Person - Orporation: Income Tax

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Case Summary Doctrine
INCOME TAX
Section 22
(A) to (I), (A) PERSON – individual, trust, estate, corporation - ITEC
(Z), (GG), (B) CORPORATION
and (HH), 1. Partnership – no matter how created / organized
Tax Code 2. Joint stock companies
3. Joint accounts/ associations
4. Insurance companies
Does not include:
- General professional partnerships – partnerships formed by persons for the sole purpose of
exercising their common profession, no part of their income of which is derived from
engaging in any trade or business
- Joint venture or consortium – formed or the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal, and other energy operations pursuant to an
operating or consortium agreement under a service contact of government
(C) DOMESTIC – corporation created or organized in the Philippines and under its laws
(D) FOREIGN – corporation which is not domestic
(E) NON-RESIDENT CITIZEN means:
A citizen of the Philippines
1. Who establishes with satisfaction of the Commission the fact of his physical presence
abroad with a definite intention to reside therein
2. Who leaves the Philippines during the taxable year to reside abroad with a definite
intention to reside therein
3. Who works and derives income from abroad and whose employment thereat requires him
to be physically present abroad most of the time during the taxable year
4. A citizen who has been previously considered as nonresident citizen and who arrives in
the Philippines at any time during the taxable year to reside permanently in the Philippines
shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in
the Philippines with respect to his income d1erived from sources abroad until the date of
his arrival in the Philippines
5. The taxpayer shall submit PROOF to the commission to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the
case may be for purposes of this Section.
(F) RESIDENT A. – individual whose residence is within the Philippines, and who is not a citizen
thereof
(G) NONRESIDENT A. – individual who is not within the Philippines, and who is not a citizen thereof
(H) RESIDENT FOREIGN CORPORATION – foreign corporation engaged in trade/business within
the Philippines
(I) NONRESIDENT FOREIGN CORPORATION – foreign corporation not engaged in business
within the Philippines
(Z) ORDINARY INCOME
- includes GAIN from the sale or exchange of property which is not a capital asset or property
described in Section 39(A)(1)
 CAPITAL ASSETS – property held by the taxpayer (whether connected with his trade /
business) but does NOT include :
o Stock in trade of the taxpayer
o Other property of a kind which would properly be include in the inventory of the TP if
on hand at the close of the taxable year
o Property held by TP primarily for sale to customers in the ordinary course of his
trade or business
o Property used in the trade or business of a character which is subject to the
allowance for depreciation provided in Subsection (F) of Section 34
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o Real property used in the trade or business of TP

(GG) STATUTORY MINIMUM WAGE – refers to the rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by Bureau of Labor and Employment Statistics of the DOLE
(HH) MINIMUM WAGE EARNER – refers to a worker in the private sector paid in the statutory minimum
wage / to an employee in the public sector with compensation income of not more than the statutory
minimum wage in the non-agricultural sector where he/she is assigned
Sections 25 TAX ON NONRESIDENT ALIEN INDIVIDUALS

(A)(1), 31, A. Nonresident alien engaged in trade/business WITHIN THE PHILIPPINES
and 39 (A), 1. In general TREATMENT– a NRAETB in the Philippines is subject to an income tax in the same
Tax Code manner as an individual citizen and a resident alien individual on taxable income received
from all sources within the Philippines
2. Who? A NRA individual who shall come to the Philippines and stay therein for an aggregate
period of more than 180 days during any calendar year shall be deemed a nonresident alien
doing busines sin the Philippines, Sec 22(G) of this Code notwithstanding
RA 10754
Web designer, living in the Philippines, but I design web pages for clients abroad as they operate
solely from abroad – citizen/alien
GR: it is a necessary requirement that work necessitated that you stay outside most of the year, July 1 
if you are designated as an OFW, securing a license and there’s pre-set outside the PH, you become a
non resident citizen on day 1
1. Definitions
Garrison Petitioners are US Citizens who entered the Revenue Regulations No. 2 Section 5 provides: “An
v. CA country through the Philippine Immigration Act of alien actually present in the Philippines who is not a
(1990) 1940 and are employed in the US Naval Base in mere transient or sojourner is a resident of the
Olongapo City. They earn no Philippine source Philippines for purposes of income tax.”
income and it is also their intention to return to
the US as soon as their employment has Whether or not an alien is a transient or not is further
ended. determined by his: “intentions with regards to the
length and nature of his stay. A mere floating
The BIR claimed that they were resident aliens intention indefinite as to time, to return to another
and required them to file their returns. country is not sufficient to constitute him as
transient.”
Petitioners refused stating that they were not
resident aliens but only special temporary If he lives in the Philippines and has no definite
visitors. They also claimed exemption by virtue intention as to his stay, he is a resident.”
of the RP-US Military Bases Agreement, which
states that “a national of the United States Further, if the alien is in the Philippines for a definite
serving in or employed in the Philippines in purpose which by its nature may be promptly
connection with construction, maintenance, accomplished, he is considered a transient. However,
operation or defense of the bases and reside in if an extended stay is necessary for him to
the Philippines by reason only of such accomplish his purpose, he is considered a resident,
employment is only liable for tax on Philippine “though it may be his intention at all times to return to
sources of income.” his domicile abroad when the purpose for which he
came has been consummated or abandoned.
WON PETITIONERS CAN BE CONSIDERED
RESIDENT ALIENS  YES Notwithstanding the fact that the Petitioners are
resident aliens who are generally taxable, their class
WON PETITIONERS MUST STILL FILE ITR is nonetheless exempt from paying taxes on income
NOTWITHSTANDING THE EXEMPTION  derived from their employment in the naval base by
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YES virtue of the RP- US Military bases agreement.
Since they are RESIDENT ALIENS – they are Even though the petitioners are exempt from paying
required to file ITR for BIR to assess income taxes from their employment in the Naval Base, they
derived from PH sources can be taxed. They must nevertheless file an ITR. The Supreme Court
are only exempted from income derived from held that the filing of an ITR and the payment of taxes
employment in US bases are two distinct obligations. While income derived
from employment connected with the Naval Base is
exempt, income from Philippine Sources is not. The
requirement of filing an ITR is so that the BIR can
determine whether or not the US National should be
taxed.
RR 1-79 Section 22 (E) of the Tax Code defines a non-resident citizen as any of the following:
(Section 2)
1. A Philippine citizen who establishes to the satisfaction of the Bureau of Internal Revenue (BIR)
“Who are Commissioner the fact of his physical presence abroad with a definite intention to reside therein.
non- 2. A Philippine citizen who leaves the country during the taxable year to reside abroad, either as an
resident immigrant or for employment on a permanent basis.
citizens” 3. A Philippine citizen who works and derives income from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the taxable year.
4. A person previously considered a non-resident citizen and who arrives in the Philippines at any
time during the taxable year to reside permanently in the country shall likewise be treated as a
non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of his arrival in the Philippines.
The forgoing Tax Code provision mirrors the definitions under Section 2 of Revenue Regulations (RR)
No. 1-79 dated Jan. 8, 1979. Under the RR, a non-resident citizen is one who establishes to the
satisfaction of the Commissioner the fact of his physical presence abroad with the definite
intention to reside therein, and shall include any Filipino who leaves the country during the
taxable year as an immigrant, a permanent employee abroad, or a contract worker.
Immigrant – one who leaves the PH to reside abroad as an immigrant for which a foreign visa is
secured
Permanent employee abroad – one who leaves the PH to reside abroad for employment on a more or
less permanent basis
Contract worker – one who leaves the Philippines on account of a contract of employment which is
renewed from time to time under such circumstance as to require him to be physically present abroad,
most of the time (not less than 183 days)
RR 5-01 Revokes the requirement for non-resident citizens, overseas contract workers, and seamen to file
information returns on income derived from sources outside the Philippines beginning taxable year 2001.
BIR Ruling Technoserve International Co., Inc. (TIC), is a According to Sec 22(E)(3) of the Tax Code of 1997, a
33-00 domestic foreign corporation engaged in non- resident citizen is a citizen of the Philippines
rendering specialty and technical services for who:
“most of overseas or domestic projects in the areas of 1. works and derives income from abroad and
the time” engineering, procurement service and 2. whose employment thereat requires him to
construction management and other related be physically present abroad most of the
fields. time during the taxable year.
TIC has a Secondment Agreement with its main MOST OF THE TIME  At least 183 days abroad
client and parent company, JGC Corp. which is The phrase "most of the time" which is used in
based in Japan. determining when a citizen's physical presence
abroad will qualify him as non-resident, shall mean
Under this agreement, TIC employees shall be that the said citizen shall have stayed abroad for at
assigned or seconded to Japan or other site least 183 days in a taxable year.
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offices to work for JGC’s clients but will not lose

status of employment under TIC. Since TIC All employees whose services are rendered abroad
shall pay the salaries of the employees for being seconded or assigned for at least 183 days
abroad, Ms. Baria, VP and Admin. Mngr. of TIC, may fall under the first category and are thus exempt
requested the BIR to clarify or rule on the from payment of Philippine income tax.
proper tax classification of TIC employees
assigned abroad. The same exemption applies to an overseas
contract worker but as such worker, the time
WON TIC EMPLOYEES WHO ARE ASSIGNED spent abroad is not material for tax exemption
OVERSEAS FOR AT LEAST 183 DAYS IN A purposes. The only requirement is that the
TAXABLE YEAR WERE CLASSIFIED AS employment contract be pass through and be
NON-RESIDENTS  YES registered with the POEA.
Sec 23(C) of NIRC – an individual citizen of the

Philippines who is working and deriving income
from abroad as an overseas contract worker is
taxable only on income from sources within the
Philippines.
BIR Ruling Jose Borromeo, from Houston Texas wrote a Section 23 of the Philippine Tax Code espouses the
DA 095-05 letter to the BIR requesting to apply for source rule of income taxation, except for resident
Philippine Dual citizenship under RA. 9225 and citizens and domestic corporations that remain
he asks if he is required to pay taxes for income taxable on their worldwide income.
earned in the U.S.He was neither a citizen nor a
resident of the Philippines at the time of this Nonresident citizens and resident aliens are taxed
inquiry. only on their Philippine-sourced income. Under the
inherent limitation of territoriality of taxation, a state
Not citizen can only tax properties, activities or services within its
Not resident at time of inquiry territory. If the flow of wealth proceeded from U.S.
territory enjoying the protection accorded by the U.S.
WON BORROMEO IS REQUIRED TO PAY Government or obtained by a person enjoying that
INCOME TAXES FOR INCOME EARNED IN protection, the situs of the source of income is the
THE US  NO US.
In consideration of such protection, the flow of wealth

should share the burden of the supporting
government which is the U.S. Government. Since
income was derived without the Philippines, the situs
of the income is without the Philippines; hence, the
Philippine Government has no jurisdiction over
income derived outside the Philippines by
nonresident citizens not engaged in trade or business
in the Philippines. “
Since you will be a nonresident citizen, [after

