preferential rate. The individual taxpayers can be classified as
follows:
Rules on OSD
o Taxpayer wishing to be deducted using OSD A. Citizens
shall signify its intention in its first quarter i. Resident Citizens (RC)
income tax return. ii. Non-Resident Citizens (NRC)
o Once exercise is irrevocable for the taxable
year the election was made B. Aliens
Rules on OSD on General Professional i. Resident Alien (RA)
Partnership ii. Non-Resident Alien
a. Engaged in trade or business (NRA-
The distributable net income of the partnership ETB)
may be determined by claiming either itemized b. Not engaged in trade or business
deductions or OSD. The share in the net income (NRA-NETB)
of the partnership, actually or constructively
received, shall be reported as taxable income of C. Special Class of Individual Employees
each partner. i. Aliens employed by regional
The partners comprising the GPP can no longer headquarters, regional operating
claim further deduction from their distributive headquarters, offshore banking units,
share in the net income of the GPP and are not and petroleum services contractors.
allowed to avail of the 8% income tax rate ii. Minimum wage earners
option since their distributive share from the
GPP is already net of cost and expenses. A. Citizens

Summary: i. Resident Citizen (RC)

If partnership Partners may claim:
chooses:  Are those citizens who reside in the
Itemized Deduction Itemized Deductions Philippines.
ONLY

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 A citizen of the Philippines who stayed in the 2018 in the
Individual who is not a citizen but resides
Philippines or stay outside for less than 183 Philippines
days during the taxable year (VALENCIA &
ROXAS, Income Taxation, p. 583) An alien is considered as resident if:
1. He is not a mere transient or sojourner (R.R.
Coverage : Taxed on income sourced within No. 02-40, Sec. 5);
and without the Philippines and maybe taxed at 2. He has no definite intention as to his stay in
a rate of 0%-35% (effective 2018-2022) or 8% the Philippines; or
tax rate on gross annual sales or receipts (if 3. His purpose is of such nature that an
applicable). extended stay may be necessary for its
accomplishment and to that end, the alien
ii. Non-Resident Citizens (NRC) – Filipino makes home temporarily in the Philippines
citizen who: ELWoP (BIR DA -ITAD Ruling No. 153-06, December
(a) Establishes to the satisfaction of the 12,2006)
Commissioner the fact of his physical
presence abroad with a definite intention to When is residency lost?
reside therein. An resident alien who has acquired residence in
(b) Leaves the Philippines during the taxable the Philippines retains his status a resident alien
year to reside abroad, either as an until he abandons the same and actually departs
immigrant or for employment on a the Philippines. Mere intention to change his
permanent basis. residence is not enough.(R.R. No. 02-40, Sec. 5)
(c) Works and derives income from abroad and
whose employment thereat requires him to Coverage: Taxed on income sourced WITHIN
be physically present abroad most of the the Philippines. Based on the graduated rate of
time during the taxable year. ―Most of the 0%-35% of the NET taxable income.
time‖ meaning at least 183 days.
(d) Has been Previously considered as non- (i) Coverage
resident citizen and who arrives in the
Philippines at any time during the taxable
year to reside permanently in the Philippines Income Taxation on Individuals
shall likewise be treated as a non-resident Kinds of Taxable on How taxed?
citizen for the taxable year in which he Individuals income
arrives in the Philippines with respect to Resident Citizen Within and Graduated tax
his income derived from sources (RC) Without (Global) table (0% -
abroad until the date of his arrival in 35%) /8%
the Philippines (Section 22[E], NIRC). Gross
Sales/Receipt
Note: Taxpayer shall submit proof to the (if applicable)
Commissioner to show his intention of Nonresident Within ONLY Graduated tax
leaving the Philippines to reside permanently Citizen (NRC) table(0%-
abroad or to return to and reside in the 35%) /8%
Philippines as the case may be. Gross
Sales/Receipt
(if applicable)
Coverage: Taxed on income sourced within
maybe taxed at a rate of 0%-35% of net Resident Alien Within ONLY Graduated tax
(RA) table (0%-
taxable income (effective 2018-2022) or 8% tax
35%) /8%
rate on gross annual sales or receipts (if Gross
applicable). Sales/Receipt
(if applicable)
B. Aliens Nonresident Within ONLY Graduated tax
alien engaged table (0%-
i. Resident Aliens (RA) in trade or 35%) /8%
business (NRA- Gross

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Taxation Law
ETB) Sales/Receipt a. Fees,
(if applicable) b. Salaries,
Nonresident Within ONLY 25% on Gross c. Wages
alien not Income d. Commission and
engaged in e. Similar items
trade or ii. Fringe Benefit given to rank and file
business (NRA- employees in excess of Php 90,000 limit
NETB) iii. Taxable portion of De Minimis Benefits in
excess of Php 90,000 limit
ii. Taxation on Compensation Income iv. A Taxable portion of 13th month pay and
other benefits in excess of Php 90,000
Purely Compensation Income earner
v. Representation and Transportation
Allowance of employees of the private
Individuals whose source of income is purely
sector (RATA)
derived from an employer-employee relationship
vi. Taxable Pension, Retirement and Separation
(Sec. 2(a), R.R. 8-2018)
Pay
These are all remuneration for services
vii. Voluntary contributions in excess of the
performed by an employee for his employer
mandatory contributions to SSS, GSIS,
under an employer-employee relationship,
PhilHealth and HDMF. (R.M.C. 27 -2011)
unless specifically excluded by the Tax Code.
Requisites for compensation to be taxable
Note: Gross compensation income does not
(APaR)
include compensation for services rendered by
an independent contractor since income is not
1. There must be personal services actually
derived from employer-employee relationship.
rendered
2. There must be payment for such services
TAXABILITY: Taxed on individuals earning
rendered
purely compensation income are taxed at 0%-
3. The payment made is reasonable
35% graduated tax table on their net taxable
compensation income (Sec. 3 (b), R.R. No. 8-2018)
(The manner and procedure on how
compensation income is taxed shall be discussed
(a) Inclusions
on the topic of Withholding Tax on
Compensation Income – all remuneration for
Compensation)
services performed by an employee for his
employer under an employee – employer
(b) Exclusions
relationship, unless specifically excluded by
i. Fringe Benefits subject to Fringe
theCode
Benefits Tax (FBT)
The name by which the remuneration for
ii. 13th month pay and other benefits not
services is designated is immaterial. Thus,
exceeding Php 90,000
salaries, wages, emoluments and honoraria,
iii. De Minimis Benefits within the limits
allowances, commissions (e.g. transportation,
iv. Convenience of the Employer
representation, entertainment and the like); fees
v. Amount received through accident or
including director's fees, if the director is, at the
health insurance
same time, an employee of the employer / vi. Separation Pay due to death sickness or
corporation; taxable bonuses and fringe
other disability or any other cause
benefits, except those which are subject to the
beyond the control of the employee or
fringe benefits tax under Sec. 33 of the Code
the official
and the allowable "de minimis" benefits; taxable
pensions and retirement pa-v; and other income i. Fringe benefits subject to fringe benefit
of a similar nature constitute
tax
compensationincome(Sec. 2(a), R.R. 8-2018)
i. Compensation for services in whatever from
Fringe Benefits
paid including but not limited to:
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Taxation Law
Definition — Any goods, services or benefits 2018
furnished or granted in cash or in kind by an 1. Expenses of Foreign travel
employer to an individual employee, in addition
to basic salaries, except a rank and file When subject to FBT:
employee. (Sec 2.33 (B), RR (3.98)) i. When no documentary evidence is shown
that the employee‘s travel was in connection
with business meetings or conventions
Fringe Benefit
Given to Rank and Given to Managerial What amount is subject to FBT
File Employees and Supervisory a. 30% of the cost of the first class airplane
employees tickets
Part of Compensation Income ? b. Lodging cost in a hotel or similar
Part of employee‘s Not part of taxable
establishment in excess of $ 300
compensation income compensation income
treated as other benefit. subject to graduated
c. Travel expenses paid by the employer for
tax rates. the family members of the employee
(BANGAWAN, Income Taxation, p. 374)
Subject to What Tax? When NOT subject to FBT:
May be subject to Subject to Fringe i. Foreign travel is in line with the trader or
regular income tax rates Benefit Tax business.
for individuals using the ii. Inland travel expenses such as food,
graduated tax table if beverages and local transportation.
it‘s 13th Month and iii. Lodging cost in a hotel or similar
other benefits has establishment amounting to an average of $
already exceeded the
300 or less
Php 90,000 limit.
iv. Cost of economy or business class airplane
Who pays for the tax?
The EMPLOYEE pays for EMPLOYER pays for the tickets
the tax which will be tax v. 70% of the cost of the first class airplane
withheld from the tickets
employee‘s
compensation To summarize:

Classification of employees for tax Travel Expense Subject to FBT

purposes: Inland Travel Expense No
Lodging cost in hotel or Yes, only if cost exceeds
Supervisory employees – are those who similar establish $300
recommend managerial actions if the exercise of Travel expenses for Yes
family members
such authority is not merely routinary or clerical
Airline tickets:
in nature but requires the use of independent
Economy or business No
judgment. class
First class Yes up to 30% of the
Managerial employees – those who are given cost of the ticket
the powers or prerogatives to lay down and
execute management policies and/or to hire, 2. Expense account
transfer, suspend, lay-off, recall, discharge,
assign or discipline employees. When subject to FBT:
i. Expenses incurred by the employee but
Rank and file employees – are those which are paid by his employer;
employees who are neither managerial nor ii. Expenses paid by the employee but
supervisory employees. Rank and file employees reimbursed by employer; and
are not subject to Fringe Benefit Tax. iii. Personal expenses of the employee paid
for or reimbursed regardless the fact it
Fringe benefits subject to fringe benefit is duly receipted and is under the name
tax (FBT) : of the employer. (R.R. 3-98)

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Taxation Law
When NOT subject to FBT: When NOT subject to FBT:
i. Expenses incurred by the employee but
which are paid by his employer but is a. Cost for the premiums borne by the
duly receipted and is under the name of employer for group insurance of
the employer; employees.
ii. Expenses paid by the employee but b. Cost of contributions of the employer for
reimbursed by employer but is duly the benefits of the employee to the SSS,
receipted and is under the name of the GSIS and similar contributions arising
employer. (R.R. 3-98) from the provisions of law.
i. Voluntary contributions in excess of
To summarize: the mandatory are taxable. (R.M.C
27-2011)
Expense Duly receipted Subject
and under to FBT 5. Housing
employer‘s
name When subject to FBT:
Expense of the i. Employer leases a residential property
employee
for use of the employee;
whether paid or No Yes
reimbursed by the
ii. Employer owns a residential property
employer and assigns the same for use by the
Expense of the employee;
employee iii. Employer purchases a residential
whether paid or Yes No property on installment basis and allows
reimbursed by the the use by employee;
employer iv. Employer purchases a residential
Personal property and transfers ownership to the
expenses by the Regardless Yes employee;
employee
v. Employer provides a monthly
amount for the employee to pay his
3. Educational assistance to the employee or landlord.(R.R. 3-98)
his dependents.
When NOT subject to FBT:
When NOT subject to FBT: i. Housing privileges of military officials of
the AFP consisting officials of the
Educational Educational
Philippine Army, Philippine Navy and
assistance to assistance to
employee dependents Philippine Air Force;
1. Study is directly ii. Housing unit which is situated inside or
connected with adjacent (i.e. the unit is located within a
employer‘s trade or maximum of 50 meters from the
business and perimeter of the business premises) to
2. There is a written
Assistance was
the premises of a business or factory;
contract that the and
provided through a
employee shall iii. Temporary housing for an employee
competitive scheme
remain employed who stays in a housing unit for three
with the employer for
months or less. (R.R. 3-98)
a period mutually
agreed upon by the
parties. 6. Interest on loans

When subject to FBT:

4. Life or health insurance and other non-life i. When the employer interest free interest
insurance premiums. loans or at less than market rate to the
extent of the difference between the
market rate and the actual rate granted
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Taxation Law
7. Membership fees, dues and other expenses Compensation Allowance (ACA) 2018
granted and
borne by the employer for the employee in paid to all officials and employees of the
social and athletic clubs, and similar National Government Agencies (NGAs)
organizations including State Universities and Colleges
8. Vehicle of any kind. (SUCs), Government-Owned and/or
Controlled Corporations (GOCCs),
When subject to FBT: Government Financial Institutions (GFIs)
i. Employer provides a car to the employee and Local Government Units (LGUs).
under his name either by:
a. purchasing in full payment or in
installment, or The above stated exclusions under (a) and (b)
b. providing cash for the purchase shall cover benefits paid or accrued during the
vehicle in employee‘s name or year, provided that the total amount shall not
c. shouldering a portion of the purchase exceed ninety thousand pesos (₱ 90,000),
price which may be increased through rules and
ii. Employer either owns or leases a fleet regulations issued by the Secretary of Finance,
of motor vehicle for use of the business upon recommendation of the Commissioner,
and the employee after considering among others, the effect on
iii. Use of yacht whether owned and the same of the inflation rate at the end of the
maintained or leased by the employer taxable year.(Sec. 6, R.R. No. 11-2018)
(CASASOLA, NIRC (2013), p 267-269)
iii. De Minimis Benefits
9. Household personnel (maid or driver)
These facilities or privileges furnished to
When subject to FBT: employees that are of relatively small value and
a. Salaries of household help, personal are offered or furnished merely as a means of
drivers of the employee or promoting heath, goodwill, contentment or
b. Other similar personal expenses like efficiency of employees. Applicable to all types
payment of homeowner‘s association of employees, whether Supervisory, Managerial
dues or Rank and File.

10. Holiday and vacation expenses The following are the de minimis benefits,
as amended by the TRAIN LAW (M 3R.
Note: The manner and procedure for the tax on DALEGUC)
fringe benefits or Fringe Benefit Tax shall be
discussed in Withholding Taxes 1. Monetized unused vacation and sick leave
credits paid to government officials and
ii. 13th month Pay and other benefits not employees;
exceeding Php 90,000
 The number and nature (both vacation
a. Thirteenth month pay equivalent to the and sick leave) of monetized unused
mandatory one (1) month basic salary of leaves is NOT subject to any limitations
official and employees of the government for employees of the GOVERNMENT
(whether national or local), including officials and employee.
government-owned or controlled
corporations, and/or private offices received 2. Monetized unused vacation leave credits of
after the twelfth month pay; and private employees not exceeding 10 days
b. Other benefits such as Christmas bonus, during the year;
productivity incentives, loyalty award, gift in
cash or in kind, and other benefits of similar  Only monetized unused VACATION
nature actually received by officials and LEAVE credits not exceeding days are
employees of both government and private non – taxable. Monetized unused SICK
offices, including the Additional LEAVE credits shall be taxable

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Taxation Law
regardless of days for employees of the 11. Benefits received by an employee by virtue
PRIVATE SECTOR. of a Collective Bargaining Agreement (CBA)
and productivity incentive schemes,
Non taxable unused provided the total annual monetary value
Employee monetized leave received from both CBA and productivity
Limit
of: Sick incentive schemes combined do not exceed
Vacation
Leave P10,000 per employee per taxable year.
Government None
Yes Yes on
The enumeration of De Minimis Benefits is
both
Private Up to
exclusive. (Section 2, RR-2011, May 11, 2012)
Sector 10
Yes No Changes Made in TRAIN Law:
days
only  The medical cash allowance was
increased from P750 to P1,500 per
3. Medical cash allowance to dependents of semester;
employees, not exceeding P1,500 per  The rice subsidy was increased from
employee per semester or P250 per month; P1,500 to P2,000 per month; and
4. Rice subsidy of P2,000 or one 50-kg sack of  The clothing allowance was increased
rice per month worth not more than P2,000; from P4,000 to P6,000 per annum.
5. Uniforms and clothing allowance not
exceeding P6,000 per annum; De minimis Benefits Fringe Benefits
6. Actual medical assistance not exceeding
Benefits given
P10,000 per annum;
7. Laundry allowance not exceeding P300 per Subject to limitations of No limitations as to
month; amounts amount
8. Employees‘ achievement awards, which
must be in the form of tangible personal Exclusivity of the List
property other than cash or gift certificates,
List is exclusive Any benefits can be
with an annual monetary value not
treated as fringe
exceeding P10,000 received by the
employee under an established written plan
which does not discriminate in favor of What happens when the given de minimis
highly paid employees; benefits exceeds the prescribed limit?
9. Gifts given during Christmas and major
anniversary celebrations not exceeding De minimis granted by an employer shall form
P5,000 per employee per annum; part of compensation income subject to
10. Daily meal allowance for overtime work and graduated rates but only to the amount in the
night/graveyard shift not exceeding 25% of excess of ceiling prescribed if given to rank and
the basic minimum wage; and file employee or if were given to managerial or
supervisory employees, the excess will be
 If the grant of meal allowance was not
subject to fringe benefit tax.(R.M.C No. 5- 2011)
for overtime work or night/graveyard
shift SHALL BE SUBJECT TO INCOME
TAX. (R.R.5-2011) Excess of De
Minimis Benefit Tax Implication
 Meal allowance and lodging furnished given to:
for the ―advantage or convenience of
the employer‖ shall be exempt from tax.
Meal should be furnished within the
premises of the employer. (TABAG,
Income Taxation with Special Topics in
Taxation, 2018, p.18)

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Taxation Law
Rank and file Excess will form part of 13th Benefit Amount Limit 2018
Amount of
month pay and other 13th month
benefit and any excess and other
from the Php 90,000 limit benefit
shall be taxable under
regular income tax rates 13th month Php 30,000
Pay
Managerial and Excess amount is subject to 14th month 30,000
Supervisory Fringe Benefit Tax pay

Productivity 15,000
Incentive
Illustration: Bonus

Mr. Juan, a rank and file employee, during 2019 Laundry 6,000 3,600 2,400
allowance
was given the following benefits:
Rice 36,000 24,000 12,000
allowance
Compensation Amount Classification
Uniform 10,000 6,000 4,000
13th Month Pay Php30,000 13th month
allowance
14th Month Pay 30,000 Other Benefit
Total 13th 93,400
Productivity 15,000 Other benefit month and
Incentive Bonus other
benefits
Laundry 6,000 De minimis
allowance, Php benefit Less :Non - (90,000)
500 per month Taxable
for 12 months 13thmonth
(limit is only Php and other
300 per month or benefit
Php 3,600 per
Taxable 13th Php 3,400
year)
month and
Rice Allowance, 36,000 De minimis other benefit
Php 3,000 per benefit
month for 12
months (limit is  As can be seen in the above computation,
only Php 2,000 or with regards to the de minimis benefits
Php 24,000 per given only the excess of the limit was
year) credited as part of 13th month pay and other
benefit which is reclassified as ―other
Uniform 10,000 De minimis
benefit.‖
allowance (limit benefits
Php 6,000) What is the tax implication on the excess?
Total Benefits Php112,000 Mr. Juan being a rank and file employee, the
Given
excess shall form part of his taxable
compensation income subject to regular income
tax rates together with all other taxable
Compute for the taxable portion of the benefits
compensation income.
givens, if any.

Solution:

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Taxation Law
Supposing, Mr. Juan is a manager, what When excluded:
will be the tax implication on the excess? i. Amount is received by an official, employee
or by his heirs;
Mr. Juan, being a managerial employee, such ii. Received from the employer;
excess shall be treated as fringe benefit subject iii. It was received as a consequence of the
to fringe benefit tax. separation of such official or employee from
the service of the employer by reason of:
iv. Convenience of the Employer Rule a. Because of death, sickness and/or other
disability; or
Benefit given to the employee but proves to be
b. For any caused beyond the control of
more advantageous to the employer.
such official or employee. (Sec. 32
Such as a housing unit which is situated inside [B][6][b] of NIRC)
The phrase ―any caused beyond the
or adjacent (i.e. the unit is located within a
control‖ connotes involuntariness on the
maximum of 50 meters from the perimeter of
part of the official or employee. The
the business premises) to the premises of a separation from service of the official or
business or factory; employee must not be asked or initiated
by the employee (Sec. 2 [B], R.R. No. 12 -
v. Amount Received Through Accident or
1986 )
Health Insurance Compensation for
Injuries or Sickness: iii. Taxation of business income/income
from practice of profession
a. Any amount received by reason of
compensation for personal injury or sickness
Terminologies:
through Accident or Health Insurance or
under Workmen‘s Compensation Acts.
Self-employed - a sole proprietor or an
independent contractor who reports income
b. Plus the amount of any damages received,
earned from self-employment. S/he controls
whether by suit or agreement, on
who s/he works for, how the work is done and
account of such injuries or sickness.
when it is done. It includes those hired under a
c. The injury or sickness must arise from an
contract of service or job order, and
employee – employer relationship.
professionals whose income is derived purely
from the practice of profession and not under an
Excluded Damages arising from personal
employer - employee relationship.
injuries and sickness:
 Actual and compensatory damages
Professional - a person formally certified by a
 Moral, nominal, temperate or moderate,
professional body belonging to a specific
liquidated
profession by, virtue of having completed a
required examination or course of studies and/or
Punitive damages or exemplary damages
practice, whose competence can usually be
are taxable within the broad concepts of
measured against an established set of
gross income (Glenshaw glass vs. CIR, 75 US
standards. It also refers to a person who
473)
engages in some art or sport for money, as a
means of livelihood, rather than as a hobby. It
Compensation for lost profits is taxable.
includes but is not limited to doctors, lawyers,
(DOMOMDON)
engineers, architects, CPAs, professional
entertainers, artists, professional athletes,
Reason: Compensatory, not gain/profit.
directors, producers, insurance agents,
insurance adjusters, management and technical
vi. Separation Pay due to death sickness or
consultants, bookkeeping agents, and other
other disability or any other cause beyond
recipients of professional, promotional and
the control of the employee or the official
talent fees.

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Taxation Law
(a) Schedular 2018
Not Of Excess
Over Basic Additional
over over
In general, the income tax on the individual's
taxable income shall be computed based on the 0 250k Exempt
following schedules as provided under Sec. 250k 400k 0 20% 250,000
24(A)(2)(a) of the Tax. 400k 800k 30,000 25% 400,000
800k 2M 130,000 30% 800,000
Tax Due How Computed:
2M 8M 490,000 32% 2,000,000
8M - 2,410,000 35% 8,000,000
Step 1 : Determination of Taxable Income
K- hundred thousand
M -million
Taxable Income - refers to the pertinent items Effective January 1,2023 and onwards:
of gross income specified in the Code, less
deductions, if any, authorized for such types of Range of
income by the Code or other special laws. Income Tax Due a+(b x c)

If computed using itemized deductions: Not Of Excess

Over Basic Additional
over over
Gross or Net Sales Php 1,000,000
/Gross Receipts 0 250k Exempt
Less : Cost of Sales (350,000) 250k 400k 0 15% 250,000
Gross Income 650,000 400k 800k 22,500 20% 400,000
Less: Itemized (350,000) 800k 2M 102,500 25% 800,000
Deductions
2M 8M 402,500 30% 2,000,000
Taxable Income Php 300,000
8M - 2,202,500 35% 8,000,000
K- hundred thousand
If computed using Optional Standard Deductions M -million
(OSD):
Effect of being taxed under schedular
Gross or Net Sales / Php 1,000,000 rates (either opted to or failed to signify
Gross Receipts its option to be taxed at 8%: or failed to
Less: Optional (400,000) qualify)
Standard Deductions
(40% of Gross Sales i. Individual allowed to deduct itemized
or Gross Receipts deduction or optional standard deduction
Taxable Income Php 700,000 ii. Gross sales or gross receipts shall be subject
to business tax of:
The TRAIN Law, repealed the following a. If annual gross sales or gross receipt
exemptions: exceeds the VAT threshold or opted to
be a VAT payer – 12%
i. Personal Exemptions – Php 50,000 b. If annual gross sales or gross receipt
ii. Additional Exemptions – Php 25,000 per does not exceed the VAT threshold
qualified dependents (maximum of 4 AND does not opt or is not to be a
qualified dependents) VAT payer – 3% or other applicable
iii. Premium on Health Insurance – Php 2,400 percentage tax rates
iii. Individual shall be required to submit a
Step 2: Determination of tax due by using financial statement attached to the annual
the schedular/graduated tax rates: income tax return if:
a. Individual who opts to use itemized
Effective 2018 -2022: deduction or failed to signify or elect the
option to use the Optional Standard
Range of Deduction; or
Income Tax Due a+(b x c)

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Taxation Law
b. Individual exceeded the VAT - be liable to percentage tax of three
threshold(Sec.3[C], NIRC) percent (3%) on gross sales/receipts
- Individual shall be required to submit a
(b) 8% option financial statement attached to the
annual income tax return if:
Option is available to: (RSA -116) o Individual who opts to use itemized
i. Individual is a resident citizen or resident deduction or failed to signify or elect the
alien option to use the Optional Standard
ii. Individual‘s who earns Deduction.
a. purely from self-employment or
practice of profession and b) Option 2 -Taxed at 8%.
b. mixed income earner;
iii. Individual‘s annual gross sales or gross Under this option, an individual will:
receipts does not exceed the VAT threshold - be taxed at 8% on its gross sales or
or is not a VAT registered taxpayer and receipts (including other non-operating
iv. Individual‘s gross sales or gross receipt is income) in excess of Php250,000
under Section 116 of Title V of the Tax - NOT be allowed to deduct itemized or
Code as amended. optional deduction
- NO longer be liable to the 3%
a. Self-Employed Individuals Earning percentage tax on gross sales or
Income Purely from Self-Employment receipts as the 8% tax is already in lieu
or Practice of Profession. - Individuals of percentage tax.
earning income purely from self- - No longer required to attached financial
employment and/or practice of profession statements with the annual income tax
whose gross sales/receipts and other non- return
operating income does not exceed the
value-added tax (VAT) threshold as provided
under Section 109 (BB) of the Tax Code, as
amended, shall have the optionto avail of:

The graduated rates under Section 24(A)(2)(a) Summary:

of the Tax Code, as amended; OR Gross Annual Gross Annual
Receipts EXCEEDS Receipts DOES NOT
An eight percent (8%) tax on gross sales or Php 3M EXCEED Php 3M
receipts and other nonoperating income in Taxed at 0%-35% Option 1 -Taxed at
graduated tax rates. 0%-35% graduated tax
excess of two hundred fifty thousand pesos
Allowed to deduct rates. Allowed to deduct
(P250,000.00) in lieu of the graduated income itemized or optional itemized or optional
tax rates under Section 24(A) and the standard deduction. standard deduction.
percentage tax Subject to 12% VAT Subject 3% tax

The options available to the taxpayer are

as follows: Option 2- Taxed at 8%
of gross sales /receipts
a) Option 1 -Taxed at Graduated Tax including non –
table of 0%-35%. operating income in
excess of Php 250,000.
CANNOT deduct itemized
Under this option, an individual will: or optional standard
- be taxed on its taxable income using the deduction. NOT subject
graduated tax table (see letter a – to 3% percentage tax.
schedular)
- be allowed to deduct itemized
deductions or optional standard
deduction
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 Purple Notes
Taxation Law
Option 1 v. Option 2 (Purely Self business and/or profession. 2018
(see letter a
Employed) – schedular)
Option 1 Option 2 - be allowed to deduct itemized
Tax Base deductions or optional standard
Net Income (Sales – Gross Sales/receipts + deduction
COS –Deductions) other non – operating - be liable to percentage tax of three
income in excess of Php percent (3%) on gross sales/receipts
250,000
- Individual shall be required to submit a
Tax Rate
financial statement attached to the
0%-35% 8%
Subject to 3% Percentage Tax on Gross annual income tax return if:
Sales/receipts and other non – operating o Individual who opts to use itemized
income? deduction or failed to signify or elect the
Yes No option to use the Optional Standard
Allowed to deduct expenses and Cost of Deduction.
Sales?
Yes No ii) Option 2 -Taxed at 8%.

b. Individual Earning Income Both Under this option, an individual will:

(business or practice of profession) - - be taxed at 8% on its gross sales or
For mixed income earners, the income annual receipts (including non-
tax rates the applicable rates are operating income)
- NOT be allowed to deduct itemized or
Mixed Income Earner - an individual earning optional deduction
compensation income from employment, and - NO longer be liable to the 3%
income from business, practice of profession percentage tax on gross sales or
and/or other sources aside from employment. receipts as the 8% tax is already in lieu
of percentage tax.
Taxability - No longer required to attached financial
statements with the annual income tax
Taxpayers earning both compensation income return
and income from business or practice of - Income earned from compensation will
profession shall be subject to the following be taxed at 0%-35% graduated tax
taxes: table.