being dual citizen] you will not be required to pay
Philippine tax for income earned in the United
States.”
Sec 5 & 6, An alien who has acquired residence in the Philippines – retains his status until he abandons the
RR 2 same and actually departs from the Philippines
A mere intention to change his residence – does not change his status from resident alien to non-
resident alien. An alien who has acquired a residence is taxable as resident for the remainder of his stay
in the PH
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CORPORATIONS
One person corporation v. Sole Proprietorship
1. Different tax implications
Rates : flat 30% rate
Lesser than 7.5 – better sole proprietorship
Greater than 7.5 million – better than corporation
2.MCIT – only applies to one person corporation
3. Deductions
4. Donations – threshold for corporations are higher than individual
Domestic Corporations have a fixed 30% regular income tax rate while sole proprietors have the
option to be taxed either at an 8% preferential tax rate or using the graduated tax table.
5. Optional standard deduction threshold in OPC and sole proprietorship
As for optional standard deductions, corporations can deduct their direct costs first before deducting a
fixed 40% OSD in lieu of itemized deductions while for sole proprietors, the tax base for OSD is their
gross revenues. This means that corporations may have a lower tax payable compared to their sole
proprietor counterparts.
AFISCO AFISCO and 40 other non-life insurance A pool is considered a corporation for taxation
Insurance companies entered into reinsurance treaties purposes. Citing the case of Evangelista v. CIR, the
v. CA (Agreement) with Munich, a non- resident Court held that Sec. 24 of the NIRC covered these
(1999) foreign insurance corporation, [NRFC] to cover unregistered partnerships and even associations
all their insurance policies over machinery or joint accounts, which had no legal
erection, breakdown and boiler explosion. Under personalities apart from individual members.
the Agreement, AFISCO and 40 other non-life
insurance companies should form a pool for the The ceding companies entered into a Pool
purpose of contracting with Munich. The said Agreement or an association that would handle all
“pool” of insurance companies was assessed the insurance businesses covered under their quota-
deficiency corporate taxes. share reinsurance treaty and surplus reinsurance
treaty with Munich. The following unmistakably
The “pool” contends that indicates a partnership or an association covered by
(I) the reinsurance policies were made by Section 24 of the NIRC:
them individually, a. The pool has a common fund, consisting of
(II) their liability was limited to the extent of money and other valuables that are deposited in
their share, the name and credit of the pool. This common
(III) there is no common fund, fund pays for the administration and operation
(IV) the executive board does not exercise expenses of the pool.
control over the funds and b. The pool functions through an executive
(V) it could not derive income for itself. board, which resembles the board of
directors of a corporation, composed of one
WON THE “POOL” IS A TAXABLE ENTITY  representative for each of the ceding
YES companies.
c. True, the pool itself is not a reinsurer and does
Section 22(B) of NIRC: not issue any insurance policy; however, its
(B) The term 'corporation' shall include work is indispensable, beneficial and
partnerships, no matter how created or economically useful to the business of the
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ceding companies and Munich, because without

organized, joint-stock companies, joint accounts it they would not have received their premiums.
(cuentas en participacion), association, or The ceding companies share in the business
insurance companies, but does not include ceded to the pool and in the expenses
general professional partnerships and a joint according to a Rules of Distribution annexed to
venture or consortium formed for the purpose of the Pool Agreement. Profit motive or business
undertaking construction projects or engaging in is, therefore, the primordial reason for the
petroleum, coal, geothermal and other energy pools formation.
operations pursuant to an operating consortium
agreement under a service contract with the The fact that the pool does not retain any profit or
Government. 'General professional partnerships' income does not obliterate an antecedent fact, that of
are partnerships formed by persons for the sole the pool being used in the transaction of business for
purpose of exercising their common profession, profit. It is apparent, and petitioners admit, that their
no part of the income of which is derived from association or coaction was indispensable to the
engaging in any trade or business. transaction of the business. x x x If together they
have conducted business, profit must have been the
Different corporations magkakasama object as, indeed, profit was earned. Though the
profit was apportioned among the members, this is
only a matter of consequence, as it implies that profit
actually resulted.
Pascual v. Pascual and Dragon bought 2 sets of parcels 2 ELEMENTS IN FORMING A PARTNERSHIP:
CIR (1988) of land. They sold the 1st set (consists of 2 1. Agreement to contribute money, property, or
parcels of land) in 1968 and the 2nd set industry to a common fund [M.P.I]
“Sharing of (consists of 3 parcels of land) in 1970. Later 2. Intention of dividing profits among
returns” on, they paid the corresponding capital gains themselves. [Divide P]
taxes in 1973 and 1974 by availing the tax
amnesties on the said years. There is no evidence that Pascual and Dragon
entered into an agreement to contribute money,
Different individuals magkaksama property or industry to a common fund, and that they
intended to divide the profits among themselves.
However, the CIR assessed them for tax Basically, they did not intend to form a partnership.
deficiencies saying that they formed an
unregistered partnership and must pay the SHARING OF RETURNS  NOT SUFFICIENT TO
corresponding corporate income tax therefor. ESTABLISH PARTNERSHIP
Pascual and Dragon brought the matter to the The sharing of returns does not in itself establish
CTA, which affirmed the decisions of the CIR. a partnership whether or not the persons sharing
therein have a joint or common right or interest in the
WON PASCUAL AND DRAGON ARE LIABLE property. There must be a clear intent to form a
TO PAY CORPORATE INCOME TAX  NO partnership, the existence of a juridical
personality different from the individual partners,
and the freedom of each party to transfer or assign
the whole property. Absence the formation of a
partnership, an entity cannot be liable for the
corresponding taxes therefor
Although there was clear evidence of co-ownership

in this case, the two isolated transactions of
purchasing lots and subsequently selling them
do not make them partners. They shared in the
gross profits as co-owners and paid their CGT on
their net profits and availed of the tax amnesty. Also,
even if they did make an unregistered partnership,
there is the question of from whom the CIR will
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collect from since the partnership does not have any

assets to speak of.
Obillos v. Jose Obillos Sr. transferred 2 Greenhills lots to Jose Obillos, Jr. testified that they had no intention
CIR (1985) his four children (petitioners), who hold the to form an unregistered partnership. They were
properties as co-owners to build their co-owners only.
“co-owners residences.
To consider them partners would obliterate the
onli” distinction between a co-ownership and a
After more than a year, the siblings resold the partnership.[ A co-owner is an individual or group
lots and derived profit therefrom amounting to that shares ownership in an asset with another
Php 134, 341.88 and correspondingly paid individual or group. Each co-owner owns a
capital gains tax. percentage of the asset, although the amount may
vary according to the ownership agreement.]
*resold the properties and derived profit
They were not engaged in any joint venture by
reason of that isolated transaction. Original purpose
The CIR held them liable for corporate income
was to divide the lots for residential purposes.
tax as well, arguing that they formed an
However, later on they found out that it was not
unregistered partnership to derive those profits.
feasible to build their residences because of the high
cost of construction, then they had no choice but to
WON THE PETITIONERS FORMED AN
resell the same & to dissolve the co-ownership. The
UNREGISTERED PARTNERSHIP OR JOINT
division of profit was merely incidental to the
VENTURE  NO
dissolution of the co-ownership.
Recall partnership law: Civil Code, Art. 1769(3) →

“the sharing of gross returns does not itself establish
a partnership…”
Ona v. CIR Julia Buñales died leaving as HEIRS her For tax purposes, the co-ownership of inherited
(1972) surviving spouse, Lorenzo Oña and her 5 properties is automatically converted into an
children. unregistered partnership the moment the said
“co- common properties and/or the incomes derived
ownership A civil case was instituted for the settlement therefrom are used as a common fund with intent to
automatical of her state, in which Oña was appointed produce profits for the heirs in proportion to their
ly administrator and later on the guardian of the respective shares in the inheritance as determined in
converted three heirs who were still minors when the a project partition either duly executed in an
to project for partition was approved. extrajudicial settlement or approved by the court in
unregistere the corresponding testate or intestate proceeding.
d Although the project of partition was
partnership approved by the Court, no attempt was made Scenario #1
” –subject to divide the properties therein listed. Instead, Project of partition, then distribution
to normal the properties remained under the management The reason is simple. From the moment of such
corporate of Lorenzo who used said properties in business partition, the heirs are entitled already to their
income tax by leasing or selling them and investing the respective definite shares of the estate and the
income derived therefrom and the proceeds incomes thereof, for each of them to manage and
from the sales thereof in real properties and dispose of as exclusively his own without the
securities. intervention of the other heirs, and, accordingly, he
As a result, petitioners' properties and becomes liable individually for all taxes in
investments gradually increased. connection therewith.
Instead of actually distributing the estate of the Scenario #2
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deceased among themselves pursuant to the If after such partition, he allows his share to be
project of partition, the heirs allowed their held in common with his co-heirs under a single
properties to remain under the management of management to be used with the intent of making
Lorenzo and let him use their shares as part of profit thereby in proportion to his share, there
the common fund for their ventures, even as can be no doubt that, even if no document or
they paid corresponding income taxes on their instrument were executed, for the purpose, for
respective shares. tax purposes, at least, an unregistered
partnership is formed.
Based on these facts, CIR decided that
petitioners formed an unregistered partnership
and therefore, subject to the corporate income
tax, particularly for years 1955 and 1956.
WON THERE WAS A CO-OWNERSHIP OR AN

UNREGISTERED PARTNERSHIP 
UNREGISTERED PARTNERSHIP
WON THE PETITIONERS ARE LIABLE FOR
THE DEFICIENCY CORPORATE INCOME TAX
 YES
RR 10- The tax exemption of joint ventures for the purpose of construction projects was pursuant to PD 929 to
2012 assist local contractors in achieving competitiveness with foreign contractors by pooling their resources in
undertaking big construction projects.
Joint ventures or consortiums formed for the purpose of undertaking construction projects not
considered as a corporation under Section 22 of the NIRC, should be:
1. For the undertaking of a construction project;
2. Should involve joining or pooling of resources by licensed local contractors; that is, licensed as
general contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department
of Trade and Industry (DTI);
3. These local contractors are engaged in construction business; and
4. The joint venture itself must likewise be duly licensed as such by the PCAB
Joint ventures with foreign contractors may be treated as a non-taxable corporation, only if
1. the member foreign contractor is covered by a special license as contractor by the PCAB and
2. the construction project is certified by the appropriate Tendering Agency (government office)
that
3. the project is a foreign financed/internationally-funded project and
4. that international bidding is allowed under the Bilateral Agreement entered into by and between
the Philippine Government and the foreign/international financing institution.
Absent any of the requirements, the joint venture shall be considered as a taxable corporation. Mere
suppliers of goods, services, or capital to a construction project are not included in the definition stated
above.
NOTE! Members of the joint venture are each responsible in reporting and paying appropriate income
taxes on their respective share to the joint ventures profit.
BIR Ruling Avida Land Corp and Aurora Properties Inc. The Development Agreement entered into by and
108- entered into a joint venture to develop a between Aurora and Avida is not subject to the
2010**** parcel of land owned by Aurora Properties income tax under Sec 27 (A). PD929 excluded joint
READ into a residential subdivision. ventures formed for the purpose of undertaking
construction projects. This is because
Aurora will contribute the Property to the joint 1. Local contractors contribute substantially to
venture while Avida will contribute project the development program of the country
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development services. 2. Local contractors are at a disadvantage in