All Income from Compensation – The b) If the Total Gross Sales and/or Gross
Graduated Tax Rates of 0%-35% Receipts and Other Non-operating Income
Exceed Php 3M VAT Threshold– Taxed at 0-
All Income from Business or Practice of 35% graduated tax rates
Profession -
Summary:
a. Income earners who are mixed income
earners that have gross sales or receipts Gross Annual Gross Annual
not exceeding the VAT threshold of Receipts EXCEEDS Receipts DOES NOT
Php 3M shall have the following options: Php 3M EXCEED Php 3M
Taxed at 0%-35% Option 1 -Taxed at 0%-
i) Option 1 -Taxed at Graduated Tax graduated tax rates. 35% graduated tax
Allowed to deduct table. Allowed to deduct
table of 0%-35%
itemized or optional itemized or optional
standard deduction. standard deduction.
Under this option, an individual will: Subject to 12% VAT Subject 3% tax
- be taxed on its taxable income using the
graduated tax table both for
compensation and income earned from Option 2- Taxed at 8%
of gross sales /receipts

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Taxation Law
including non – its option on its 1st Quarter ITR and be
operating income. irrevocable and no amendment of option
CANNOT deduct itemized shall be made for the taxable year. (Section
or optional standard 3(C) RR 8-2018, )
deduction. NOT subject
to 3% percentage tax.
Failure to exercise or to signify its option shall
However the tax on
compensation income subject the income to the graduated tax rates of
will be taxed at 0%- 35% (i.e. it is as if Option 1 was chosen).
graduated tax table of
0%-35% What is the effect if the Php 3M gross
annual sales /receipts was breached
Option 1 v. Option 2 (Mixed Income within the year?
Earner)
A taxpayer shall automatically be subject to the
Option 1 Option 2 graduated rates under Section 24(A)(2)(a) of
Tax Base the NIRC, as amended, even if the flat 8%
Compensation Income Gross Sales/receipts + income tax rate option is initially selected, when
+ Net Income from other non – operating taxpayer's gross sales/receipts and other non-
business (Sales –COS – income operating income exceeded the VAT threshold
Deductions) during the taxable year.
Tax Rate
0%-35% on 8% on Business income
Compensation and Net only
In such case, his income tax shall be computed
Income from Business under the graduated income tax rates and shall
and/or profession 0%-35% - on be allowed a tax credit for the previous
Compensation income quarter/s income tax payment/s under the 8%
Subject to 3% Percentage Tax on Gross income tax rate option.
Sales/receipts and other non – operating
income? 8% Option not available to:
Yes No
Allowed to deduct expenses and Cost of a. Pure compensation income earners;
Sales? b. VAT registered taxpayers;
Yes No
c. Non-VAT taxpayers whose gross
receipts/sales exceed P3,000,000.00;
Purely Self employed Mixed income earner
d. Taxpayers subject to other percentage taxes
No compensation Earns from business except Sec. 116;
income being earned income and e. Partners of General Professional Partnerships;
compensation f. Individuals enjoying income tax exemption
Tax based on 8% option such as those registered with Barangay Micro
Gross sales/receipts + Gross sales/receipts + Business Enterprise since taxpayers are not
other non-operating other non-operating allowed to avail of double or multiple tax
income less first Php income exemptions under different tax laws unless
250,000 specifically provided by law. (RR 8-2018 and
Taxability of Compensation Income RMC 50-2018)
No separate tax Has separate tax Summary of Important Rules:
computation for computation for
compensation income compensation income
which will be taxed at 1. The 8% income tax rate shall be based on
0%-35% graduated the gross sales/receipts and other non-
income tax. operating income, net of returns and cash
discounts, in excess of P250,000.00.
How to avail of the option?
2. Taxpayer must signify his intention to avail of
Individual taxpayers who are eligible and would the 8% income tax rate in the 1st Quarter
like to be taxed at 8% (Option 2) shall signify
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ITR / Percentage Tax Return, or on the initial 2018
payment/s under the 8% income tax rate
quarter return of the taxable year after the option.
commencement of a new business/practice
of profession. Otherwise, taxpayer is 8.b. The taxpayer is required to update his/her
considered to have availed of the graduated registration immediately within the month
rates. following the month s/he exceeded the VAT
threshold. S/he shall be liable to VAT
3. Such election shall be irrevocable and no prospectively starting on the first day of the
amendment of option shall be made for the month following the month when the
said taxable year. threshold is breached. The taxpayer shall pay
4. The option to be taxed at 8% gross income the required percentage tax covering the
tax rate is not available to a VAT-registered sales/receipts and other non-operating
taxpayer, regardless of the amount of gross income, from the beginning of the taxable
sales/receipts, and to a taxpayer who is year or commencement of business/practice
subject to Other Percentage Taxes under the of profession until the time the taxpayer
Tax Code except Sec. 116. becomes liable for VAT, without imposition of
penalty if timely paid on the immediately
5. Partners of a General Professional Partnership succeeding month/quarter(Aty. Bobby Lock,
2019 Taxation Updates and Critical Areas,page 4)
(GPP) by virtue of their distributive share
from GPP which is already net of cost and
iv. Taxation of partners in a general
expenses cannot avail of the 8% income tax
professional partnership (GPP)
rate option.
A general professional partnership as such shall
6. The Financial Statements is not required to be not be subject to the income tax imposed under
attached in filing the final income tax return. this Chapter. Persons engaging in business as
However, existing rules and regulations on partners in a general professional
bookkeeping and invoicing/receipting shall partnership shall be liable for income tax only
still apply. in their separate and individual capacities.

7. The P250,000.00 exemption for those subject For purposes of computing the distributive share
to the 8% tax is not applicable to mixed of the partners, the net income of the
income earners since it is already partnership shall be computed in the same
incorporated in the first tier of the graduated manner as a corporation.
income tax rates applicable to compensation
income. Under the said graduated rates‘ the Each partner shall report as gross income his
excess of the P250,000.00 over the actual distributive share, actually or constructively
taxable compensation income is not received, in the net income of the
deductible/creditable against the taxable partnership.(Sec.26,NIRC)
income from business/practice of profession
under the 8% income tax rate option. v. Taxation of Passive income

8.a. A taxpayer shall automatically be subject to (See detailed discussion under B. 3. vi. Income
the graduated rates under Section on Passive investment Income)
24(A)(2)(a) of the Tax Code, as amended,
even if the flat 8% income tax rate option is To summarize:
initially selected, when taxpayer's gross
sales/receipts and other non-operating i. Interest
income exceeded the VAT threshold during
the taxable year. In such case, his income a. From any currency bank deposit, yield,
tax shall be computed under the graduated or any other monetary benefit from
income tax rates and shall be allowed a tax deposit substitutes and from trust
credit for the previous quarter/s income tax funds and similar arrangements

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derived from sources within the
Philippines: b. Royalties, in general (passive income)

Taxpayer Rate Taxpayer Rate

Resident Citizen Resident Citizen
Non Resident Citizen Non – Resident
20%
Resident Alien Citizen
20% on interest income Resident Alien
Non Resident Alien
Engaged in Trade or
Business vi. Taxation of Capital Gains

b. From long-term deposit or investment (See detailed discussion under B. 3. v. Income

in the form of savings, common or from dealings in property)
individual trust funds, deposit
substitutes, investment management To summarize:
accounts and other investments
evidenced by certificates in such form a. Income from sale of shares of stocks of
prescribed by the BangkoSentral ng a Philippine Corporation
Pilipinas (BSP)
Taxpayer Tax Rate
Pre -terminated Tax Implication Resident Citizen
15% of net capital
On the 5th year or thereafter Exempt Non – Resident Citizen
gain
Four (4) years to less than five 5% Resident Alien
(5) years
Three (3) years to less than (4) 12% b. Income from sale of real property
years situated in the Philippines
Less than three (3) years 20%
6% of Gross Selling Price or Fair Market
c. Interest from foreign currency Value (FMV) whichever is higher
depositary units
c. Income from sale, exchange or other
Taxpayer Rate disposition of other capital assets
Resident Citizen
15%
Resident Alien
Holding Period Rule
Non Resident Citizen Exempt
If Capital asset was If Capital asset was
held for more than held for less than 12
ii. Dividends 12 months (Long months (Short Term
Term Gain) Gain)
Taxpayer Rate The net capital gain or The net capital gain or
Resident Citizen loss is reported at 50% loss is reported at
Non – Resident Citizen 10% of the amount realized 100% of realized gain
Resident Alien gain or loss or loss

iii. Royalty income Loss Limitation Rule

a. From literary works and musical Capital losses are allowed only to the extent of
compositions (Individuals Only ) capital gains;

Taxpayer Rate Net Capital Loss Carry Over

Resident Citizen
Non – Resident If any taxpayer, other than a corporation,
10%
Citizen sustains in any taxable year a net capital loss,
Resident Alien such loss (in an amount not in excess of the net
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 Purple Notes
Taxation Law
income for such year) shall be treated in the 2018
a. Income from sale of shares of stocks of
succeeding taxable year as a loss from the sale a Philippine Corporation-15% of net capital
or exchange of a capital asset held for not more gain
than 12 months.(Sec. 39 (D) of NIRC)
Income from sale of real property situated
b. Non – Resident Aliens Engaged in Trade in the Philippines
or Business
Final tax of 6% of Gross Selling Price or FMV
Coverage:From all income sourced within whichever is higher

a. Passive investment income d. Taxable income

(See detailed discussion under B. 3. vi. Income Taxed on income sourced WITHIN the
on Passive investment income) Philippines. Based on the graduated rate of
0%-35% of the NET taxable income.
i. Interest (see discussion on Tax Taxation of business
income/income from practice of profession – (a)
a. From any currency bank deposit, yield, Schedular)
or any other monetary benefit from
deposit substitutes and from trust funds c. Non-Resident Alien NOT Engaged in
and similar arrangements derived from Trade or Business - Individual who is not a
sources within the Philippines -20% Final citizen, with residence outside the Philippines
Tax and does not perform any of the above-
mentioned.
b. From long-term deposit or investment
in the form of savings, common or TAXABILITY:
individual trust funds, deposit substitutes, i. Passive investment income
investment management accounts and
other investments evidenced by (See detailed discussion under B. 3. vi. Income
certificates in such form prescribed by the on Passive investment income)
Bangko Sentral ng Pilipinas (BSP) i. Interest

Pre -terminated Tax a. From any currency bank deposit, yield,

Implication or any other monetary benefit from
On the 5th year or thereafter Exempt deposit substitutes and from trust funds
Four (4) years to less than 5% and similar arrangements derived from
five (5) years sources within the Philippines -25% Final
Three (3) years to less than 12% Tax
(4) years
Less than three (3) years 20% b. From long-term deposit or investment
in the form of savings, common or
ii. Dividends -20% individual trust funds, deposit substitutes,
investment management accounts and
iii. Royalties - other investments evidenced by
certificates in such form prescribed by the
a. In General – 20% BangkoSentral ng Pilipinas (BSP)– 25%
b. Literary and Music Compositions – 10%
ii. Dividends -25%
b. Capital Gains
(See discussion under B. 3. v. Income from iii. Royalties -25%
dealings in property)
b. Capital Gains

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(See discussion under B. 3. v. Income from differential pay and hazard pay received by such
dealings in property) minimum wage earners shall likewise be exempt
from income tax (Sec.3[A] R.R. 8-2018)
a. Income from sale of shares of stocks of
a Philippine Corporation-15% of net capital Rules with regard to MWEs receiving 13th
gain month pay and other benefits? *

Income from sale of real property situated a. Statutory Minimum Wage (SMW), Holiday
in the Philippines Pay, Overtime Pay, Night Differential Pay
and Hazard Pay are exempt from income
Final tax of 6% of Gross Selling Price or FMV and withholding tax;
whichever is higher
b. Additional compensation such as
[Link] income other than (i) and (ii) commissions, honoraria, fringe benefits,
Taxed on income sourced WITHIN the benefits in excess of the allowable statutory
Philippines. Based on the fixed rate of 25% of amount of P90,000.00, taxable allowances,
the GROSS income. and other taxable income given to MWE by
the same employer other than those which
d. Aliens employed by regional are expressly exempt from income tax shall
headquarters, regional operating be subject to income tax and withholding
headquarters, offshore banking units, and tax;
petroleum services contractors. c. MWEs receiving other income from other
(AEHQ;OBU;PSC) sources in addition to compensation income,
such as income from other concurrent
"The preferential income tax rate under employers, from the conduct of trade,
Subsection (C, D) and (E) of Section 25 of the business or practice of profession, except
Tax Code, as amended, shall no longer be income subject to final tax, are subject to
applicable income tax only to the extent of income
without prejudice to the application of other than SMW, holiday pay, overtime pay,
preferential tax rates under existing international night shift differential pay, and hazard pay
tax treaties, if warranted. Thus, all concerned earned during the taxable year; and
employees of regional or area headquarters and
regional operating headquarters of multinational d. Any reduction or diminution of wages for
companies, offshore banking units and purposes of exemption from income tax
petroleum service contractor and subcontractor shall constitute misrepresentation and
shall be subject to the regular tax rate therefore, shall result to the automatic
under Sec. 24(A)(2)(a) of the Tax Code, as adisallowance of expense, i.e. compensation
amended.‖(Sec. 4 [C], R.R. No. 8-2018) and benefits account, on the part of the
employer. The offenders may be criminally
e. Individual taxpayers exempt from prosecuted under existing laws. (RR 11-
income 2018)

i. Minimum Wage Earner (MWE) - Worker in [Link] under international

the private sector paid the statutory minimum agreements
wage (SMW) or an employee in the public sector
with compensation income of not more than the Income of any kind [shall be exempted from
statutory minimum wage in the non-agricultural taxation], to the extent required by any treaty
sector where he/she is assigned (Sec. 2 [i]R.R. obligation binding upon the Government of the
No. 8 -2018) Philippines. (Sec. 32 [B][5] of NIRC)

TAXABILITY: MWEs shall be exempt from the

payment of income tax on their taxable income.
The holiday pay, overtime pay, night shift
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 Purple Notes
Taxation Law
Summary of Tax Rates on Passive Income 2018
and Sale of Capital Assets as amended by
TRAIN LAW

Income RC/NRC/RA NRA ETB NRA NETB

I. Passive Income on sources WITHIN the
Philippines
i. Interest
[Link] any currency bank deposit, yield, or any
other monetary benefit from deposit substitutes
Final tax of 20% Final Tax of 25%
and from trust funds and similar arrangements
derived from sources within the Philippin2es
b. From long-term deposit or investment in the
form of savings, common or individual trust funds,
deposit substitutes, investment management
0-20% Final Tax of 25%
accounts and other investments evidenced by
certificates in such form prescribed by the
BangkoSentral ng Pilipinas (BSP)
c. Interest from foreign currency deposits Final tax of 15%* Exempt
ii. Dividends from Domestic or Resident Final Tax of 20%
Final Tax of 10% Final Tax of 25%
Foreign Corporations
iii. Royalties
a. On literary works and musical compositions Final Tax of 25%
Final tax of 20%

b. Other royalties from use or lease of intellectual Final Tax of 25%

Final tax of 20%
properties
iv. Rentals Subject regular tax rates of 0-35% on Final Tax of 25%
income from properties leased
v. Prizes and winnings of more than Php
Final Tax of 20%* Final Tax of 25%
10,000 including winnings from PCSO
II. Tax on Dealings of Properties WITHIN
the Philippines
a. Sale of shares of stocks NOT listed and
Final Tax of 15% on net capital gains*
traded thru the local stock exchange
b. Sale of shares of stocks LISTED and Other Percentage Tax of 6/10 of 1% of gross selling price*
TRADED thru local stock exchange
c. Sale of real property held as capital asset 6% of Gross selling price or Fair Market Value whichever is
higher
d. Sale of other capital assets Final tax of
Subject to regular income tax rates
25%

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Taxation Law
[Link] Tax on Corporations e. Usually, there is a single transaction.
(MAMALATEO, Income Tax, p.41-42)

Corporations for Tax Purposes Kinds of Corporation and Tax implication:

The term Corporation shall include: (J2AP) i. Domestic Corporations (DC)

1. Partnerships not matter how created or Definition

organized;
2. Joint stock corporation; A corporation created or organized in the
3. Joint accounts (cuentasen participation) Philippines or under its laws. (Sec. 27 of NIRC)
4. Associations or Insurance Companies
Coverage
The term Corporation shall not include:
1. General Professional Partnership (GPP) Taxed on TAXABLE INCOME fromits income
from source within and without.
Definition
ii. Foreign Corporation (FC)
Partnerships formed by persons for the sole
purpose of exercising their common Definition
profession, no part of the income of which is
derived from engaging in any trade or A corporation is one which is not a domestic
business. corporation (Sec. 22[D] of NIRC).

2. Joint venture or corporation formed for the Foreign corporations could either be:
purpose of undertaking :
a. Construction projects or, a. Resident Foreign Corporations (RFC)
b. engaging petroleum, coal, geothermal,
and other energy operations Definition
c. pursuant to an operation or consortium A corporation which is not domestic and
agreement under a service contract with engaged in trade or business in the Philippines.
the government (Sec. 22(B) of NIRC) (Sec. 22[H] of NIRC).

Definition Coverage

It has been generally understood to mean Taxed on TAXABLE INCOME fromits income
an organization formed for some temporary from source within and without.
purpose. (Philex Mining Corporation vs. CIR,
G.R. No. 148187, April 16,2008)
―Doing Business‖
What constitute a joint venture:
 In order that a foreign corporation may
be regarded as doing business within a
A joint venture is:
State, there must be continuity of
a. Each party making a contribution, not
conduct and intention to establish a
necessarily capital but by way of services,
continuous business, such as the
skill or knowledge, material or money;
appointment of a local agent, and not
b. Profits must be shared among the
one of a temporary character.(CIR vs.
parties;
British Airways Overseas Corp., G.R. Nos. L
c. Profit must be a joint proprietary -65773-74, April 30,1987)
interest
d. Right of mutual control over the subject
matter or enterprise

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 Purple Notes
Taxation Law
 The phrase ―doing business‖ shall include 2018
- 10% of improperly
soliciting orders, service contracts, opening accumulated earnings
offices, whether called ―liaison‖ offices or [Link] tax on passive
branches; appointing representatives or income
distributors domiciled in the Philippines or
who in any calendar year stay in the country
for a period or periods totaling one hundred
eighty (180) days or more; participating in
the management, supervision or control of
any domestic business, firm, entity or
corporation in the Philippines; and any other
act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to that extent the performance RFC Within Phil 1. NCIT
of acts or works, or the exercise of some of Only - 30% on Net Income
the functions normally incident to, and in Tax Rates: 2. MCIT
progressive prosecution of, commercial gain 30%
2% of gross income, if
or of the purpose and object of the business effective
MCIT applies
organization. (Sec. 3[d] or R.A. 7042, Foreign January 1,
2009 [Link] (Optional
Investments Act)
Corporate Income Tax)
b. Non - Resident Foreign Corporation Tax Base: 15% of gross income, if
qualified
(NRFC) Net taxable
income [Link] tax on passive
Definition income
[Link] from
A foreign corporation not engaged in trade or deposits and yields and
royalties
business with the Philippines. (Sec. 22[I] of NIRC)
[Link] gains from
Coverage: sale of shares not
traded in the stock
exchange
Taxed on GROSS INCOME from income sourced
[Link] derived
within the Philippines
under the Expanded
Foreign Currency
Deposit System
Income Taxation on Corporations [Link]-corporate
Kinds Coverage Imposition of Tax dividends
[Link] profit
DC Within and 1. NCIT remittance tax
Without - 30% on Net Income Non – Within Phil 30% on Gross
Tax rates: Phil Resident ONLY Income(GI)
2. MCIT
30% (Global) Foreign
effective - 2% of gross income,
Corporation
January 1, if MCIT applies
2009 [Link] (Optional
Corporate Income Tax)
Tax Base: - 15% of gross income,
Net taxable if qualified
income.
[Link]
Accumulated Earnings
Tax

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Taxation Law
 RCIT - Regular Corporate Income Tax Taxable Income Php 350,000
 MCIT - Minimum Corporate Income Tax
 GIT – Gross Income Tax If computed using Optional Standard Deductions
(OSD):
Common Tax Provisions for Domestic and
Resident Foreign Corporation Gross or Net Sales Php 1,000,000
/Gross Receipts
This section will cover the following items in the Less : Cost of Sales (350,000)
2020 Tax law bar syllabus: Gross Income 650,000
Add: Non -operating 50,000
6. Income Tax on Corporations income or other taxable
a. Domestic Corporations income
i. Taxation - in general Total Gross Income 700,000
(a) Regular Corporate Income Tax Less: Optional Standard (280,000)
(b) Minimum Corporate Income Tax Deduction (40% of
Total Gross Income)
b. Resident foreign corporations
Taxable Income Php 420,000
i. Taxation - in general
(a) Regular Corporate Income Tax
 The difference of the tax base for OSD for
(b) Minimum Corporate Income Tax
individuals and for corporations are:
(a) Regular Corporate Income Tax (RCIT)
OSD Rate 40% of
An income tax of thirty percent (30%) shall be For Individual For Corporation
imposed upon the taxable income derived during Gross sales or Gross Gross Income
the taxable year. Receipts
(no benefit of deducting (with the benefit of
 Domestic Corporations - all sources within allowable deductions) deducting Cost of
and without the Philippines Sales/Return on Capital
 RFC - all sources within the Philippines for only )
RFC (See discussion on Deductions under B.3.4)

Tax Due under Regular Corporate Income Step 2. Multiply the RCIT Rate of 30% tot
Tax (RCIT) How Computed: the Taxable Income:

Step 1: Compute the taxable income: If computed using itemized deductions:

Taxable Income - refers to the pertinent items Taxable Income Php 350,000
of gross income specified in the Code, less RCIT Tax Rate 30%
deductions, if any, authorized for such types of Tax Due under RCIT Php 105,000
income by the Code or other special laws.
If computed using itemized deductions: If computed using Optional Standard
Deductions:
Gross or Net Sales Php 1,000,000
/Gross Receipts Taxable Income Php 420,000
Less : Cost of Sales (350,000) RCIT Tax Rate 30%
Gross Income 650,000 Tax Due under RCIT Php 126,000
Add: Non -operating 50,000
income or other (b) Minimum Corporate Income Tax
taxable income (MCIT)
Total Gross Income 700,000
IMPOSITION
Less: Itemized (350,000)
Coverage DCs and RFCs
Deductions Amount to 2% of the Gross Income as

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 Purple Notes
Taxation Law
be imposed opposed to normal corporate 2018
income tax which is imposed on Year Tax Due MCIT/NCIT
the taxable income. (Gross income
would mean gross sales/receipts 2016 42,000.00 NCIT
less cost of sales plus other income 2017 50,000.00 MCIT
not subject to final tax.) 2018 70,000.00 MCIT
When Starts on the fourth taxable year
imposed following the year in which such 2019 105,000.00 NCIT
corporation commenced its
business operations (date when (a) Carry Forward of Excess Minimum Tax
the corporation registers with the (CCF-N)
BIR as reflected in its Certificate of  Any excess of MCIT over the normal income
Registration). tax can be carried forward on an annual
basis.
*This is the tax due whenever the amount of  The excess can be credited against the
MCIT is greater than the Normal Corporate normal income tax due in the next 3
Income Tax (NCIT) due from such corporation immediately succeeding taxable years.
determined under Sec. 27[A].  Any amount of the excess MCIT which
cannot be credited against the normal
Example: income tax due in the next 3-year period
shall be forfeited.
X Company, Domestic Corporation,  The credit must be taken in a year where
incorporated and registered with the BIR NCIT is greater than MCIT.
in 2012. When would X Company be liable
to MCIT? Example:

In 2016 or 4 years after it commence its Following the example above:

operation (registered with the BIR). Which years would have an excess MCIT
and how much?
X Company had the following gross
income and net income for from 2016- Years 2017 and 2018 with amounts of 2,000 and
2019: 10,000 respectively. This is because there is only
excess MCIT if the tax due is MCIT for the
Year Gross Net Income taxable year. The excess MCIT is the difference
Income (GI) (NI) between MCIT and NCIT for the taxable year.
2016 2,000,000 140,000
2017 2,500,000 180,000
Year MCIT (2% NCIT (30% Excess
2018 3,500,000 200,000 of GI) of NI) MCIT?
2019 4,000,000 350,000 2016 40,000.00 42,000.00 Nil
2017 50,000.00 48,000.00 2,000
Compute the MCIT and NCIT. 2018 70,000.00 60,000.00 10,000
2019 80,000.00 105,000.00 Nil
A:
Year MCIT (2% of NCIT (30% For 2019, how much is the tax to be paid
GI) of NI) by X Co.?
2016 40,000.00 42,000.00
2017 50,000.00 48,000.00
93,000 (105,000 – 12,000). It is the NCIT due
2018 70,000.00 60,000.00
for the taxable year of Php 105,000 less the
2019 80,000.00 105,000.00
accumulated excess MCIT of 12,000.
How much is tax due?
Excess MCIT can be deducted from the tax due
ONLY if NCIT (30% CIT) is due the
A: Whichever is higher.