competitive bidding with foreign contractors
The developed saleable lots and house units will in view of limited capital and financial
then be allocated to each party (Avida – 89% resources
House and lots; 75% Lots and Aurora – 11% 3. In order to compete with big foreign
House and lots; 25% Lots). contractors, it may be necessary for local
contractors to enter into joint ventures to pool
WON THE JOINT VENTURE FORMED BY their limited resources in undertaking big
AURORA AND AVIDA IS A TAXABLE construction projects.
CORPORATION  NO
The allocation of saleable units between Aurora
4 stages of a JV and Aviida does not constitute a taxable event, as
no income is actually realized by either Aurora
2. ENTRY IN AGREEMENT or/and Avida.
3. CONTRIBUTION IN JV Hence, the allocation of units will not be subject
4. DISTRIBUTION OF THE OUTFLOW ; to income tax, and consequently to withholding
ALLOCATION OS SALEABLE UNITS tax. Likewise, not subject to VAT.
-not taxable
Aurora/Avida will only realize income upon their
5. SALE FROM THE PARTIES OF respective sales of the saleable units allocated to
SALEABLE UNITS TO THEM each of them. In this regard, sales to third parties
-taxable would be subject to regular (corporate) income tax at
1. the rate of 30%, and to withholding tax. It will also be
subject to VAT at 12% and DST at P15 per P1,000.
With regard to Avida’s undertaking (as provided in

the JVA) of marketing Aurora’s saleable lots by virtue
2. of an exclusive marketing agreement, the marketing
services which will be performed by Avida for Aurora
in the selling of the lots/ units, which will result to
marketing fees, will be subject to taxes (income tax,
withholding tax, VAT, DST)
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2. Income
Income – broad sense, it means all wealth that flows into the taxpayer other than as a mere return of capital. It
includes the forms of income specifically described as gains and profits, including gains derived from the sales or
other disposition of capital assets. Income means cash received or its equivalent. It is an amount of money coming to a
person within a specific time. It means something distinct from principal / capital; for while capital is a fund, income is a
flow. As used in our income tax law, income refers to the flow of wealth.
To be taxable, the amount must be income first!
Requisites for taxability of income:

3. There must be a gain/profit in cash or its equivalent
4. The gain must be realized/received – when income is physically transferred or constructively received by him.
This implies that no all economic gains constitute taxable income
In General
Madrigal v. Vicente Madrigal filed sworn declaration on the CAPITAL v. INCOME
Rafferty prescribed form with the CIR, showing, as his Income as contrasted with capital or property is to be
(1918) total net income for the year 1914, the sum of the test.
P296,302.73. Madrigal argued that the said
amount did not represent his income for the year The essential difference between capital and
1914, but was in fact the income of the conjugal income is that capital is a fund; income is a flow.
partnership existing between himself and his  A fund of property existing at an instant of
wife, and that in computing and assessing the time is called capital.
additional income tax provided by the Act of  A flow of services rendered by that capital by
Congress of October 3, 1913, the income the payment of money from it or any other
declared by Vicente Madrigal should be divided benefit rendered by a fund of capital in
into two equal parts. relation to such fund through a period of time
is called an income.
Why does Vicente Madrigal want to do this?
Capital is wealth, while income is the service of
Because under the old law, there are tax wealth.
deductions where the person making the return • No! The point of view of the CIR is that the Income
is a single person, or married and not living with Tax Law, as the name implies, taxes upon income
consort, and $1,000 additional where the person and not upon capital and property.
making the return is married and living with • The essential difference between capital and
income is that capital is a fund; income is a flow. A
consort.
fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by
WON THE INCOME DECLARED BY VICENTE the payment of money from it or any other benefit
MADRIGAL SHOULD BE DIVIDED INTO TWO rendered by a fund of capital in relation to such fund
EQUAL PARTS, ONE-HALF TO BE through a period of time is called income. Capital is
CONSIDERED THE INCOME OF VICENTE wealth, while income is the service of wealth.
AND THE OTHER HALF OF HIS WIFE  NO • As Paterno has no estate and income, actually and
legally vested in her and entirely distinct from her
husband’s property, the income cannot properly be
considered the separate income of the wife for the
purposes of the additional tax.
• To recapitulate, Vicente wants to half his declared
income in computing for his tax since he is arguing
that he has a conjugal partnership with his wife.
However, the court ruled that the one that should be
taxed is the income which is the flow of the capital,
thus it should not be divided into 2.
The wife of Vicente has an inchoate right in the

property of her husband during the life of the conjugal
partnership. She has an interest in the ultimate
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property rights and in the ultimate ownership of

property acquired as income after such income has
become capital.
The wife has no absolute right to one-half the
income of the conjugal partnership. Not being seized
of a separate estate, Susana Paterno cannot make a
separate return in order to receive the benefit of the
exemption which would arise by reason of the
additional tax. As she has no estate and income,
actually and legally vested in her and entirely distinct
from her husband's property, the income cannot
properly be considered the separate income of the
wife for the purposes of the additional tax.
Fisher v. Philippine American Drug Company was a STOCK DIVIDENDS PER SE NOT TAXABLE
Trinidad domestic corporation doing business in the City Generally speaking, stock dividends represent
(1922) of Manila. undistributed increase in the capital of
FISHER was a stockholder in said corporation. corporations or firms, joint stock companies, etc., etc.,
stock Said corporation, as result of the business for for a particular period.
dividends that year, declared a "stock dividend" and that
NOT the proportionate share of said stock dividend of A stock dividend really takes nothing from the
INCOME Fisher was P24,800. For this reason, CIR property of the corporation and adds nothing to the
collector demanded payment of income tax for interests of the shareholders. Its property is not
the stock dividend received by Fisher. Fisher diminished and their interest are not increased. The
paid under protest. Fisher filed an action for the proportional interest of each shareholder remains
recovery of the income tax on the stock the same. In short, the corporation is no poorer and
dividends. the stockholder is no richer than they were before.
WON THE STOCK DIVIDENDS ARE When a corporation or company issues "stock
TAXABLE INCOME  NO dividends" it shows that the company's accumulated
profits have been capitalized, instead of distributed to
the stockholders or retained as surplus available for
distribution, in money or in kind, should opportunity
offer. The essential and controlling fact is that the
stockholder has received nothing out of the
company's assets for his separate use and
benefit; on the contrary, every dollar of his original
investment, together with whatever accretions and
accumulations resulting from employment of his
money and that of the other stockholders in the
business of the company, still remains the property of
the company, and subject to business risks which
may result in wiping out of the entire investment. The
stockholder by virtue of the stock dividend has in fact
received nothing that answers the definition of an
"income."
The stockholder who receives a stock dividend has

received nothing but a representation of his increased
interest in the capital of the corporation. There has
been no separation or segregation of his interest. All
the property or capital of the corporation still belongs
11
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to the corporation. There has been no separation of

the interest of the stockholder from the general capital
of the corporation. The stockholder, by virtue of the
stock dividend, has no separate or individual control
over the interest represented thereby, further than he
had before the stock dividend was issued. He cannot
use it for the reason that it is still the property of the
corporation and not the property of the individual
holder of stock dividend.
A certificate of stock represented by the stock

dividend is simply a statement of his proportional
interest or participation in the capital of the
corporation. The receipt of a stock dividend in no way
increases the money received of a stockholder nor
his cash account at the close of the year. It simply
shows that there has been an increase in the amount
of the capital of the corporation during the particular
period, which may be due to an increased business
or to a natural increase of the value of the capital due
to business, economic, or other reasons.
Limpan Limpan Corporation is a domestic business The Court said that Limpan in fact admitted that it had
Investmen entity engaged in leasing properties. Sometime undeclared income, yet it was not able to present by
t v. CIR in 1958-59, BIR discovered that Limpan had clear and convincing evidence the reason why such
(1966) undeclared its rental income during years income need not be declared.
1956 and 1957. The CIR then issued a letter-
assessment and demanded payment of The Court said that the Limpan’s claim (1) and (2) are
“construct deficiency against Limpan. Limpan Corp. denied not supported by any document/unbiased
ively the unreported income claiming that: evidence/satisfactory corroboration.
received, (1) For 1956, it was the previous owners of
for refusal the buildings that collected the income, For claim (3), the Court said that the deposit was
to accept (2) For 1957, it was its President that resorted to due to the refusal of Limpan to accept the
the same collected the income and declared it not same; hence, Limpan is deemed to have
as corporate income, but rather constructively received such rentals.
personal,
(3) One of the tenants deposited his rental For claim (4), the Court said that it should have been
fee to the court, which Limpan Corp. declared as rental income nonetheless, because it is
had no actual/constructive control, and income just the same regardless of source.
(4) A sub-tenant paid rental fees which
should not be declared as rental
income.
WON LIMPAN IS JUSTIFIED IN NOT

REPORTING THE ABOVE-MENTIONED
ITEMS  NO
Conwi v. Petitioners are Filipino citizens and employees INCOME DEFINED
CTA (1192) of Procter and Gamble Philippines with an office Income may be defined as an amount of money
located at Ayala Ave. Makati. (subsidiary) coming to a person or corporation within a specified
time, whether as payment for services, interest or
The corporation is a subsidiary of P&G based at profit from investment. Unless otherwise specified, it
Ohio USA. For the year 1970 and 1971, means cash or its equivalent. Income can also be
petitioners were assigned outside the thought of as flow of the fruits of one's labor.
Philippines with their compensation paid in US
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dollars. Petitioners are correct as to their claim that their

dollar earnings are not receipts derived from foreign
When they filed their income tax returns for the exchange transactions. For a foreign exchange
year 1970, they’ve computed the tax by applying transaction is simply that — a transaction in foreign
the dollar-to-peso conversion based on the exchange, foreign exchange being "the conversion of
floating rate provided by the BIR ruling No. an amount of money or currency of one country into
70-27. an equivalent amount of money or currency of
another." When petitioners were assigned to the
However, on 1973, they filed an amended tax foreign subsidiaries of Procter & Gamble, they were
return using the par value of the peso provided earning in their assigned nation's currency and were
by Sec.40 of RA 265 in relation to CA 699. They ALSO spending in said currency. There was no
claim for a refund due to overpayment. conversion, therefore, from one currency to another.
WON PETITIONERS ARE ENTITLED TO Petitioners claim that since the dollar earnings do not
REFUND  NO fall within the classification of foreign exchange
transactions, and are not included in the coverage of
Central Bank Circular No. 289 which provides for the
specific instances when the par value of the peso
shall not be the conversion rate used. They conclude
that their earnings should be converted for income
tax purposes using the par value of the Philippine
peso.
They’re not included in transactions under Circular
No. 289
A careful reading of said CB Circular No. 289 shows
that the subject matters involved therein are export
products, invisibles, receipts of foreign exchange,
foreign exchange payments, new foreign borrowing
and investments — nothing by way of income tax
payments. Thus, petitioners are in error by
concluding that since C.B. Circular No. 289 does
not apply to them, the par value of the peso
should be the guiding rate used for income tax
purposes.
Revenue Memorandum Circular Nos. 7-71 10 and 41-