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Taxation Law
applicable taxable year. It is an asset in the 5. Resident foreign international carrier
Company‘s books good for 3 consecutive years. 6. Resident foreign offshore banking units
7. Resident foreign ROHQ
Are excess MCIT subject to expiration?
(d) Applicability of the MCIT Where a
Yes. It is only good for 3 consecutive years. Corporation is Governed Both Under
After 3 years it cannot be used even it has a the Regular Tax System and a Special
balance.(Sec 27[E][2], NIRC) Income Tax

(b) Relief From the MCIT under Certain For Domestic Corporations, the MCIT shall apply
Conditions on operations covered by the regular tax system
only. (R.R. 9 -98)
The Secretary of Finance is authorized to
suspend the imposition of the MCIT on any Is MCIT a Tax on Capital?
corporation which suffers losses because of:
(Pro-Fo-Le) The MCIT is imposed on gross income which is
arrived at by deducting the capital spent by a
a. Prolonged labor dispute; Substantial losses corporation in the sale of its goods, i.e., the cost
incurred from a labor dispute arising from a of goods48 and other direct expenses from
strike staged by the employees which gross sales. Clearly, the capital is not being
lasted for more than six (6) months within taxed. (Chamber of Real Estate and Builder‘s
a taxable period and which has caused the Association vs. Alberto Romulo, G.R. No. 160756,
temporary shutdown of business operation March 9,2010)
b. Force majeure; or a cause due to an
irresistible force as by ‗Act of God‘ like a. Domestic Corporations
lightning, earthquake, storm, flood and the
like. It shall also include armed conflicts like i. Taxation in general
war or insurgency.
c. Legitimate business reverses shall include (a) Regular Corporate Income Tax (RCIT)
substantial losses due to fire, theft or (b) Minimum Corporate Income Tax
embezzlement or for other economic reason
as determined by the Secretary of (See preceding discussion under Common
Finance(Sec.27[E][3],NIRC) Provisions for Domestic and Resident Foreign
Corporation)
(c) Corporations Exempt from the MCIT
(HEDS-F3) (c) Tax on Passive Income
1. Those operating as proprietary educational
institutions subject to preferential tax of (See detailed discussion under B. 3. vi. Income
10% on their taxable income; (Domestic) on Passive investment income)
2. Those engaged in hospital operations which
are non-profit subject to tax at 10% on their i. Interest
taxable income; (Domestic)
3. Those engaged in business as depository a. From any currency bank deposit, yield,
banks under the expanded foreign currency or any other monetary benefit from
deposit system subject to final income tax at deposit substitutes and from trust funds
10% of such income; (Domestic) and similar arrangements derived from
4. Firms that are taxed under aspecial income sources within the Philippines: - 20%
tax regime such as those in accordance with
RA 7916 and 7227 (The PEZA law and the b. Interest from foreign currency
Bases Conversion Development Act, depositary units -15%
respectively). ii. Dividends

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 From Domestic and Resident Foreign Nature and Purpose 2018
Corporations – Exempt
 From Foreign Corporations – subject to The underlying purpose of the additional tax in
RCIT or NCIT question on a corporation's improperly
accumulated profits or surplus is as set forth in
iii. Royalty income – 20% the text of Section 25 of the Tax Code itself to
avoid the situation where a corporation unduly
(d) Tax on Capital Gains retains its surplus instead of declaring and
paving dividends to its shareholders or members
(See detailed discussion under B. 3. v. Income who would then have to pay the income tax due
from dealings in property) on such dividends received by them. (CIR v.
Ayala Securities Corp., G.R. No. L-29485, November
To summarize: 21,1980)

a. Income from sale of shares of stocks of The tax which is essentially a penalty tax is
a Philippine Corporation -15% of net imposed for each taxable year in addition to the
capital gain other income taxes imposed on corporations.

b. Income from sale of land and/or Note: With the additional tax, corporations will
buildings be compelled to distribute corporate gains or
earnings not necessary in the business to
6% of Gross Selling Price or Fair Market Value stockholders in the form of dividends which are
(FMV) whichever is higher now taxable.

c. Income from sale, exchange or other Presumptions of Improper Accumulation

disposition of other capital assets
There is prima facie evidence of a purpose to
Subject to RCIT/MCIT on income from sale avoid the tax upon its shareholders where:
of capital asset NOT subject to capital gains (1) The corporation is a mere holding company;
tax without the benefit of Holding Period (2) The corporation is an investment company
and Net Capital Loss Carry Over and at any time during the taxable year
(e) Improperly Accumulated Earnings Tax more than 50% in value of its outstanding
stocks is owned, directly or indirectly, by
Definition one person; and
(3) The corporation permits its earnings or
Improperly Accumulated Earnings profits to be accumulated beyond the
reasonable needs of the business.
Profits of a corporation that are permitted to
accumulate instead of being distributed to its  For purposes of RR No. 2-2001, the
shareholders for the purpose of avoiding the term holding or investment company,
income tax with respect to its share holders or shall refer to a corporation having
shareholders of another corporation (R.R. No. 2- practically no activities except holding
2001) property, and collecting the income
therefrom or investing the same.
Improperly Accumulated Earnings Tax (CASASOLA, NIRC, Annotated)

10% of the Improperly Accumulated Taxable  The touchstone of liability is the purpose
Income (in addition to other taxes). behind the accumulation of the income
and not the consequences of the
accumulation. If there is a determination
that a corporation has accumulated
income beyond the reasonable needs of

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the business, IAET shall be imposed. even if not declared as dividends. This
(Id.) notwithstanding, once finally declared, the
dividends shall still be subject to tax on
 To determine reasonable needs, dividends under NIRC.
Immediacy Test shall be applied.
The accumulated profits must be used Period of Payment
within a reasonable time after the close
of the taxable year. The taxpayer must Dividends must be declared and be paid not
establish by clear and convincing later than one (1) year following the close of the
evidence that such accumulation was for taxable year.
the immediate needs of the
business.(CASASOLA, NIRC Anotated) IAET should be paid fifteen (15) days thereafter.

How taxed: Example:

Step 1. Compute for Improperly For the close of the taxable year for 2018.
Accumulated Earnings: Dividends must be declared and be paid on or
before December 31,2019.
From the corporation‘s taxable income, add the
following: Otherwise, the company will be imposed a
liability under IAET which should be paid on or
Taxable Income (2018) Php 1,000,000
the 15th date from December 31, 2019 which is
Add:
January 15 (assuming that said date is not a
Income subject to final tax 100,000
non – working day).
Net Loss Carry Over (NOLCO) 200,000
Income exempt from income 50,000 Exempt Corporations
tax
Income excluded from gross 30,000 The tax shall not apply to the following kinds of
income corporation enumerated in Sec 29(B)(2):
Less: 1,380,000
Income tax paid (300,000)
Dividends declared or paid 0 a. Publicly-held corporations;
Total 1,080,000 b. Banks and other non-bank financial
Add: intermediaries; and
Retained Earnings, as of the 500,000 c. Insurance companies.
end of the year
Less:
and also the following:
100% Paid Capital (350,000)
Improperly Accumulated 1,230,000
Earnings
d. Taxable partnerships
Multiply: e. General Professional Partnerships
Improperly Accumulated 10% f. Non-taxable joint ventures
Earning Tax Rate g. Enterprises duly registered under the
Improperly Accumulated 123,000 Philippine Economic Zone Authority under
Earning Tax R.A. 7916
([Link]. 35-2011) h. Enterprises registered pursuant to the
Bases Conversion and Development Act of
The tax is imposed for each taxable year on 1992 under R.A. 7227
the improperly accumulated taxable income i. Other enterprises duly registered under
equal to 10% of such income. special economic zones declared by law
which enjoy payment of special tax rate on
 Once the profit has been subject to IAET, their registered operations or activities (Sec
the same shall no longer be subject to it 4, RR No. 2-2001).

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j. Foreign corporations 2018 and
ii. Proprietary educational institutions
hospitals
 IAET shall not apply in cases where the
corporation is entitled to a preferential tax General Rule: Tax rate is 10%
rate. The retained earnings of a domestic
corporation with the Subic Bay Metropolitan Exceptions:
Authority (SBMA) from its gross income a. 30% NCIT rate if the gross income from
earned from registered activities which were unrelated trade, business or other activity
already subjected to 5% preferential tax rate exceeds 50% of the total gross income
are not subject to IAET.(BIR Ruling DA-587-09, derived from all sources.
Oct 2009) b. Exempt if a non-stock, non-profit
educational institution (Sec. 4, Art. XIV,
 Income derived by a subcontractor of a Constitution).
petroleum service contractor of the
Government from petroleum subcontracting What is meant by unrelated trade,
operations is exempt from the IAET. business or other activity?
However, the exemption shall be limited Any trade business or other activity, the conduct
only to income derived from petroleum of which is not substantially related to the
subcontracting under P.D. 1354. Income performance by such educational institution or
from other sources shall be subject to hospital of its primary purpose or function.(Sec
normal income tax rate or MCIT, as the case 27 (B), NIRC)
may be.(BIR Ruling 302-04, June 2004)
Distinguish Non – Stock, Non Profit
MCIT vs. IAET Educational Institution from Proprietary
Educational Institution
Improperly
Minimum Corporate Accumulated Earnings NON-STOCK, PROPRIETARY
Income Tax Tax NON-PROFIT, EDUCATIONAL
Tax Rate and Tax Base EDUCATIONAL INSTITUTION
2% of TOTAL GROSS 10% of IMPROPERLY Privilege granted is Tax privilege granted to
INCOME ACCUMULATED not subject to the latter may be
EARNINGS TAX limitations imposed subject to limitations
by law since it is imposed by law.
When Liable constitutionally
granted.
Whenever NORMAL Whenever there is an
INCOME TAX IS ZERO IMPROPERLY Income is tax Income is subject to
OR LESS THAN MCIT ACCUMULATED exempt provided income tax.
EARNINGS that the income it
seeks to be The rate shall be at 10%
How is the Tax Based computed? exempted from if gross income from
Total Gross Income is Improperly Accumulated taxation is used unrelated trade,
computed from Earnings is computed
actually, directly business or activity does
Gross/Net Sales less Cost from the TAXABLE
of Sales add other INCOME add all income
and exclusively for not exceed 50% of its
income not subject to not subjected or was educational total gross income,
final taxes exempted from tax and purposes. otherwise,30% RCIT.
other tax benefits less all (CIR vs. DLSU, G.R. (Predominancy Test)
tax income payments and No. 196596,
dividend payments or November 9, 2016)
declarations and less paid
up capital

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 Even if the charitable institution must be 10% on its net income from its for-profit
"organized and operated exclusively" for activities. (CIR vs. St. Luke‘s Medical Center
charitable purposes, it is nevertheless Inc., GR 195909,September 26, 2012)
allowed to engage in "activities conducted
for profit" without losing its tax-exempt (iii) Government-owned or controlled
status for its not-for-profit activities. The corporations (GOCC), agencies or
only consequence is that the "income of instrumentalities
whatever kind and character" of a charitable
institution "from any of its activities General Rule: The rules governing domestic
conducted for profit, regardless of the corporations engaged in similar business,
disposition made of such income, shall be industry or activity shall apply.
subject to tax." Prior to the introduction of
Section 27(B), the tax rate on such income Exceptions: (GS-PL)
from for-profit activities was the ordinary a. Government Service Insurance System
corporate rate under Section 27(A). With the b. Social Security System
introduction of Section 27(B), the tax rate is c. Philippine Health Insurance Corporation
now 10%.(CIR vs. St. Luke‘s Medical Center, d. Local Water districts
Inc., GR No. 195909, September 26, 2012)
Under the TRAIN Law, the Philippine Charity
(ii) Non-Profit hospitals (same rules as those Sweepstake is not anymore exempt from
imposed on proprietary educational institutions) payment of income tax.

(See also Sec. 27 (B), NIRC) Are GOCC not included in the list taxable?

Q: Is St. Luke‘s Medical Center Inc., No. Under Sec. 32 (B) (7)* of the NIRC, income
organized as a non – stock and non profit derived from any public utility or from the
charitable institution making it entitled for exercise of essential government function
tax exemption? accruing to the government of the Philippines or
to any political subdivision are exempt from
A: There is no dispute that St. Luke's is income tax. Therefore, even if the GOCC is not
organized as a non-stock and non-profit one of those enumerated in Sec. 27 (C), it may
charitable institution. However, this does not still exempted under Sec. 32 (B)(7) due to its
automatically exempt St. Luke's from paying governmental function.
[Link] be exempt from income taxes, Section
30(E) of the NIRC requires that a charitable *Income Derived by the Government or its Political
institution must be "organized and operated Subdivisions
exclusively" for charitable purposes. Likewise, to
be exempt from income taxes, Section 30(G) of (iv) Domestic Depository banks (foreign
the NIRC requires that the institution be currency deposit units)
"operated exclusively" for social welfare.
Income derived by a depositary bank under the
St. Luke's fails to meet the requirements under expanded foreign currency deposit system from
Section 30(E) and (G) of the NIRC to be foreign currency transactions with non-residents,
completely tax exempt from all its income. offshore banking units in the Philippines, local
However, it remains a proprietary non-profit commercial banks and other depositary banks
hospital under Section 27(B) of the NIRC as long under the expanded foreign currency deposit
as it does not distribute any of its profits to its system shall be EXEMPT from all taxes.
members and such profits are reinvested
pursuant to its corporate purposes. St. Luke's, Exception:
as a proprietary non-profit hospital, is
entitled to the preferential tax rate of

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 Purple Notes
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 Net income from such transactions which i. Interest 2018
shall be subject to the regular income tax
payable by banks. a. From any currency bank deposit, yield,
or any other monetary benefit from
Interest income from foreign currency loans deposit substitutes and from trust funds
granted by such depositary banks under said and similar arrangements derived from
expanded system to residents other than OBUs sources within the Philippines: - 20%
in the Philippines or other depository banks
under the expanded system shall be subject to a b. Interest from foreign currency
final tax of 10%(Sec. 27[D][3],NIRC) depositary units -7.5%

b. Resident Foreign Corporation ii. Dividends

i. Taxation – in general
 From Domestic and Resident Foreign
(a) Regular Corporate Income Tax Corporations – Exempt
(b) Minimum Corporate Income Tax  From Foreign Corporations-subject to
RCIT or MCIT
(See preceding discussion under Common
Provisions for Domestic and Resident Foreign iii. Royalty income – 20%
Corporation)
(e) Tax on Capital Gains
(c) Branch Profit Remittance Tax (BPRT)
(by a Resident Foreign Corporation) (See detailed discussion under B. 3. v. Income
from dealings in property)
Definition
Any profit remitted by a branch to its head office To summarize:
shall be subject to 15% BPRT on its head office
based on total profits applied or earmarked for d. Income from sale of shares of stocks of
remittance WITHOUT any deduction for the a Philippine Corporation -15% of net
tax component(Sec. 28[A][5],NIRC) capital gain

e. Income from sale of land and/or

Exception: Entities registered with the
buildings
Philippine Economic Zone Authority (PEZA) (Sec.
28 (A) (5), NIRC)
6% of Gross Selling Price or Fair Market
Rationale Value (FMV) whichever is higher
The remittance tax was conceived in an attempt
to equalize the income tax burden on foreign f. Income from sale, exchange or other
corporations maintaining, on the one hand, local disposition of other capital assets
branch offices and organizing, on the other
hand, subsidiary domestic corporations where at Subject to RCIT/MCIT on income from sale
least a majority of all the latter's shares of stock of capital asset NOT subject to capital gains
are owned by such foreign corporations.(Bank of tax without the benefit of Holding Period
America NT &SA vs. Court of Appeals, G.R. No. and Net Capital Loss Carry Over
103092, July 21,1994)
ii. Resident Foreign Corporations subject
(d) Tax on Passive Income to Preferential Tax Rates