71 11 were issued to prescribe a uniform rate of
exchange from US dollars to Philippine pesos for
INTERNAL REVENUE TAX PURPOSES for the
years 1970 and 1971.
Petitioners argue that since there were no

remittances and acceptances of their salaries and
wages in US dollars into the Philippines, they are
exempt from the coverage of such circulars.
Petitioners forget that they are citizens of the
Philippines, and their income, within or without,
and in these cases wholly without, are subject to
income tax. Sec. 21, NIRC, as amended, does not
brook any exemption.
CIR v. In this case, the US Supreme Court The treble and punitive damages must be reported as
Glenshaw consolidated two cases with a similar issue. part of the gross income. Gross income includes any
Glass income from any source. In determining what
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(1955) In the first case, Glenshaw Glass was in constitutes "gross income" as defined in § 22(a),
LITIGATION with the Hartford-Empire Company, effect must be given to the catch-all language "gains
which manufactures machinery used by or profits and income derived from any source
Glenshaw. Glenshaw made demands for
whatever."
exemplary damages for fraud and treble
damages for injury to its business for Hartford’s
VIOLATIONS OF ANTI TRUST laws. The The mere fact that such payments are extracted
parties settled and Glenshaw received from the wrongdoers as punishment for unlawful
$800,000. Of that, $324,529.94 represented conduct cannot detract from their character as
punitive damages. Glenshaw did not report taxable income to the recipients.
that amount as income.
Certainly punitive damages cannot reasonably be
In the second case, William Goldman sued
Loew’s Inc. for violations of antitrust law and classified as gifts, nor do they come under any other
sought treble damages. William Goldman exemption provision in the Code.
received $375,000 in treble damages but
claimed $250,000 of that represented punitive The Court then held that the amounts received by the
damages and did not report it as income. taxpayers in this case were "instances of undeniable
accessions to wealth, clearly realized, and over which
WON PUNITIVE DAMAGES SHOULD BE
the taxpayers have complete dominion."
INCLUDED AS PART OF THE “GROSS
INCOME” FOR TAX PURPOSES  YES
ELEMENTS OF INCOME
WINDFALL GAIN is also part of income 1. Undeniable accession to wealth
2. Clearly realized
3. Over which the taxpayer has complete
dominion
4. Must not be excluded by law (Section 32)
Cesarini v. In 1957, the plaintiffs purchased a used piano at Congress has used a broad all-inclusive language to
United an auction sale for $15, and the piano was used exert the full measure of its taxing power.
States by their daughter for piano lessons. In 1964,
while cleaning the piano, they discovered $4,467
(1969) Gross income means all income from whatever
in old currency.
source derived, unless excluded by law. Gross
Money Being unable to ascertain who put the money income includes income realized in any form,
found in there, they exchanged the old currency for new whether in money, property, or services.
Piano at a bank, and reported the money on their 1964
joint income tax return as income from other In addition, IRS Revenue Ruling points that
sources. “the finder of treasure trove is in receipt of taxable
income, for income tax purposes, to the extent of its
value in United States currency, for the taxable year
They then filed an amended return eliminating
in which it is reduced to undisputed possession.”
the sum from their gross income, and requesting
a refund. The CIR rejected their refund claim.
The district court denied the Cesarinis’ claim for So the income should be declared not in 1957, when
the recovery of income tax paid in the year they bought the piano, but in 1964, when the
1964. The district court found that the Cesarinis treasure was reduced to their undisputed
were not entitled to a refund for taxes paid on possession.
money found in a second-hand piano. The
district court held that the statute of limitations
did not foreclose assessment of the tax merely WHEN DO U REALIZE?
because the money was not found until 1964, Realization v Complete dominion
seven years after the piano had been When they bought the piano – no income
purchased. The Cesarinis sought appellate There will be income as to the time of discovery –
review. Treasure trove doctrine
WON THE MONEY FOUND IS CONSIDERED Rent agreement

AS INCOME  YES - Advanced deposit – dependent on some
form of time
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- Security deposit – because there is no

setting in of elements of income yet, no
certainty that security deposit will be
owned (dependent on certain factors pa)
- Current Rent – income already
- What constitutes the
Hornung Hornung is a football player for the Green Bay 1962 Corvette - Item was constructively received
v. CIR Packers. He played in the NFL championship when it has been set apart for the Taxpayer or
(1967) game on December 31, 1961. After the game, otherwise made available for him to draw upon, if the
he was named the outstanding player of the intent to do so is unknown. On Dec 31, 1961, there
game and was given a new Corvette. Hornung were substantial limitations or restrictions on his
agreed to appear at a luncheon in NYC to control over the Corvette. Since Dec 31 was a
officially accept the car. Sunday, dealership was closed and he could not
On January 3, 1962, he accepted the car in have accessed it on that date.
NYC.
He did not report the car as part of his Constructive receipt doctrine was inapplicable and
income in 1962 or any other year. Corvette was received by Hornung for income tax
Commissioner said that the value of the car purposes in 1962.
should have been included in his gross income
for 1962. The Corvette should still form part of his gross
income since it is not a gift. The Court stated that the
In July 1962, Hornung asked a friend to arrange gifts that the law was referring to was gift or awards
a car to be available for him to drive while in received for outstanding contribution for “enhancing
Green Bay. A local Ford dealership furnished the public good”, which does not include performance
him with a 1962 Thunderbird, the title to the car in sports. The award contemplated by the law was
remained with Ford, but Hornung paid the the awards similar to Nobel Prize. Hence, the
insurance and all operating costs. value of the Corvette should have been included
in Hornung’s gross income for taxable year 1962.
He was not asked to make any personal
appearances or special efforts but was asked 1962 Thunderbird - The court rejected the
to “come in and say hi” during a Ford- contention of Hornung that his use of the thunderbird
sponsored children’s football event. This was not was a gift or loan to him. Under the exemptions, the
reported as part of his income. (value “intention” of the donor should be controlling on
determined to be $600) whether the “donation” would fall under
“generosity.” The court stated that FMC’s motive for
After winning the division title of NFL in 1961, Hornung’s free use was to advertise the use of the
Lombardi bought and distributed fur stoles to the thunderbirds by famous athletes and was thus
wives, friends, and mothers of each player. considered as motivated commercial consideration.
Hornung’s mother received the stole in 1961. It Hence, the rental value of the Thunderbirds should be
was reported by the Packers as other included in Hornung’s income for taxable year 1962.
unallowable deductions and was described as
Awards to Players’ Wives etc. (value determined Fur Stole – it was found out by the court that
to be $395 each) Hornung’s mother actually received the fur stole in
1961, and since Hornung is using cash receipts
WON THE VALUE OF THE FOLLOWING method in computing his income, the fur should not
ITEMS SHOULD HAVE BEEN INCLUDED IN be considered as income for Hornung in 1962.
THE COMPUTATION OF HIS GROSS INCOME
1. CORVETTE  YES
2. THUNDERBIRD  YES
3. FUR STOLE  NO
Murphy v. Marrita Murphy (plaintiff) was unlawfully fired The Court ruled that Ms. Murphy was not entitled to
Internal from her job at the New York Air National the tax refund she claimed, and that the personal
15
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Revenue Guard (NYANG) after reporting environmental injury award she received was "within the reach of the
Service hazards to state authorities. Murphy filed a congressional power to tax under Article I, Section 8
(2007) retaliation claim against NYANG with the of the Constitution"— even if the award was "not
Department of Labor (DOL). income within the meaning of the Sixteenth
Amendment."
Murphy testified to her physical and emotional
damages. The DOL awarded Murphy $45,000 The Congress amended Sec 104 (a) to explicitly
for emotional distress and $25,000 for injury provide that “emotional distress shall not be treated
to reputation. as a physical injury or physical sickness,” thus
making clear that an award received on account of
Murphy initially included the $70,000 award as emotional distress is not excluded from gross income.
income and paid taxes on it. Murphy later filed
an amended return, seeking reimbursement of The Court ruled:
the taxes paid on the $70,000 award, arguing it (1) that the taxpayer's compensation was
was not income. The Internal Revenue Service received on account of a non-physical
(IRS) (defendant) denied reimbursement. injury or sickness;
(2) that gross income under section 61 of the
WON PERSONAL INJURY AWARD WAS Internal Revenue Code does include
INCOME  YES compensatory damages for non-physical
injuries, even if the award is not an
"accession to wealth,"
(3) that the income tax imposed on an award for
non-physical injuries is an indirect tax,
regardless of whether the recovery is
restoration of "human capital," and therefore
the tax does not violate the constitutional
requirement of Article I, section 9, that
capitations or other direct taxes must be laid
among the states only in proportion to the
population;
Citing Commissioner v. Banks, the court noted that

"the power of the Congress to tax income extends
broadly to all economic gains.”
Officemetr Petitioner, Officemetro Philippines, Inc., is a duly Association/condominium dues and other fees and
o organized domestic corporation. CIR conducted charges collected from members that are used solely
Philippine an examination of petitioner's books of accounts for administrative purposes are not subject to income
s v. CIR and other accounting records for all internal tax and withholding tax. The BIR held that
(2014) revenue tax liabilities for taxable year 2005. association/condominium dues, membership fees and
After doing so, CIR found the petitioner liable for other assessment/charges collected from the
tax deficiencies in its Expanded Withholding Tax members, which are merely held in trust and which
(EWT), Final Withholding of VAT and Final are to be used solely for administrative expenses in
Withholding Tax (FWT). For the EWT it was implementing their purpose(s), viz., to protect and
contesting the payment of Rentals and Purchase safeguard the welfare of the owners, lessees and
of Services. occupants; provide utilities and amenities for their
members, and from which the corporation could not
WON CONDO/ASSOCIATION DUES ARE realize any gain or profit as a result of their receipt
CONSIDERED AS TAXABLE INCOME  NO thereof, must not be included in said corporation’s
gross income. This means that the same are not
subject to income tax and to withholding tax.
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ELEMENTS THAT DON’T MAKE THE CUT Calamansi tree

Must it be in money?- NO - Situations where no counterparty upon
Cow - liquidate
No wherewithal to pay –
Need not arise from capital / investment

- windfall can generate income
Need not be severance in capital
- must be return ON capital not return
of capital ; capital and return may
still be attached so taxable
(Helvering v Bruun)
Realization income
- “no closed and completed
transaction” – closed and completed
transaction means ‘ requires
counterparty; where government
cannot establish clearly there is no
closed and complete transaction
Associatio Bureau of Internal Revenue (BIR) issued RMC RMC No. 35-2012 only clarified the taxability
n of Non- No. 35-2012, which was addressed to all (particularly, income tax and VAT liability) of clubs
Profit revenue officials, employees, and others organized and operated exclusively for pleasure,
recreation, and other non-profit purposes based on
Clubs concerned for their guidance regarding the
the BIR's own interpretation of the NIRC provisions
(ANPC) v. income tax and Valued Added Tax (VAT) liability on income tax and VAT.
BIR of the said recreational clubs.
RMC No. 35-2012 erroneously foisted a sweeping
BIR claims that under the doctrine of casus interpretation that membership fees and
omissus proomisso habendus est, a person, assessment dues are sources of income of
object, or thing omitted from an enumeration recreational clubs from which income tax liability
may accrue.
must be held to have been omitted intentionally.
The provision in the 1977 Tax Code which The distinction between "capital" and "income" is
granted income tax exemption to such well-settled in our jurisprudence. As held in the early
recreational clubs was omitted in the current tax case of Madrigal v. Rafferty,47 "capital" has been
list of tax exemptions under 1997 NIRC. Hence, delineated as a "fund" or "wealth," as opposed to
the income of recreational clubs from whatever "income" being "the flow of services rendered by
source, including but not limited to membership capital" or the "service of wealth":
fees, assessment dues, rental income, and
Income as contrasted with capital or property is to be
service fees are subject to income tax.
the test. The essential difference between capital
and income is that capital is a fund; income is a
WON the membership fees, assessment flow. A fund of property existing at an instant of time
dues, and similar nature collected by clubs is called capital. A flow of services rendered by that
which are organized and operated capital by the payment of money from it or any other
exclusively for pleasure, recreational clubs benefit rendered by a fund of capital in relation to
from whatever source are “subject to income such fund through a period of time is called
tax”? – NO income. Capital is wealth, while income is the
service of wealth. (See Fisher, "The Nature of
Capital and Income.")
In Conwi v. Court of Tax Appeals,49 the Court

elucidated that "income may be defined as an amount
of money coming to a person or corporation within a
specified time, whether as payment for services,
17
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interest or profit from investment. Unless

otherwise specified, it means cash or its equivalent.
Income can also be thought of as a flow of the fruits
of one's labor."50
The membership fees, assessment dues, and other

fees of similar nature only constitute contributions
to and/or replenishment of the funds for the
maintenance and operations of the facilities
offered by recreational clubs to their exclusive
members. They represent funds "held in trust" by
these clubs to defray their operating and general
costs and hence, only constitute infusion of
capital.
There was no realized “gain.”

In order to constitute "income," there must be realized
"gain." Clearly, because of the nature of membership
fees and assessment dues as funds inherently
dedicated for the maintenance, preservation, and
upkeep of the clubs' general operations and facilities,
nothing is to be gained from their collection.
This stands in contrast to the fees received by

recreational clubs coming from their income-
generating facilities, such as bars, restaurants, and
food concessionaires, or from income-generating
activities, like the renting out of sports equipment,
services, and other accommodations: In these latter
examples, regardless of the purpose of the fees'
eventual use, gain is already realized from the
moment they are collected because capital
maintenance, preservation, or upkeep is not their
pre-determined purpose. As such, recreational
clubs are generally free to use these fees for
whatever purpose they desire and thus, considered
as unencumbered "fruits" coming from a business
transaction.
For as long as these membership fees,

assessment dues, and the like are treated as
collections by recreational clubs from their
members as an inherent consequence of their
membership, and are, by nature, intended for the
maintenance, preservation, and upkeep of the
clubs' general operations and facilities, then
these fees cannot be classified as "the income of
recreational clubs from whatever source" that are
"subject to income tax."
Instead, they only form part of capital from which

no income tax may be collected or imposed.
It is a well-enshrined principle in our jurisdiction that

the State cannot impose a tax on capital as it
constitutes an unconstitutional confiscation of
property. The due process clause may properly be
invoked to invalidate, in appropriate cases, a
revenue measure when it amounts to a
confiscation of property. Certainly, an income tax
is arbitrary and confiscatory if it taxes capital
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because capital is not income. In other words, it.is

income, not capital, which is subject to income tax.
Thus, by sweepingly including in RMC No. 35-2012

all membership fees and assessment dues in its
classification of "income of recreational clubs from
whatever source'' that are "subject to income
tax,"59 the BIR exceeded its rule-making authority.
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GROSS INCOME | Statutory Inclusions

TAXABLE INCOME – pertinent items of gross income COMPENSATION FOR SERVICES
specified in this Code, less deductions, if any, authorized for SEC 78(A) : Definitions –
such types of income by this Code or other special laws WAGES – the term wages shall mean all
renumeration (other than fees paid to a public official)
SEC 32. GROSS INCOME for services performed by an employee for his
(A) General definition – Except when otherwise provided in employer, including the cash value of all
this title, gross income means, all income DERIVED renumeration paid in any medium other than cash,
FROM WHATEVER SOURCE, including but not limited except that such term shall not include
to: remuneration paid:
1. Compensation for services in whatever 1. For agricultural labor paid entirely in
form paid, including but not limited to: products of the farm where the labor is
fees, wages, salaries, commissions, performed or
similar items 2. For domestic service in a private home or
2. Gross income derived from the conduct 3. For casual labor not in the course of
of trade or business, or exercise of a employer’s trade or business or
profession 4. For services by a citizen or resident of the
3. Gains derived from dealings in property Philippines for a foreign government or an
4. Interests international organization
5. Rents
6. Royalties If the renumeration paid by an employer to an
7. Dividends employee for services performed during ½ or more of
8. Annuities any payroll period of not more than 31 consecutive
9. Prizes and winnings days constitute wages, all the renumeration paid by
10. Pensions and such employer to such employee for such period shall
11. Partner’s distributive share from the net be deemed to be wages;
income of the general professional
partnership BUT if renumeration paid by an employer to an
employee for services performed during more than ½
of any such payroll period does not constitute wages,
then none of the renumeration paid by such employer
to such employee for such period shall be deemed to
be wages.
Old William Wood was president of the American FORM OF PAYMENT IS IMMATERIAL
Colony Woolen Company for the years 1918 through The payment of the tax by the employers was in
Trust Co. 1920. consideration of the services rendered by the
v. CIR employee, and was again derived by the
(1929) The company instituted a policy for 1919 and employee from his labor.
1920 wherein the company would pay the taxes
of the president and other company officers. The The form of the payment is expressly declared to
company paid $681,169.88 for 1918 and make no difference. It is therefore immaterial that the
$351,179.27 for 1919 on behalf of Wood. taxes were directly paid over to the government. The
discharge by a third person of an obligation to him is
The Board of Tax Appeals held that these equivalent to receipt by the person taxed.
amounts paid were income of Wood.
The certificate shows that the taxes were imposed
WON THE TAXES PAID BY THE COMPANY upon the employee, that the taxes were actually paid
ARE ADDITIONAL TAXABLE INCOME OF by the employer, and that the employee entered upon
WOOD  YES his duties in the years in question under the express
agreement that his income taxes would be paid by his
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Claim of right doctrine employer. The taxes were paid upon a valuable
- It does not mean that I never got my consideration – namely, the services rendered by
hands the said income, even if the employee and as part of the compensation
somebody else is receiving it, it may therefor.
be still be considered an income
Position of taxpayer –cannot it be a gift? – no,

anything that flows out of employee employer
relationship will in default be part of the
compensation. If it were a gift – it would create a
different tax implication  excluded from gross
income, as long as donor’s taxes were paid
RENTS
Helvering Bruun leased land and an old building to a Brun insists that gain derived from capital must be
v. Bruun tenant for a period of 99 years. something of exchangeable value proceeding from
(1940) The tenant was allowed to make improvements property, severed from capital, however invested or
to the land, but the improvements would be employed, and received by the recipient for his
forfeited back to Bruun if the lease was canceled separate use, benefit, and disposal. These
at the tenant’s fault expressions, however, were used to clarify the
The tenant removed the old building, distinction between stock dividends from ordinary
constructed a new building, and dividends.
subsequently failed to pay rent and taxes.
Bruun received the property back, including the GAIN NEED NOT BE IN THE FORM OF CASH
new building, which was valued about $50,000 While it is true that economic gain is not always
higher than the old building. taxable as income, it is settled that the realization
of gain need not be in cash derived from the sale
CIR issued a deficiency notice against Bruun for of an asset. Gain may occur as a result of exchange
failing to report any income resulting from the of property, payment of the taxpayer's indebtedness,
receipt of the property relief from a liability, or other profit realized from the
WON THE NET GAIN UPON RECEIPT OF THE completion of a transaction.
PROPERTY SHOULD BE TAXABLE AS
INCOME  YES The fact that the gain is a portion of the value of
property received by the taxpayer in the transaction
Entered into lease contract does not negate its realization.
Demolition of standing improvements
Construction over the property Bruun received back his land with a new building on
Discontinuance of the lease it, which added an ascertainable amount to its value.
Return of the property to Bruun It is not necessary that he should be able to sever
the improvement begetting the gain from his
One specific point where gain realized– gain, original capital to recognize it as taxable gain. If
realized, tax payer had complete dominion ; that were necessary, no income could arise from the
since there was a default on the part of the exchange of property; whereas such gain has always
tenant and gave rise to the landlord owning the been recognized as realized taxable gain.
improvements which was built on by the land
lord,
Without the default?

End of lease?
Entitlement on the landlord on improvements is

merely inchoate – bago maglapse lease nag
earthquake if pinareport income at time binuild
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building – falling into situation as fisher, cannot

force somebody to force income when there is
distinct
Gains from property

- Amount Realized (Selling price) –
purchase price
- Amount > Basis = gain
Royalties
- Licensor creates, licensee uses
Dividends
Cash
Property
Liquidating
Stock
Disguise Dividends – for tax purposes
1.
DIVIDENDS
Sec 73(A) to (C)
(A) Definition of Dividends –

The term 'dividends' when used in this Title means
any distribution made by a corporation to its shareholders out of its earnings or profits and payable to
its shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss
sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the
case may be.
(B) Stock Dividend. - A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax.
XPN: However, if a corporation cancels or redeems stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to
the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall
be considered as taxable income to the extent that it represents a distribution of earnings or profits.
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any distribution made to
the shareholders or members of a corporation shall be deemed to have been made form the most recently
accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in
which received.
CIR v. CA A. Soriano Corp. (ANSOR) is wholly owned Redemption is the y. The corporation gets back
(1999) and controlled by the family of Don Andres some of its stock, distributes cash or property to the
Soriano. When Don Andres died, he had a total shareholder in payment for the stock, and continues
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Redemptio shareholdings of 185,154 shares (50,495 in business as before.