(See detailed discussion under B. 3. vi. Income (a) International carrier doing business in
on Passive investment income) the Philippines

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Taxation Law
 Subject to 2.5% tax rate on its Gross
Philippine Billings. International Air International Carrier
 Gross Philippine Billings, defined: Carrier Maintaining with NO FLIGHTS or
to and from PH LANDING RIGHTS
but operate thru
General Sales Agent
in PH
International Air International Taxed as a SPECIAL Taxed as a RESIDENT
Carrier Shipping CORPORATION at a rate FOREIGN
The amount of gross The gross revenue of 2.5% on GROSS CORPORATION
revenue derived from whether for passenger, PHILIPPINE subject to normal
carriage of persons, cargo or mail originating BILLINGS income tax of 30% of
excess baggage, cargo from the Philippines up taxable income or
and mail originating from to final destination, minimum corporate
the Philippines in a regardless of the place income tax of 2% of
continuous and of sale or payments of total gross income.
uninterrupted flight, the passage or freight
irrespective of the place of documents. (Air Canada vs. CIR, GR 169507,January
sale or issue and the place 11,2016,penned by J. Leonen)
of payment of the ticket or
passage document.
(b) Resident foreign depositary banks
(foreign currency deposit units) and
 Basis for Gross Philippine Billings Tax
Offshore Banking units
exemption: Reciprocity may be invoked by
an international carrier, when its Home
Resident foreign depositary banks (foreign
Country grants income tax exemption to
currency deposit units)(same rules as those
Philippine carriers.
imposed on domestic depositary banks)(Sec.
27[D][3],NIRC)
 That international carriers doing business in
the Philippines may avail of a preferential Off-shore banking units
rate or exemption from the tax herein
imposed on their gross revenue derived General Rule: Income derived by OBUs from
from the carriage of persons and their foreign currency transactions with non-residents,
excess baggage on the basis of an other offshore banking units, local commercial
applicable tax treaty or international banks are exempt from all taxes
agreement to which the Philippines is a
signatory or on the basis of reciprocity such Exception:
that an international carrier, whose home
country grants income tax exemption to Income derived from (NF3):
Philippine carriers, shall likewise be exempt 1. Nonresidents;
from the tax imposed under this provision. 2. Foreign currency transactions with local
(Sec. 1, RA 10378) commercial banks;
3. Foreign currency transactions with branches
 An offline international air carrier selling of foreign banks authorized by the BSP
passage tickets in the Philippines, through a 4. Foreign currency transactions with OBUs in
general sales agent, is a resident foreign the Philippines
corporation doing business in the
Philippines. As such, it is taxable under Interest income from foreign currency loans
Section 28(A)(l), and not Section 28(A)(3) of granted to residents other than OBUs or local
the 1997 National Internal Revenue Code, commercial banks shall be subject to a final tax
subject to any applicable tax treaty to which of 10%.(Sec. 28[A][4],NIRC)
the Philippines is a signatory. (Air Canada vs.
CIR, GR 169507,January 11,2016, penned by J.
Leonen)
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 Purple Notes
Taxation Law
(c) Regional or Area Headquarters and Income covered: 2018
Regional Operating Headquarters of i. Interests,
Multinational Companies ii. Dividends,
iii. Rents,
1. Regional or area headquarters – not subject iv. Royalties,
to tax v. Salaries,
2. Regional operating headquarters – 10% on vi. Premiums (except reinsurance premiums),
taxable income (Sec. 28[A][6],NIRC) annuities, emoluments or other fixed or
determinable annual, periodic or
Regional or Area Regional vii. Casual gains, profits and income, and
Headquarters OPERATING viii. Capital gains, except capital gains subject to
Headquarters tax(Sec. 28[B][1], NIRC)
Branch established in Branch established in
the Philippines by the Philippines by ii. NRFC subject to special rates:
multinational multinational On specific properties rented owned by
companies and which companies which are non -resident foreign corporation:
headquarters DO engaged in the
NOT EARN or DERIVE following: general Lease on Rate on Gross
INCOME from the administration, income
Philippines and which business planning and Cinematographic
25%
act as SUPERVISORY, coordination, sourcing Films
COMMUNICATIONS and procurement of Foreign vessels 4.5%
and COORDINATING raw materials and Aircraft machineries
7.5%
CENTER for their components, and equipment
affiliates, subsidiaries corporate finance
or branches. advisory services, (Sec.s 28[B][2],[3]&[4],NIRC)
(Sec.22[DD], NIRC) marketing control and
sales promotion, (d) Corporation Exempt From Income Tax
training and personnel (ABS -C2BN2 -GF2)
management, logistic
services, research and These are:
development and
product development, (A) Labor, agricultural or horticultural
technical support and organization not organized principally for
maintenance, data profit;
processing and
communications and Requisites to be exempt : B-E-N
business (1) No net income inuring to the benefit of
development. (Sec. any member;
22[EE], NIRC) (2) Educational or instructive in character;
Not Subject to tax Taxed at 10% in (3) Have as their objects the Betterment of
Taxable Income the conditions of those engaged in such
pursuits, the improvement of the grade
of their products and the development
of a higher degree of efficiency in their
c. Non – Resident Foreign Corporation respective occupations.
(NRFC)
(B) Mutual savings bank not having a capital
i. Taxation of NRFC in General stock represented by shares, and
cooperative bank without capital stock
Coverage: Taxable on GROSS income at 30%.

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organized and operated for mutual purposes member, organizer, officer or any specific
and without profit; person;

Requisites to be exempt: Requisite to be exempt:

(1) It must appear that it is an organization
which has no capital stock (1) It must be a non-stock and organized
represented by shares; and and operated for one or more specified
(2) whose earnings less only the expenses purposes; and
of operation, are distributable whole (2) No part of its net income or asset shall
among the depositors. belong to or inure to the benefit of any
member.
If it appears that the organization has
shareholders who participate in the ―Charity‖ may be fully defined as a gift, to
profits, the organization will not be be applied consistently with existing laws,
exempt. for the benefit of an indefinite number of
persons, either by bringing their minds and
(C) A beneficiary society, order or association, hearts under the influence of education or
operating for the exclusive benefit of the religion, by assisting them to establish
members such as a fraternal organization themselves in life or otherwise lessening the
operating under the lodge system, or burden of government ((CIR vs. St. Luke‘s
mutual aid association or a nonstock Medical Center, Inc., GR No. 195909, September
corporation organized by employees 26, 2012)
providing for the payment of life, sickness,
accident, or other benefits exclusively to Charitable institutions does not lose its
the members of such society, order, or character as such because it derives income
association, or nonstock corporation or their from paying patients so long as the money
dependents; received is devoted or used altogether to
the charitable object which it is intended to
Requisite to be exempt: achieve.
(1) Operated for the exclusive benefit of the
members such as a fraternal (F) Business league chamber of commerce, or
organization operating under the lodge board of trade, not organized for profit and
system. no part of the net income of which inures to
(2) Established system for payment to its the benefit of any private stock-holder, or
members of life, sick, accident, or other individual;
benefits.
Requisite to be exempt:
(D) Cemetery company owned and operated (1) An association of persons having some
exclusively for the benefit of its members; common business interest, which limits
its activities to work for such common
Requisite to be exempt: interest; and
(1) Owned by and operated exclusively for (2) Does not engage in a regular business
the benefit of its lot owners; or if it is of a kind ordinarily carried on for profit.
(2) Not operated for profit.
(G) Civic league or organization not organized
(E)Nonstock corporation or association for profit but operated exclusively for the
organized and operated exclusively for promotion of social welfare;
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
105
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 Purple Notes
Taxation Law
Requisite to be exempt: 2018 of its
the purpose of marketing the products
(1) Not organized for profit but operated members and turning back to them the
exclusively for purposes beneficial to the proceeds of sales, less the necessary selling
community as a whole. expenses on the basis of the quantity of
produce finished by them;
NOTE:―For the promotion of social
welfare‖ covers activities that advance Notwithstanding the provisions in the
the common good and the general preceding paragraphs, the income of
welfare of the people of the community. whatever kind and character of the
foregoing organizations from any of their
(H) A non-stock and non-profit educational properties, real or personal, or from any of
institution; their activities conducted for profit
regardless of the disposition made of such
Non Stock Non Other non -stock non income, shall be subject to tax imposed
Profit Educational profit organization under this Code.
Institution under Sec. 30
What is exempt?  The last paragraph of Section 30 of the
Income REGARDLESS Only income from non – Tax Code is without force and effect
of source profit activities are subject
with respect to non-stock, non-profit
to exemption.
(whether the source of educational institutions, provided, that
income coming from the non-stock, non-profit educational
profit activity or not) institutions prove that its assets and
Other conditions for exemption revenues are used actually, directly and
Income must be No portion of the income exclusively for educational purposes(CIR
actually, directly or inures to the benefit of any vs. DLSU, G.R. No. 196596, November 9,
exclusively used for member, organizer, officer 2016)
educational purpose or any specific officer.  The tax exemption granted under Sec.
Source of Exemption 30 covers only income taxes for which
Article XIV, Section 4 Section 30 of the Tax Code it is directly liable. Such exemption
(3) of the Constitution does not cover indirect taxes such
as business taxes.

(I) Government educational institution;

Tax on Association /Condominium Dues:
May include associations whose sole
purpose is the instruction of the public.  Condominium dues received from the unit
Associations formed to disseminate owners, which are merely held in trust and
controversial or partisan propaganda are not which are used by the Condominium
educational with the meaning of the law (Sec Corporation solely for administrative
30, RR No. 25). expenses, utilities, and maintenance of the
common areas for the benefit of the unit
(J) Farmers' or other mutual typhoon or fire owners and from which the Condominium
insurance company, mutual ditch or Corporation could not realize any gain or
irrigation company, mutual or cooperative profit are not subject to income and
telephone company, or like organization of a consequently, to withholding tax (BIR Ruling
purely local character, the income of which No. DA- 336-08, Oct 23, 2008).
consists solely of assessments, dues, and
fees collected from members for the sole  As long as these membership fees,
purpose of meeting its expenses; and assessment dues, and the like are treated as
collections by recreational clubs from their
(K) Farmers', fruit growers', or like association members as an inherent consequence of
organized and operated as a sales agent for

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their membership, and are, by nature,  Unlike an ordinary business partnership
intended for the maintenance, preservation, which is treated as a corporation for income
and upkeep of the clubs' general operations tax purposes and, therefore, subject to
and facilities, then these fees cannot be corporate income tax, a general professional
classified as "the income of recreational partnership is not in itself an income
clubs from whatever source" that are taxpayer.
"subject to income tax . (Association of Non –  A General Professional Partnership, provided
Profit Clubs [Link], G.R. No. 228539 , June 26, that no part of its income is derived from
2019) engaging in any other trade or business, is
exempt from corporate income tax.
(e) Tax on other Business Entities: General
Partnerships, General Professional  If it derives income from other sources, the
Partnerships, Co-ownerships, Joint GPP nonetheless remains to be exempt from
Ventures and Consortia the payment of corporate income tax if the
income from other sources has been
General Partnership (Business subjected to final income tax.
Partnership)  They are required to file tax returns for the
purpose of furnishing information as to the
Partnerships - Under the Philippine setting on share in the net gains or profits which each
taxation, the term ―corporation‖ likewise partner shall include in his individual return.
includes partnerships no matter how created or  A partner‘s share in the net profits of GPP is
organized(Sec.22[B],NIRC) not compensation income. (BIR Ruling No. 008,
Jan. 1989)
General rule: Taxable as corporations  Payments made to individual partners are
subject to 15% withholding tax, if the gross
Exception: General professional partnerships income for the current year exceeds
- EXEMPT from income tax (Sec. 26, NIRC). Php720,000; and 10% if otherwise. (Sec.
2.57.2(E), RR. No. 11-18, January 31, 2018 )
General Professional Partnerships
Determination of the Optional Standard
Requisites for Exemption: SP-NT Deduction for GPP and Partners of GPP
(Sec 8, RR 8-2018)
a. Formed by persons for the sole purpose of
exercising their common profession. GPP is not subject to income tax imposed
b. No part of its income is derived from pursuant to Sec. 26 of the Tax Code, as
engaging in any trade or business. amended. However, the partners shall be liable
to pay income tax on their separate and
 If the conditions set by law are not met, the individual capacities for their respective
exemption from corporate income tax is distributive share in the net income of the GPP.
withdrawn and the partnership is subjected
to tax as an ordinary corporation. (Tan vs. The GPP is not a taxable entity for income tax
Del Rosario, G.R. No. 109289, October 3, 1994) purposes since it is only acting as a
"passthrough‖ entity where its income is
The income tax is imposed on the partners ultimately taxed to the partners comprising it.
themselves in their separate and individual Section 26 of the Tax Code, as amended,
capacity on their separate and respective likewise provides that"[f]or purposes of
distributive shares of the net income of the computing the distributive share of the partners,
partnership computed in the same manner as the net income of the GPP shall be computed in
that of a corporation. the same manner as a corporation.'