n of stock shares which were of original issue when the
dividends corporation was founded and 134,659 shares In sum, for stock redemptions to be taxed, it is
as stock dividend declarations). Half of which indispensable that:
went to his wife as her conjugal share and half a. There is a redemption or cancellation
went to his estate. b. The transaction involves stock dividends
ANSCOR redeemed a total of 108,000 c. The time and manner of the transaction makes
common shares from his estate. The BIR it essentially equivalent to a distribution of
assessed ANSCOR for deficiency withholding taxable dividends.
tax for these transactions. ANSCOR contested
the assessment claiming that redemption was There is no dispute that ANSCOR redeemed shares.
done in furtherance of its Filipinization plan. But its taxability depends on the source of the stock
dividend.
WON THE REDEMPTION WAS TAXABLE  a. If its source is the original capital subscriptions
YES upon establishment of the corporation or
formed initial capital investment, it will not be
Stock dividends, strictly speaking, represent taxable under Section 83.
capital and do not constitute income to its b. If the redeemed shares are from stock
recipient. So that the mere issuance thereof is dividend declarations, it is taxable for it is not
not yet subject to income tax as they are nothing merely a return of capital but a gain.
but an enrichment through increase in value of
capital investment. Such an exception came about as a response to the
devious means to circumvent the law and evade tax,
However, the redemption or cancellation of i.e., corporate earnings would be distributed under
stock dividends, depending on the time and the guise of its initial capitalization by declaring the
manner it was made, is essentially equivalent to stock dividends previously issued and later redeem
a distribution of taxable dividends, making the said dividends by paying cash to the stockholder.
proceeds thereof taxable income to the extent it Here, the redemption amounts to a distribution of
represents a distribution of earnings or profits. taxable cash dividends which was just delayed to
The exception was designed to prevent the escape the tax.
issuance and cancellation or redemption of
stock dividends, which is fundamentally not The purpose for which the shares were redeemed
taxable, from being made use of as a device for is immaterial and the legitimacy of such business
the actual distribution of cash dividends, which is purpose cannot be an excuse to be exempt from
taxable. tax
Held: General Rule Redemption or cancellation of stock dividends,

depending on the “time” and “manner” it was made, is
Section 83(b) of the 1939 NIRC was taken from essentially equivalent to a distribution of taxable
Section 115(g)(1) of the U.S. Revenue Code of dividends, making the proceeds thereof taxable
1928. 60 It laid down the general rule known as
income to the extent it represents profits.
the ‘proportionate test’ 61 wherein stock
dividends once issued form part of the capital
and, thus, subject to income tax. 62 Specifically, Whether the amount distributed in the redemption
the general rule states that: should be treated as the equivalent of a “taxable
"A stock dividend representing the transfer of dividend” is a question of fact, which is determinable
surplus to capital account shall not be subject to on the basis of the particular facts of the transaction
tax." in question.
Having been derived from a foreign law, resort
to the jurisprudence of its origin may shed light.
Under the US Revenue Code, this provision But where did the shares redeemed come from? If its
originally referred to "stock dividends" only, source is the original capital subscriptions upon
without any exception. Stock dividends, strictly establishment of the corporation or from initial capital
speaking, represent capital and do not constitute investment in an existing enterprise, its redemption to
income to its recipient.So that the mere issuance the concurrent value of acquisition may not invite the
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thereof is not yet subject to income tax 64 as application of Sec. 83(b) under the 1939 Tax Code,
they are nothing but an "enrichment through as it is not income but a mere return of capital. On the
increase in value of capital investment." 65 As contrary, if the redeemed shares are from stock
capital, the stock dividends postpone the dividend declarations other than as initial capital
realization of profits because the "fund investment, the proceeds of the redemption is
represented by the new stock has been additional wealth, for it is not merely a return of
transferred from surplus to capital and no longer capital but a gain thereon.
available for actual distribution." 66 Income in
tax law is "an amount of money coming to a
person within a specified time, whether as Collapsing the transaction case – like CIR v.
payment for services, interest, or profit from TODA case
investment." 67 It means cash or its equivalent.
1 company – ANSCOR
68 It is gain derived and severed from capital, 69
from labor or from both combined 70 — so that - Incorporation, shareholders
to tax a stock dividend would be to tax a capital - Declared dividends --- they declared
increase rather than the income. 71 In a loose stock dividends to all shareholders
sense, stock dividends issued by the - After declaration, the company
corporation, are considered unrealized gain, and REDEEMED
cannot be subjected to income tax until that gain If tail end is the redemption  NOTE: redemption is
has been realized. Before the realization, stock
no different from sale of shares but the buyer is the
dividends are nothing but a representation of an
interest in the corporate properties. 72 As COMPANY
capital, it is not yet subject to income tax. It
should be noted that capital and income are Net capital gains = redemption
different. Capital is wealth or fund; whereas
income is profit or gain or the flow of wealth. 73 Pano stock dividends na nauna?
The determining factor for the imposition of
income tax is whether any gain or profit was
We look at the case of fisher as absolute rule –
derived from a transaction. 74
exception to fisher, because it was the “manner’” and
The Exception “method” in which redemption was done
"However, if a corporation cancels or redeems Issue stock dividends then redeem

stock issued as a dividend at such time and in Between ANSCOR give shares (stock dividend
such manner as to make the distribution and declaration not taxable) after a while redeem the
cancellation or redemption, in whole or in part,
shares, shareholder nakareceive shares, nakareceive
essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in ako ng pera (is there actual gain?) amount realized –
redemption or cancellation of the stock shall be basis = mababa and halos walang gain, no
considered as taxable income to the extent it implication stock dividends and no implication si
represents a distribution of earnings or profits redemption
accumulated after March first, nineteen hundred
and thirteen." (Emphasis supplied). Ang talagang gusto nyong ginawa is to declare cash
dividends kasi pag nagdeclare cash dividends,
taxable yun and on gross! So for a fact, that under
Sec 24 and 25 10-20-25% tax rate. Definitely mas
unfavorable if cash dividends. In the same way we
did in TODA, why did you interfere BIR? Even if taxes
were probably lower?
NO LEGITIMATE PURPOSE
Toda: the counter to a situation where a government
to impose its will to tax is the the ability to pose a
legitimate business purpose ! = in this cae no LBP
ANSCOR’s defense: para mabawasan foreign

shareholders – redemption exercise in consonance to
filipinize the company
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BIR : kung gusto mo ifilipinize, you would not have

declared dividends that resulted to increase in foreign
shareholdings
Wise & This complaint was filed by Wise & Co., et. al. to The amounts received were liquidating dividends. A
Co., et. al. recover certain amounts they paid under distribution does not necessarily become a dividend
v Meer & protest as deficiency income taxes for the by reason of the fact that it is called a dividend by the
CIR (1947) year 1937. distributing corporation. The determining element is
whether the distributions were in the ordinary course
Liquidating Wise & Co., et. al. were stockholders of Manila of business and with intent to maintain the
dividends Wine Merchants, Ltd (an HK Company). The corporation as a going concern, or after deciding to
BOD of such HK Company sold its business quit and with intent to liquidate the business.
and assets to Manila Wine Merchants, Inc
(Manila Company) The amounts were taxable income. The Income Tax
Law, Act No. 2833 Sec 25 (a), as amended by Sec 4,
Pursuant to a RESOLUTION BY ITS BOD, the Act. No. 3761: Where a corporation, partnership,
HK Company made a DISTRIBUTION from its association, joint-account, or insurance company
earnings for the year 1937 to its stockholders distributes all of its assets in complete liquidation
(Wise & Co, et. al). or dissolution, the gain realized or loss sustained
by the stockholder, whether individual or corporation,
HK Company has paid PH income tax on the is a taxable income or a deductible loss as the
entire earnings from which the said case may be.
distributions were paid.
The earnings and profits accumulated by the
After HK Company gained surplus from the corporation were to be treated NOT under section
active conduct of its business, it distributed 201 (a) of the U.S. Revenue Act of 1918 but
said surplus to its stockholders. PH income tax distributions under section 201 (c), which deal
had been paid by the HK Company on the said specifically with such liquidation "as other gains or
surplus. profits."
The stockholders of the HK Company The profit realized by Wise & Co., et. al. constitutes
directed that company be voluntarily as income from PH sources and is subject to
liquidated. CIR subsequently made deficiency Philippine taxes. The HK Company was incorporated
assessments against Wise & Co., et. al for the for the purpose of carrying on in the PH Islands the
said distributions. business of wine, beer, and spirit merchants and the
other objects set out in its memorandum of
association.
WON THE DISTRIBUTIONS WERE
LIQUIDATING DIVIDENDS  YES Redemption sale of shares, liquidation is also sale of
shares, sell to company that originally issued the
WON SUCH AMOUNTS WERE TAXABLE stock ;
INCOME  YES
Ordinary dividends? Liquidating dividends?
Distinction – same form
1 M = ordinary cash dividends or liquidating dividends
For tax purposes there is a difference
Cash dividends = taxed on gross amount
Liquidating dividend = still offset it on the basis of the
price of share of stock
 Bought shares for 900,000 pesos

 Dividends declared1 M ; if it were cash dividends
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 1M based on applicable rate (cash d)

 1m less 900,000 characterized as sales of shares
of stock (Amount realized – basis ; if liquidating d)
Form part of gross income

Not taxed on gross,
Tax on Capital Gain not taxed at final tax on 15%
BIR Ruling A trading company is in the process of Since upon the company’s complete liquidation, its
322- 87 liquidation. On July 1987, it wrote a letter to the individual stockholders will receive all its assets as
BIR. It mentioned that its individual liquidating dividends, capital gain or loss will be
stockholders will receive dividends in excess realized.
of their investments.
The gain, if any, is the difference between the fair
WON THE LIQUIDATING DIVIDENDS market value of the liquidating dividends and the
RECEIVED BY STOCKHOLDERS, IN EXCESS adjusted cost to the stockholders of their
OF THEIR INVESTMENT, ARE TAXABLE  respective shareholdings in the corporation. And
YES if any such gain is realized, it shall be subject to
income tax rates prescribed by the tax code.
BIR Ruling Aguirre Pawnshop Company, Inc.’s (APC) (Decision of Kim Henares is very short and
479- 11 corporate term has expired and it has ceased to ambiguous. Copied in verbatim)
exist as a corporate entity.
Its BOD decided to distribute the remaining “In reply, please be informed that it is the position of
corporate assets to its stockholders by this Office that your request cannot be granted for
liquidating dividends. To be able to transfer a lack of legal basis under the National Internal
parcel of land to stockholder Marmitz Inc., Revenue Code of 1997, as amended. Consequently,
Olondriz, a director of APC, wrote the BIR the previously issued BIR Ruling No. 039-02 cited in
requesting for a Certificate Authorizing your letter and the BIR Rulings cited in the said
Registration as well as a confirmation of her rulings are reversed and set aside.”
opinion be made as to the following issues:
1) APC is not liable for income tax either PM Reyes:
on the transfer of the properties (citing Are liquidating dividends subject to income tax?
BIR ruling 039-02 dated Nov. 11, 2002) Yes. Where a corporation distributes all of its property
or assets in complete liquidation or dissolution, the
gain realized from the transaction by the stockholder,
2) No documentary stamp tax (DST) is due whether individual or corporate, is taxable income or
on the surrender and cancellation of a deductible loss (if the amount received by the
APC shares. stockholder in liquidation is less than the cost or other
basis of the stock, the loss in the transaction is
3) No DST is due on the transfer of deductible), as the case may be.
properties Note: Previously, the CIR has ruled in BIR RULING
039-02 [NOVEMBER 11, 2002] and other previous
. rulings that the transfer by a liquidating corporation of
4) Marmitz, Inc. shall realize capital gain its remaining assets to its stockholders and the
or loss from the transfer of properties. receipt of the shares surrendered by the shareholder
are not subject to income tax. However, in BIR
RULING 479-11 [DECEMBER 5, 2011], the CIR
reversed and set aside the above-cited ruling and all
previous rulings to that effect. The rule now is that
they are subject to income tax.
BIR Ruling Note: In BIR RULING 479-11 [DECEMBER 5, The transfer by the liquidating corporation of its
39-02 2011], the CIR reversed the ruling of this case. remaining assets to its stockholders is not considered
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The rule now is that the transfer by a liquidating a sale of these assets. Thus, a liquidating corporation
corporation of its remaining assets to its does not realize gain or loss in partial or complete
stockholders and the receipt of the shares liquidation. Conversely, neither is a liquidating
surrendered by the shareholder are subject to corporation subject to tax on its receipt of the shares
income tax. surrendered by its shareholders pursuant to a
complete or partial liquidation.
All of the outstanding shares of TA Bank are
wholly owned by TMBC and its nominees. TA is The tax treatment of liquidating dividends depends on
planning to decrease its authorized capital stock, the characterization of the income in the form of such
Under the plan, all of TA’s outstanding preferred dividends received by shareholders as a result of the
and common shares shall be surrendered by dissolution of the corporation in which they hold
TMBC and cancelled immediately upon approval shares. The amounts distributed in the liquidation of a
by TA stockholders. In exchange for the corporation shall be treated as payments in exchange
surrender, TA shall transfer to TMBC both real for stock or shares, and any gain or profit realized
and personal, tangible and intangible properties shall be taxed to the distributee as other gains or
listed. profits. When the corporation was dissolved and in
the process of complete liquidation and its
WON TA shall be liable for income tax either shareholders surrendered their stick to it and it paid
on its receipt of the surrendered shares, or the sums in question to them in exchange, a
its transfer of the distributed assets to TMBC transaction took place, which was no different in its
as liquidating dividends  NO essence from a sale of the same stock to a third party
who paid therefor.
WON TMBC shall realize capital gain or loss
when TA distributed its assets as liquidating
dividends  YES
FROM WHATEVER SOURCE
James v. James is a union official who embezzled in ILLEGALLY OBTAINED INCOME IS TAXABLE
United excess of $738,000 during 1951-1954 from his Unlawful, as well as lawful, gains are comprehended
States employer union and an insurance company. He within the term “gross income.” There is an obvious
(1961) failed to report these amounts in his gross intent on the part of Congress to tax income derived
income in those years and was convicted for from both legal and illegal sources to remove the
willfully attempting to evade the federal income incongruity of having gains of an honest laborer taxed
tax due from the years 1951-1954. and the gains of the dishonest immune. Courts
should give a liberal construction to the broad
WON EMBEZZLED FUNDS ARE TO BE IN phraseology “gross income.”
THE “GROSS INCOME” OF THE EMBEZZLER
FOR THE YEAR IN WHICH THE FUNDS ARE
MISAPPROPRIATED  YES
CIR v. BIR investigated the spouses internal revenue In the case of income, for it to be taxable, there must
Spouses taxes for 2003 and prior and determined that be a gain realized by the taxpayer, which is not
Manly their ITRs were underdeclared. excluded by law or treaty from taxation. The
(2014) government is allowed to resort to all evidence or
Since the under declaration exceeded 30% of resources available to determine a taxpayer’s income
the reported or declared income, it was and to use methods to reconstruct his income.
considered prima facie evidence of fraud with
intent to evade payment of proper taxes.
Criminal cases were then filed against them. EXPENDITURE METHOD
A method commonly used by the government is the
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WON RESPONDENTS WERE GUILTY OF TAX expenditure method, which is a method of

EVASION  YES reconstructing a taxpayer’s income by deducting the
aggregate yearly expenditures from the declared
yearly income. The theory of this method is that when
the amount of the money that a taxpayer spends
during a given year exceeds his reported or
declared income AND the source of such money
is unexplained, it may be inferred that such
expenditures represent unreported or undeclared
income. This method was used in this case.
Since the underdeclaration is more than 30% of

reported or declared income, the filing of criminal
charges was recommended. SC is moreover
convinced that there is probable cause to indict
spouses for tax evasion.
If you were able to purchase these things? Where

did it come from?
RMC 16- Tax implications and recording of deposits/advances for expenses received by taxpayers not covered by
2013 RMC 89-2012
DEPOSITS/ADVANCES PART OF GROSS RECEIPTS

When cash deposits or advances are received by taxpayers other than GPP covered by RMC 89-2012
from the Client/Customer, a corresponding Official Receipt shall be issued. The amount received shall
be booked as income and shall form part of the Gross Receipts and subject to VAT or Percentage
Tax (Gross Receipt Tax), if applicable, and shall in turn be deductible as expense by the
Client/Customer provided that it is duly substantiated by Official Receipts pursuant to Section 34(A)(1) of
the Tax Code.
RMC 88- RMC 88-2012 issues clarifies the tax implications of income or gain derived by an employee from the
2012 exercise of STOCK OPTION PLANS.
In BIR Ruling No. 119-2012, it was ruled that any income or gain derived by the employees from
their exercise of stock options is considered as additional compensation subject to Income Tax,
and consequently, to withholding taxes on compensation. In the said ruling, stock options were
granted by domestic corporations as part of their compensation plan. Under the plan employees
were given the right to buy a specified number of shares of a foreign corporation up to a
specified time/period from the grant date, at a fixed price regardless of the stock’s future market
price. It was designed to reward employees and the criteria for the reward was dependent on
performance, outstanding business achievements, and exemplary organization, technical or business
accomplishments/demonstrated expertise yielding significant effects on business/society. At the same
time, all full-time and most part-time employees were given one-time number of shares upon
employment.
Any income or gain derived from stock option plans granted to managerial and supervisory
employees which qualify as fringe benefits is subject to fringe benefit tax imposed under Section
33 of the NIRC.
The additional compensation or the taxable fringe benefit, is the difference of the book value
(BV)/ fair market value (FMV) of the shares, whichever is higher, at the time of exercise of the
stock option and the price fixed on the grant date. The option has value only if, at the time of the
exercise, the stock is worth more than the price fixed on the grant date . The additional
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compensation or taxable fringe benefit arises whether the shares of stocks involved are that of a
domestic or foreign corporation.
If the shares to be issued at the exercise of the stock options come from the unissued shares of
stock of the issuing corporation, the original issuance of said shares is subject to Documentary Stamp
Tax (DST).
Unissued stock  DST

Secondary issuance  not traded -- CGT + SDT ; stock listed / traded – Stock transaction tax
SUBSEQUENT DISPOSITION OF SHARES

In the event that employees subsequently sell, barter, exchange or otherwise dispose of shares of stock
obtained from their exercise of the stock options, the tax treatment is as follows:
• If the shares involved are shares of stock in a domestic corporation not traded in the Stock
Exchange, the gain, if any, is subject to Capital Gains Tax. Further, the sale or transfer of the
said shares is subject to the DST, upon execution of the deed transferring ownership or rights
thereto, or upon delivery, assignment or indorsement of such shares in favor of another.
• If the shares involved are shares of stock listed and traded through the Local Stock Exchange,
the transaction is subject to stock transaction tax.
If the shares involved are shares of stock in a foreign corporation, the gain, if any, is subject to ordinary
Income Tax.
Summary:
This circular stated that any income or gain obtained by the employees from the exercise of stock options
is additional compensation subject to income tax and, consequently, to withholding tax on compensation.
It, however, clarified that the income or gain obtained by employees in managerial or supervisory
positions—which qualifies as a fringe benefit—is subject to the fringe-benefit tax. The tax on
compensation or fringe-benefit tax applies, whether the shares of stock involved are those of a domestic
corporation or a foreign one.
BIR Ruling Shell Companies requested to change its The taxpayer may choose the method of valuing its
DA 128-08 valuation method from the Weighted Average inventory for any taxable year, and such method
Method (WAVE) to the First-In-First-Out should be used in all subsequent years. Moreover,
(FIFO) to conform with the adoption by a new the CIR granted Shell’s request so that the latter may
computerized system based on the Global be consistent with the inventory system used by its
Systems Application and Product Data parent company.
Processing (GSAP) by its parent company.
Basically, if one wants to change its inventory system,
WON SHELL COMPANIES CAN SHIFT ITS ask permission first and give valid reasons.
METHOD  YES
Considering that the purpose of Shell Companies’
change in method is so that it can best conform to its
accounting practice as said valuation will clearly
reflect the income of the said companies, the CIR
allowed it.
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Cancellation/ Condonation of debt
1. Debt as a gift no service rendered 

Donation / Donor’s tax
2. X linisin kotse pag umuulan –

compensation for services and hence
forms part of income of Y , Y not having
to pay loan nevertheless exchanged it to
services, does not really mean you are
receiving it literally in your hands, in
which this case
3. Lend to Corporation - If X lends to Y and

decides not to collect to Y but as an
additional given, X is a corporation:
variation in tx implication  construed as
a DIVIDEND , so Y’s receipt of the
amount which comes into the form of
cancellation of indebtedness  receipt
of dividends hence taxable
Candidate in Elections  not income, but

under Omnibus election candidate must account
all contributions
On Taxes Refunded formerly claimed as

DEDUCTION
Taxes – recoup as taxes claimed as deductions,
TP required to report taxes as gross income
2020 – paid DST
DST not among those excluded as deductions
Was claimed deductions
2021. – TP realized not subject to DST purchase
of shares traded in stock exchanged
Claimed a claim for refund successful
TP must declare DST able to refund ; balancing
the equilibrium; when u claim deductible
expense (bumaba GI) now since u refunded
(para umakyat GI)
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Exclusions
Exclusions are income, its only that the law expressly excludes them as being NOT part of income
All of these are income, but you reduce these income with exclusions =GROSS INCOME
EXCLUSIONS are exclusive – strictly construed against taxpayer !
List:
“Amount received by insured as a return of premium” (return OF capital  di naman talaga income
Gifts on their own generate income  considered as income

i.e. car as gift  donor’s taxes paid, excluded
but when car used for grab  income generated as such  no longer excluded
Compensation for injuries / sickness  and naeexclude lang ay damages in relation to

compensation for injuries /sickness (note, Glenshaw)
Retirement benefits :
TAX CODE
 elements  not less than. 50 yrs old, 10 yrs worked, registered retirement plan
 terminal leave pay not taxable
Outside of Tax Code:

Q: What if there is a retirement plan in company, under labor code lang, (statutory provision)
what is tax treatment?
Still tax exempt, when reqs met  (1) you retire at 60 yrs old, (2) worked for 10 yrs, (3) no BIR
registered retirement plan
o If there is registered retirement plan – reference such as such tax agreement
between company and BIR how to tax employee
- When you retire at 60 yrs old, what you are receiving are payments receiving by
employee for severance in his employment which are beyond the control of the employee
o Outside of retirement, what’s common example of something u receive which is
beyond control of employee – separation pay due to authorized causes
Bayanihan 2 law  all retirement pay regardless of non-compliance with any of the things
mentioned as long as paid within the year are tax exempt – shelf life ; exemptions elements not
applicable
Prizes and awards