107
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 Purple Notes
Taxation Law
As such, a GPP may claim either the itemized Subject to CREDITABLE Subject to2018 FINAL
deductions allowed under Section 34 of the WITHHOLDING TAX of WITHHOLDING TAX of
Code or in lieu of it, can opt to avail of the OSD 15% (if income 10%. The payment
allowed to corporations in claiming the payments exceed Php thereof shall be deemed
720,000) or 10% if full and final and thus
deductions in an amount not exceeding forty
income payments no need to be included
percent (40 %) of its gross income. exceed Php 720,000) in the ITR

In computing taxable income defined under Co-ownership

Section 31 of the Tax code, as amended, the
following may be allowed as deductions: General Rule:
Co-ownerships are generally not taxable.
a. itemized expenses which are ordinary and
necessary, incurred or paid for the practice of Reason: Because the activities of the co-owners
Profession; OR are usually limited to the preservation of the
property owned in common and collection of the
b. Optional Standard Deduction (OSD). income therefrom.

When taxable:
The distributable net income of the partnership
may be determined by claiming either itemized  The co-ownership of inherited properties is
deductions or OSD. The share in the net income automatically converted into an unregistered
of the partnership, actually or constructively partnership the moment the said common
received, shall be reported as taxable income of properties and/or the incomes derived
each partner. therefrom are used as a common fund with
intent to produce profits for the heirs in
The partners comprising the GPP can no longer proportion to their respective shares in the
claim further deduction from their distributive inheritance as determined in a project
share in the net income of the GPP and are not partition either duly executed in an
allowed to avail of the 8% income tax rate
option since their distributive share from the  Extrajudicial settlement or approved by the
GPP is already net of cost and expenses court in the corresponding testate or
intestate proceeding. (Ona v. CIR, G.R. No. L-
General Professional Taxable Business 19342, May 25, 1972)
Partnership Partnership

How is the PARTNERSHIP is Taxed? Joint Venture

The partnership as As a juridical entity they
separte a juridical are taxed like a Joint Venture and Consortium- Under the
entity of its own its CORPORATION. Philippine setting on taxation, the term
income is EXEMPT from ―corporation‖ includes joint stock companies,
tax. joint ventures and consortia.

General rule: Taxable as corporations

Distributive Share of the PARTNER
Forms part of gross Not part of the partner‘s Exception: Joint ventures or consortium
income and forms part individual income tax formed for the purpose of undertaking a
of the individuals return. construction project or engaging in petroleum,
partner ITR to compute
coal, geothermal and other energy operation
for tax liability
Withholding Tax on Distributive Share of the
pursuant to an operating consortium agreement
PARTNER under service contract with the government -
EXEMPT from income tax.

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Summary of Tax Rates on Passive Income and Sale of Capital Assets as

amended by TRAIN LAW

Transaction Domestic Corporations Resident Foreign Non Resident Foreign

Corporations Corporations

Tax on Capital Gains

Sale of Land and/or 6% of Gross Selling Price Subject to Regular 30% of Gross Income
Buildings held as a Capital or FMV whichever is Corporate Income Tax
Asset higher (FMV – higher of (RCIT)/ Minimum
Zonal Value by BIR or Corpoate Income Tax
Assessed Value or LGU (MCIT) or Gross
Assessor) Income Tax whichever
is applicable

Sale of shares of stocks 15% of Net Capital Gains 5%- First Php100,000 net capital gain
not listed thru local stock –Domestic Corporations
10% - In excess of Php 100,000
exchange

Tax on Passive Investment Income

Interest Income on 20% 20% 30%

currency bank deposit, or
other monetary benefits
from deposit substitute,
trust fund, and similar
arrangements

Other royalties, prizes and 20% 20% 30%

winnings above Php
10,000

Cash or Property 20% 20% 20%

Dividends from a domestic
corporation

Interest on Foreign 15% 7.5% Exempt

Currency Deposit

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7. Filing of Returns and Payment of except income subject to final tax 2018
as provided
Income Tax under this Code;
(C) Allowable deductions under this Code;
a) Definition of a Tax Return and (D) Taxable income as defined in Section 31 of
Information Return this Code; and
(E) Income tax due and payable.
A Tax Return is the tax form used to report
income and file income taxes with Bureau of (i) Who are required to file; exceptions
Internal Revenue.
Who are required:
It is a sworn written instrument in which the
taxpayer discloses the nature and extent of his a. Every Filipino citizen residing(CR) in the
liability by formally making a report of his Philippines;
income and allowable deductions for the taxable b. Every Filipino citizen residing
year in the prescribed form.(Teodoro & De Leon) outside(CRO) the Philippines on his
income from sources within the Philippines;
An Information Return is an instrument c. Every alien residing (AR) in the
submitted by every withholding agent to the Philippines on income derived from sources
Commissioner containing the list of payees within the Philippines; and
(employees) and income payments (total d. Every non-resident alien (NA) engaged in
amount of compensation of each), amount of trade or business or in the exercise of
taxes withheld from each payee(employee) and profession in the Philippines. (Sec. 51 [A][1],
such other pertinent information as may be NIRC of 1997)
deemed necessary. (Sec. 58[C]& Sec 83[B] of
NIRC) Who are not required:

General requirements of Income Tax 1. Individuals whose gross compensation

Returns (ITR) income does not exceed Php 250,000.00
(Sec. 9 RR 8-2018);
ITR must be: 2. Individuals with respect to pure
 Verified and under oath; compensation income derived from sources
 Filed by the taxpayer or his authorized within the Philippines, the income tax on
agent/representative; which has been correctly withheld (tax due
 In triplicate and in the form prescribed by equals tax withheld).
the BIR; and 3. Individuals whose sole income has been
 Covers a period not exceeding one year subjected to final withholding tax.
except when specifically authorized by law. 4. Minimum wage earner or individuals who
are exempt from income tax.
a. Individual return
Questions and Answers on Filing Returns
Individual Tax Returns - Maximum of four (4) Mr. C is employed as a Chief Executive Officer of
pages in paper form or electronic form, and shall MNO Company, receiving an annual
only contain the following information: compensation of ₱10,000,000.00, while Mr. S is
a security guard in the same company earning
(A) Personal profile and information; an annual compensation of ₱200,000.00. Both of
(B) Total gross sales, receipts or income from them derive their income solely from their
compensation for services rendered, conduct of employment with MNO Company.
trade or business or the exercise of a profession,
Q1: At the end of the year, is Mr. C personally
required to file an annual income tax
return?

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A1:No. Mr. C is not personally required to file
his annual income tax return because Under the substituted tax filing system, the
individua taxpayers receiving pure employer‘s annual information return (BIR Form
compensation income, regardless of No. 1604-CF) may be considered as the
amount, from only one employer in the ―substitute‖ ITR of its employees.
Philippines for the calendar year, income
taxes of which has been correctly withheld Distinguished from Non-Filing (RMC 1-
by the said employer shall not be required 2003)
to file an annual income tax return.
The certificate of withholding (BIR Form
Substituted Filing Non-Filing
No. 2316) filed by the respective
employers, duly stamped 'received' by the An individual taxpayer Applicable to certain
BIR, shall be tantamount to the substituted although required types of individual
filing of income tax returns by said under the law taxpayers who are not
employees
to file his income tax required under the law
Q2: How about Mr. S? Is he personally required return, will no longer to file an income tax
to file an annual income tax return? have to personally file return. An example is
A2: No. Mr. S is not personally required to file his own income an employee
his annual income tax return because he is tax return but instead whose pure
exempted from income tax for the reason the employer‘s annual compensation income
that his annual gross income does not information return does not exceed
exceed P250,000. filed will be P60,000, and has only
considered as the one
(ii) Substituted filing ―substitute‖ income employer for the
tax return of the taxable year and
An individual may be qualified for substituted employee inasmuch as whose tax withheld is
filing if the following conditions are met:
the equivalent to his tax
 The employee receives purely compensation information in the due.
income (regardless of amount) during the employer‘s return is
taxable year; exactly the same
 The employee receives the income only from information contained
one employer in the Philippines during the in
taxable year; the employee‘s return.
 The amount of tax due from the employee
at the end of the year equals the amount of
tax withheld by the employer; b. Corporate Returns
 The employee's spouse also complies with
all three (3) conditions stated above; Corporate ITR: The ITR shall consist of a
 The employer files the annual information maximum of four (4) pages in paper form or
return (BIR Form No. 1604-CF) electronic form, be filed by the president, vice
president or other principal officer, shall be
sworn to by such officer and by the treasurer or
Note: Married individuals, who do not derive
assistant treasurer, and shall only contain the
income purely from compensation, shall file a
following information:
return for the taxable year to include the income
(1) Corporate profile and information; (2) Gross
of both spouses, but where it is impracticable for
sales, receipts or income from services
the spouses to file one return, each spouse may
rendered, or conduct of trade or business,
file a separate ITR.
except income subject to final tax as provided
under this Code; (3) Allowable deductions under
Once qualified, employees are no longer this Code; (4) Taxable income as defined in
required to file an ITR.

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Section 31 of this Code; and, (5) Income tax In case the corporation is entitled 2018
to a tax
due and payable. creditor refund of the excess estimated quarterly
Who are required: income taxes paid, the excess amount shown on
its final adjustment return may be carried over
 Domestic Corporations (including taxable and credited against the estimated quarterly
partnerships); and income tax liabilities for the taxable quarters of
 Resident Foreign Corporations. the succeeding taxable years(Sec.76, NIRC).

Who shall file the return Options when quarterly tax payments
(quarterly/annual) of the Corporation? made during the year is not equal to the
total tax due:
The return shall be filed by the:
 President; There is still a There were
 Vice-president or balance excess payments
 Other principal officer, and shall be Option 1: Carry
sworn to by such officer and by the over the excess to
treasurer or assistant treasurer be credited against
the to taxable
i. Quarterly income Tax quarters of the
Pay the balance still
succeeding taxable
due
Every corporation subject to the tax herein years
imposed, except foreign corporations not Option2: Be
engaged in trade or business in the Philippines credited or
(Sec.75, NIRC) refunded with the
excess
Manner and Procedure
Irrevocability Rule
In duplicate, a true and accurate quarterly
income tax return and final or adjustment return Once the option to carry-over and apply the
in accordance with the provisions of Chapter XII excess quarterly income tax against income tax
of this Title. due for the taxable quarters of the succeeding
taxable years has been made, such option shall
ii. Final Adjustment Return be considered irrevocable for that taxable period
and no application for cash refund or issuance of
Every corporation liable to tax under Section 27 a tax credit certificate shall be allowed therefor.
shall file a final adjustment return covering the
total taxable income for the preceding calendar When does it apply?
or fiscal year.
1. There was an excess credit;
Manner and Procedure 2. The taxpayer opted to carry over the excess
credit; or
If the sum of the quarterly tax payments made 3. The taxpayer failed to signify his intention to
during the said taxable year is not equal to the refund said excess credit.
total tax due on the entire taxable income of
that year, the corporation shall either: What is the effect of such option?

(A) Pay the balance of tax still due; or Taxpayer shall be barred from applying the
(B) Carry-over the excess credit; or excess credit for refund.
(C) Be credited or refunded with the excess
amount paid, as the case may be. (This topic shall be lengthily discussed in Tax
Remedies)

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iii.) When and where to file Income Tax Granting of extension of filing returns
Return of Individuals and Corporations
The Commissioner may, in meritorious cases,
Individuals: grant a reasonable extension of time for filing
returns of income (or final and adjustment
On or before the fifteenth (15th) day of April of returns in case of corporations), subject to the
each year covering income for the preceding provisions of Section 56 of this Code. (Sec. 53 of
taxable year. (Sec. 51 [C] of NIRC) NIRC)

Those deriving mixed income or purely Installment Payment of Tax Due

business/professional income, or other income
must file his quarterly ITR (BIR Form 1701Q) When the tax due is in excess of Two thousand
and Annual ITR (BIR Form 1701) as follows: pesos (P2,000.00), the individual may elect to
pay the tax in two (2) equal installments, in
Period Due Date for Filing Return which case, the first installment shall be paid at
st On or before May 15 of the the time the annual income tax return is filed
1 Qtr and the second installment paid on or before
current taxable year (CTR)
On or before August 15 of October 15 following the close of the calendar
2ndQtr year.
CTR
On or before November 15 of
3rdQtr If any installment is not paid on or before the
CTR
On or before the fifteenth date fixed for its payment, the whole amount of
(15th) day of April of each year the unpaid tax becomes due and payable,
Annual ITR together with the delinquency penalties to be
covering income for the
preceding taxable year. reckoned on the original date when the tax is
(Sec.74, NIRC) required to be paid. (Section 11, RR 8-2018)

Changes made in the TRAIN Law: Where to File and Pay Income Tax Returns
The due date for the filing was moved to May 15
from the previous April 15 deadline No payment returns - Revenue District Office
Corporations: (RDO) where the taxpayer payer is registered.

Quarterly Income Tax Return (BIR Form With payment returns – Authorized Agent
1702Q) Bank (AAB) of the RDO where the taxpayer is
registered.
The corporate quarterly ITR shall be filed within
sixty (60) days following the close of each of Pay as you File
the first three (3) quarters of the taxable
year(Sec.75, NIRC). The payment of taxes is simultaneous with the
filing of returns(pay as you file) except in cases
Final Adjusted Return (BIR Form 1702) of those who are required thru Electronic Filing
and Payment System (eFPS).
The final adjusted return (annual ITR) on the
other hand shall be filed on or before the 15th For Large Taxpayers:
day of the 4th month following close of the
taxpayer's taxable year(Sec.76,NIRC) All large taxpayers are required to file their
returns using Electronic Filing and Payment
Note: f due date falls on a Saturday, Sunday or System (eFPS).
a holiday, the act of filing and payment of the
tax due shall be done on the next business day.
(RMC 65-2016)
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Who are Large Tax Payers 1. Corporation Contemplating 2018
Dissolution
(Whole or in part or Reorganization;
For the purpose of this Section, 'large including
taxpayer' means a taxpayer who satisfies any 2. A corporation which has been notified of
of the following criteria: possible involuntary dissolution by the
a) Value-Added Tax (VAT) - Business Securities and Exchange Commission
establishment with VAT paid or payable of at
least P200,000 for any quarter of the What should be filed?
preceding taxable year; 1. Render a correct return (short period
b) Excise tax - Business establishment with income tax return) to the Commissioner that
excise tax paid or payable of at least is
P1,000,000 for the preceding taxable year; 2. Verified under oath
c) Income Tax - Business establishment with 3. Setting forth the terms of such resolution or
annual income tax paid or payable of at plan and such other information as the
least P1,000,000 for the preceding taxable Secretary of Finance, upon recommendation
year; and of the commissioner, shall, by rules and
d) Withholding tax - Business establishment regulations, prescribe.
with withholding tax payment or remittance
of at least P1,000,000 for the When to file?
e) preceding taxable year.
f) Percentage tax– Any taxpayer with Within 30 days after the adoption by the
percentage taxes paid or payable of at least corporation of a resolution or plan for its
P 200,000 per quarter for the preceding dissolution, or for the liquidation of the whole or
year . any part of its capital stock:
g) Documentary Stamp Tax – Any taxpayer
with aggregate annual documentary stamp What must be secured prior to the
taxes of at least Php 1 million. (Sec. 5, R.R.17 issuance of Certificate of Dissolution or
-2010) Reorganization given by the Securities
Exchange Commission (SEC)?
Penalties for Non -Filing of Returns
Should the taxpayer fail to file and/or pay on Secure a certificate of tax clearance from
time the penalties that will be imposed on top of the Bureau of Internal Revenue which certificate
the basic tax due will be as follows: shall be submitted to the Securities and
 25% surcharge on the basic tax due Exchange Commission
 12% interest per annum on basic tax due
(R.R. 21-2018) c. Return on Capital Gains Realized from
 Compromise penalty for failure to file sale of shares of stock and real estate
(Revenue Memorandum Order 7-2015)
Capital Gains Tax -Realized from Sale of
Penalties on amended returns
Shares of Stock not Traded in the Local
Thus, in an amendment of a return where an
Stock Exchange (Sec. 51[C][2] and Sec. 52
additional tax is due per amended return, 25%
[D] of NIRC)
penalty and 12% interest shall be imposed
based on the additional tax to be paid
Applicable to whom:
iv. Return of Corporation Contemplating
Dissolution or Reorganization. (Sec. 52 [C] Individual/Corporation deriving capital gains
of NIRC) from the sale or exchange of shares of stock not
traded thru a local stock exchange
Applicable to whom:

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What should be filed: Who are not required:
However, filing of the return is no longer
BIR Form 1707 -Capital Gains Tax Return for required when the real property transaction
Onerous Transfer of Shares of Stocks Not involves the following:
Traded Through the Local Stock Exchange
- it is not classified as a capital asset
BIR Form 1707A -Annual Capital Gains Tax - not located in the Philippines
Return for Onerous Transfer of Shares of Stock - disposition is gratuitous
Not Traded Through the Local Stock Exchange - disposition is pursuant to the Comprehensive
Agrarian Reform
When due to be filed and paid?
When is it due to be filed and paid
Individual:
 Within thirty (30) days after each - Filed within thirty (30) days following each
transaction (BIR FOR and sale, exchange or disposition of real property
 a final consolidated return on or before
April 15of each year covering all stock - In case of installment sale, the return shall
transactions of the preceding taxable be filed within thirty (30) days following the
year(BIR Form 1707A); receipt of the 1st downpayment and within thirty
(30) days following each subsequent installment
Corporation: payment
 Within thirty (30) days after each
transactions and a - One return is filed for every transfer
 Final consolidated return of all transactions document regardless of the number of each
during the taxable year on or before the property sold, exchanged or disposed of.
fifteenth (15th) day of the fourth (4th)
month following the close of the taxable 8. Withholding of Taxes
year.
a. Concept of withholding taxes
Capital Gains Tax Return for Onerous
Transfer of Real Property Classified as  The concept of a withholding tax on income
Capital Asset (both Taxable and Exempt) – obviously and necessarily implies that the
(Sec.51[C]) amount of the tax withheld comes from the
income earned by the taxpayer. Since the
Applicable to whom: amount of the tax withheld constitutes
income earned by the taxpayer, then that
This return is filed by all persons (natural or amount manifestly forms part the taxpayer‘s
juridical) whether resident or non- gross receipt. Because the amount withheld
resident, including Estates and Trusts, who belongs to the taxpayer, he can transfer its
sells, exchanges, or disposes of a real property ownership to the government in payment of
located in the Philippines classified as capital his tax liability. (China Banking Corporation vs.
asset as defined under Sec. 39 (A)(1) of RA CA, G.R. No. 146749, June 10, 2003).
8424 for the purpose of securing a Tax
Clearance Certificate to effect transfer of  The incidence and burden of taxation fall on
ownership (title) of the property from the seller the same entity, the statutory taxpayer.
to the buyer. The burden of taxation is not shifted to the
withholding agent who merely collects, by
What should be filed: withholding, the tax due from income
BIR Form 1706 - Capital Gains Tax Return for payments to entities arising from certain
Onerous Transfer of Real Property Classified as transactions and remits the same to the
Capital Asset government. (Asia International Auctioneers,

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 Purple Notes
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Inc. (AIA) vs. Commissioner of Internal Revenue 2018to the
transactions and remits the same
(CIR), G.R. No. 179115, September 26, 2012) government.

 Withholding tax is a method of collecting Due to this difference, the deficiency VAT and
income tax in advance. "In the operation of excise tax cannot be "deemed" as withholding
the withholding tax system, the payee is taxes merely because they constitute indirect
the taxpayer, the person on whom the tax taxes. (LG Electronics Philippines, Inc. vs. CIR,
is imposed, while the payor, a separate December 3, 2014 penned by J. Leonen).
entity, acts no more than an agent of the
government for the collection of the tax in a) Kinds of withholding taxes
order to ensure its payment. (LG Electronics
Philippines, Inc. vs. CIR, December 3, 2014 1) Withholding tax at source (Sec. 34K, 57-
penned by J. Leonen) 59, NIRC);
i) Final withholding tax
The duty to withhold is different from the duty ii) Creditable withholding tax
to pay income tax. The revenue officers 2) Withholding tax on employer‘s
generally disallow the expenses claimed as compensation or wages (Sec. 78-83,
deduction from gross income, if no withholding NIRC);
of tax as required by law or the regulations was 3) Withholding of value-added tax (Sec
withheld and remitted to the BIR within the 114c, NIRC); and
prescribed dates. (MAMALATEO, Philippine Income 4) Withholding of percentage tax (Sec.
Taxation, 2010, p.380) 116-128, NIRC).
Purpose: The withholding tax system was Parties to Withholding
devised for three primary reasons:
 To provide the taxpayer a convenient Withholding Agent – the buyer/payor who is
manner to meet his probable income tax required to withhold a certain portion of its
liability; payment to its vendor/supplier/payee which
 To ensure the collection of income tax shall represent the income tax paid on the
which can otherwise be lost or substantially vendor/supplier/payee‘s behalf
reduced through failure to file the
corresponding returns; and Payee – persons withheld a portion of its
 To improve the government‘s cash flow. income which represent his payment of taxes
(LG Electronics Philippines, Inc. vs. CIR, December 3,
due paid by the withholding agent on payee‘s
2014 penned by J. Leonen)
behalf.
Indirect taxes v. Withholding Tax
Requirement for Deductibility
In indirect taxes, the incidence of taxation falls
Any income payment which is otherwise
on one person but the burden thereof can be
deductible under the Code shall be allowed as a
shifted or passed on to another person, such as
deduction from the payor's gross income only if
when the tax is imposed upon goods before
it is shown that the income tax required to be
reaching the consumer who ultimately pays for
withheld has been paid to the Bureau in
it.
accordance with Secs. 57 and 58 of the Code.
On the other hand, in case of withholding taxes,
A deduction will also be allowed in the following
the incidence and burden of taxation fall on the
cases where no withholding of tax was made:
same entity, the statutory taxpayer. The
burden of taxation is not shifted to the
a. The payee reported the income and the
withholding agent who merely collects, by
withholding agent/taxpayer pays the tax,
withholding, the tax due from income
including the interest incident to the failure
payments to entities arising from certain

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to withhold the tax, and surcharges, if  The withholding agent is the agent both of
applicable, at the time of the original audit the government and of the taxpayer, and
and investigation; that the withholding agent is not an ordinary
government agent
b. The recipient/payee failed to report the  The liability of the withholding agent is
income on the due date thereof, but the direct and independent from the liability of
withholding agent/taxpayer pays the tax, the income recipient
including the interest incident to the failure
to withhold the tax and surcharges, if The law sets no condition for the personal
applicable, at the time of the original audit liability of the withholding agent to attach. The
and investigation; reason is to compel the withholding agent to
withhold the tax under all circumstances. In
c. The withholding agent erroneously effect, the responsibility for the collection of the
underwithheld the tax but pays the tax as well as the payment thereof is
difference between the correct amount and concentrated upon the person over whom the
the amount of tax withheld, including the Government has jurisdiction. (Commissioner vs.
interest,incident to such error, and Procter & Gamble PMC and CTA, G.R. No. 66838, Dec.
surcharges, if applicable, at the time of the 2, 1991)
original audit and investigation.
Under the withholding system, however, the
Effect of Failure of a Withholding Agent to agent-payor becomes a payee by fiction of law.
Collect and Remit Tax His (agent) liability is direct and independent
from the taxpayer, because the income tax is
Any person required to withhold, account for, still imposed on and due from the latter. The
and remit any tax imposed by the Tax Code or agent is not liable for the tax as no wealth
who willfully fails to withhold such tax, or flowed into him — he earned no income. The
account for and remit such tax, or aids or abets Tax Code only makes the agent personally liable
in any manner to evade any such tax or the for the tax arising from the breach of its legal
payment thereof, shall, in addition to interest, duty to withhold as distinguished from its duty
surcharges and compromise penalties, be liable to pay tax since: "the government's cause of
upon conviction to a penalty equal to the total action against the withholding agent is not for
amount of the tax not withheld, or not the collection of income tax, but for the
accounted for and remitted. (Sec. 251, NIRC) enforcement of the withholding provision of
Section 53 of the Tax Code, compliance with
Time of Withholding which is imposed on the withholding agent and
not upon the taxpayer."(Rizal Commercial Banking
The obligation of the payor to deduct and Corporation vs. Commissioner of Internal
withhold the tax arises at the time an income Revenue,G.R. No. 170257, September 7, 2011)
payment is:
b. Withholding of Final Tax of Certain
 Paid, or Income
 Payable, or
 Accrued or recorded as an expense or asset, The amount of income tax withheld by the
whichever is applicable, in the payor‘s books withholding agent is constituted as a full and
(Section 2.57.4, RR No. 2-98, as amended by Section final payment of the income tax due from
4, RR No. 12-2001) the payee on the said income.

Nature of liability of withholding agent The liability for payment of the tax rests
primarily on the payor as a withholding agent. In
 The obligation to withhold is compulsory, as
case of the withholding agent's failure to
it makes such withholding agent personally
liable for payment of the tax
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 Purple Notes
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withhold the tax or in case of under-withholding, of actual payment by payee-refund2018
claimant to
the deficiency tax shall be collected from him the government itself and are declared under
perjury.
The finality of the withholding tax is limited only
to the payee‘s income tax liability on the Thus, this Court sees no reason why it should
particular income. It does not extend to the not rule the same way. (Philippine Airlines, Inc. v.
payee‘s other tax liability on said income, such Commissioner of Internal Revenue, G.R. Nos. 206079-
as when the said income is further subject to a 80, January 17, 2018, penned by [Link])
percentage tax, such as gross receipts tax in the
case of a bank. (Sec. 2.57, R.R. No. 2-98) c. Withholding of Creditable Tax at Source

Income subject to final withholding tax: Taxes withheld on certain income payments are
1. Capital gains on sale of real property held as intended to equal or at least approximate
capital asset; the tax due from the payee on said income.
2. Capital gains on sale of shares of stocks not
listed and traded through the local stock The income recipient is still required to file
exchange; an income tax return, as prescribed in Sec.
3. Tax on Income of Non Resident Alien Not 51 and 52, to report the income and/or pay the
Engaged in Trade or Business difference between the tax withheld and the tax
4. Tax on Non Resident Foreign Corporation due on the income. (Sec. 2.57, R.R. No. 2-98).
5. Tax on Passive Investment income:
a. Dividends Income subject to creditable withholding
b. Royalties tax
c. Rentals
d. Interest General Rule: All income subject to regular
e. Prizes and Winnings income tax rates is subject to creditable
withholding tax.
Income subjected need not be reported in
Income Tax Return as final withholding tax Final Withholding Tax (FWT) and
being a full and final payment of the tax on the Creditable Withholding Tax (CWT)
income. distinguished

Claiming Refund for Final Tax Withheld Creditable Final Withholding

Withholding Tax Tax
Payee is required to Tax withheld is full and
This Court notes that the case of Commissioner
declare the income at final payment of income
of Internal Revenue v. Philippine National Bank gross in the income tax tax due. Thus payee is
involves a refund of creditable withholding tax return. no longer needed to
and not of final withholding tax. declare taxes withheld