o made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic
achievement
o but only if he was selected without any action on his part to enter the contest and
o he is not required to render substantial future services as a condition to receiving the prize or award
(strictly required and complied with)
o Ex. Raffle of car – not excluded ; Miss Universe ; no action to do anything proactively to win the price
13th month pay – includes anything or everything else that u will receive – 90,000, de minimis na
sobra lagay mo na rin
CIR v. CA GCL Retirement Plan (GCL, for brevity) is an REGISTERED REASONABLE PRIVATE BENEFIT
(1992) employees' trust maintained by the employer, PLAN IS EXEMPT FROM ALL TAXES
GCL Inc., to provide retirement, pension, GCL Plan was qualified as exempt from income tax
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Reasonabl disability and death benefits to its employees. by the CIR in accordance with Rep. Act No. 4917
e Private approved on 17 June 1967. This law specifically
Benefit The Plan was approved and qualified as exempt retirement benefits received by officials and
Plan from income tax. GCL made investments and employees of private firms, whether individual or
earned therefrom interest income from which corporate, in accordance with a reasonable
was withheld the fifteen per centum (15%) final private benefit plan maintained by the employer
withholding tax imposed. GCL filed several shall be exempt from all taxes and shall not be
claims for refund but these were denied. liable to attachment, levy or seizure by or under any
legal or equitable process whatsoever except to pay a
CIR argues that GCL is not exempt because debt of the official or employee concerned to the
the newer law (P.D. 1959) removed the private benefit plan or that arising from liability
exemptions. imposed in a criminal action.
GCL argues that they derive their exemption This must be read with Section 56(b) (now 53[b]) of
from Sec. 56(b) of the Tax Code. the Tax Code, "Sec. 56. Imposition of Tax. - (a)
Application of tax. - The taxes imposed by this Title
SC held that GCL plan is exempt. Sec. 56 (b), upon individuals shall apply to the income of estates
which provides for the exemption, cannot be or of any kind of property held in trust,
repealed by P.D. 1959 since the latter is a "(b) Exception. - The tax imposed by this Title shall
general law. not apply to employee's trust which forms part of
a pension, stock bonus, or profit-sharing plan of
an employer for the benefit of some or all of his
WON THE GCL PLAN IS EXEMPT FROM THE employees x x x"
FINAL WITHHOLDING TAX ON INTEREST
INCOME FROM MONEY PLACEMENTS AND P.D. 1959 is just a general law as compared to Sec.
PURCHASE OF TREASURY BILLS 56(b) a specific law granting exemption from income
REQUIRED BY PRES. DECREE NO. 1959  tax to employees’ trust. It is significant to note that
YES the GCL Plan was qualified as exempt from
income tax by the CIR in accordance with R.A.
4917.
CIR v. CA Castaneda retired from the government TERMINAL LEAVE PAY NOT SUBJECT TO
(1991) service as Revenue Attache in the Philippine INCOME TAX
Embassy in London, England, on 10 December The Court has already ruled that the terminal leave
Terminal 1982. He received his terminal leave pay, pay received by a government official or employee is
Leave Pay however, the CIR withheld approx. P12,000 from not subject to withholding (income) tax.
it because he claims that terminal leave pay
forms part of gross salary or income, hence, In the recent case of Jesus N. Borromeo vs. The Hon.
subject to income tax. Civil Service Commission, et al., G.R. No. 96032, 31
July 1991, the Court explained the rationale behind
WON TERMINAL LEAVE PAY FORMS PART the employee's entitlement to an exemption from
OF GROSS SALARY OR INCOME AND IS withholding (income) tax on his terminal leave pay as
SUBJECT TO INCOME TAX  NO follows:
. . . commutation of leave credits (terminal leave) is
applied for by an officer or employee who retires,
resigns or is separated from the service through
no fault of his own. In the exercise of sound
personnel policy, the Government encourages
unused leaves to be accumulated. The Government
recognizes that for most public servants, retirement
pay is always less than generous if not meager and
scrimpy. Terminal leave payments are given not only
at the same time but also for the same policy
considerations governing retirement benefits.
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Re: Atty. Bernardo Zialcita questioned the SC about TERMINAL LEAVE PAY IS NOT TAXABLE
Requestof the deductions made by the BIR on his Commonwealth Act 186 states that retired officials
Atty. retirement benefits. The money value of his and
Zialcita accrued leave credits, or his terminal leave pay employees are entitled to the commutation of the
(1990) was subject to income tax. The SC issued a unused vacation and sick leaves and that all benefits
resolution ordering the fiscal management and granted under this Act shall be exempt from all types
budget office to refund Atty. Zialcita and of taxes. EO 1077 also provides that officers and
declared that henceforth no withholding tax shall employees who retired through no fault of their own
be deducted to any office of this court from are entitled to the commutation of all the accumulated
terminal leave pay benefits of all retirees. The vacation and sick leaves. Section 28(b)7(b) of the
CIR, as intervenor-movant, filed an MR. NIRC states that any amount received by an officer or
employee as a consequence of separation from
WON TERMINAL LEAVE PAY IS TAXABLE  service of the employer due to death, sickness, or
NO for any cause beyond the control of the said
official or employee shall be excluded from the gross
income.
NOTE: COMPULSORY RETIREMENT 

CONSIDERED AS A CAUSE BEYOND CONTROL
Atty. Zialcita reached the age of compulsory
retirement (65 years old), and the court considers
compulsory retirement as a cause beyond the control.
Intercontin Intercontinental Broadcasting Corporation (IBC) RETIREMENT BENEFITS FROM AN
ental employed 4 employees in various positions. In UNAPPROVED RETIREMENT PLAN IS TAXABLE
Broadcasti 1996, the government sequestered the station, For the retirement benefits to be exempt from
ng including its properties, funds, and other assets, withholding tax, the taxpayer is burdened to prove the
Corporatio and took over its management and operations. concurrence of the following:
n v. The 4 employees retired from the company and 1. Reasonable private plan maintained by the
Amarilla received, on staggered basis, their retirement employer
(2006) benefits under the 1993 CBA. 2. The retiring official or employee has been in
the service of the same employer for at least
A Php1,500 salary increase was then given to 10 years
all employees, current and retired, effective July 3. The retiring official or employee is not less
1994. When the retirees demanded their than 50 years of age at the time of his
differentials, IBC refused and instead informed retirement
then that it would be used to offset the tax due 4. The benefit had been availed of only once
on their retirement benefits.
Respondents were qualified to retire optionally from
IBC claims that under Sec. 21 of the NIRC, the their employment with IBC. However, there is no
retirement benefits constitute income. Although evidence that the 1993 CBA had been approved or
they are exempt under Sec. 28(b), the law was ever presented to the BIR; hence, the
requires that such benefits received be in accord retirement benefits of respondents are taxable.
with a reasonable retirement plan duly
registered with the BIR. Since its retirement plan Under Sec. 80 of the NIRC, IBC, as employer was
in the 1993 CBA was not approved by the BIR, obliged to withhold the taxes on the benefits and
their retirement benefits are not exempt. remit the same to the BIR. However, the Court agrees
with respondents’ contention that IBC did not withhold
The employees, on the other hand, claim that the taxes due on their retirement benefits because it
they availed of the optional retirement because had obliged itself to pay the taxes due thereon. This
of IBC’s inducement that there would be no tax was done to induce respondents to agree to avail the
deductions. optional retirement scheme.
WON THE RETIREMENT BENEFITS ARE Parties are free to enter into any contract stipulation
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PART OF THEIR GROSS INCOME  YES provided it is not illegal or contrary to public morals.
An agreement to pay the taxes on the retirement
benefits as an incentive to prospective retirees
and for them to avail of the optional retirement
scheme is not contrary to law or to public morals.
IBC had agreed to shoulder such taxes to entice them
to voluntarily retire early, on its belief that this would
prove advantageous to it. Respondents agreed and
relied on the commitment of IBC. For IBC to renege
on its contract with respondents simply because its
new management had found the same
disadvantageous would amount to a breach of
contract.
RMC 27- Circular was issued to revoke BIR Ruling No. Voluntary – not excluded
2011 002-99, DA 184-04, DA 569-04, and DA 087-06 Mandatory – excluded
which excludes contributions to PAG-IBIG, The contributions referred to in Section 32(B)(7)(f) of
GSIS, SSS, Life Insurance, Pre-Need Plan in the NIRC would cover only the mandatory or
excess of the mandatory monthly contributions compulsory contributions of the employees to
to the computation of the gross income of the SSS, GSIS, PhilHealth.
taxpayer.
The voluntary contributions in excess of what the
law allows are not excluded from the gross income
of the taxpayer and are not exempt from income and
withholding tax.
CIR v. Atlas entered into a Loan and Sales Contract TWO SEPARATE CONTRACTS ARE INVOLVED
Mitsubishi with Mitsubishi Metal (a Japanese Corp. The loan and sales contract between Mitsubishi and
Metal licensed to do business in the Phils) for the Atlas does not contain any reference to Eximbank
Corp. expansion of productive capacity of Atlas’ mines whatsoever. The agreement is strictly between
(1990) in Toledo, Cebu. Mitsubishi agreed to extend a Mitsubishi as creditor in the contract of loan, and
$20 million loan to Atlas for the installation of a Atlas as the seller of the copper concentrates. It
new concentrator for copper production. Atlas in cannot be said that Mitsubishi was a mere agent in
turn undertook to sell to Mitsubishi all the copper said transaction.
concentrates produced from the machine for a
period of 15 years. Eximbank had nothing to do with the sale of the
copper concentrates since all that Mitsubishi stated in
Mitsubishi applied for loans with Eximbank of its loan application with the Eximbank was that the
Japan, as well as from a consortium of amount being procured would be used as a loan to
Japanese banks, so it could loan the money to and in consideration for importing copper
Atlas. Pursuant to their contract, Atlas made concentrates from Atlas. Such statement of purpose
interest payments to Mitsubishi, but 15% could not have been intended for a contract of
withholding tax was withheld from these agency, and if it were the purpose, they would have
payments and remitted to the Government. Atlas specifically so stated.
filed claim for tax credit, but the CIR did not act
upon it. Atlas claimed Mitsubishi was a mere When Mitsubishi secured such loans, it was in its own
agent of Eximbank, a foreign banking institution, independent capacity as a private entity and not as a
and the interest income from the loans is conduit of the consortium of Japanese banks or the
excluded from gross income, pursuant to Eximbank of Japan. The transaction between
Section 29 (b) (7) (A) of the tax code. Mitsubishi and Eximbank of Japan was a distinct
and separate contract from that entered into by
WON THE INTEREST INCOME FROM THE Mitsubishi and Atlas.
LOANS EXTENDED TO ATLAS BY
MITSUBISHI IS EXCLUDIBLE FROM GROSS The interest income of the loan paid by Atlas to
INCOME TAXATION AND, THEREFORE, Mitsubishi is entirely different from the interest income
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EXEMPT FROM WITHHOLDING TAX  NO paid by Mitsubishi to Eximbank of Japan. What was
the subject of the 15% withholding tax is not the
interest income paid by Mitsubishi to Eximbank, but
the interest income earned by Mitsubishi from the
loan to Atlas.
RA 9505 Dead letter law – weak imitation of 401K in US
- Pension plan, employer give pension plan and employee contributes as well, in the
contributory plan we will invest  will generate income  intent to fund and to fuel
the retirement [PERSONAL EQUITY AND RETIREMENT ACCOUNT]
- Tax credit equivalent to 5% of total PERA contribution – 100,000 contribution annually

– 5% of 100,000 (maximum if single, if married, separately 100,000, OFW..)
- Participation of government is 2 fold: 1. Benefit to account to company, 2. Benefit to

employee
- DEAD LETTER -- Law required that there will be cooperation in financial institution to
offer PERA specific products, employee – employer – financial institution (time
deposits) – no specific products today
- Nuances – age limit, 55 xpn to xpn : medical emergency allowed to nevertless

withdraw
AN ACT ESTABLISHING A PROVIDENT PERSONAL SAVINGS PLAN, KNOWN AS THE PERSONAL

EQUITY AND RETIREMENT ACCOUNT (PERA)
SECTION 1. Title. -- This Act shall be known as the "Personal Equity and Retirement Account (PERA)
Act of 2008".
SEC. 2. Declaration of Policy. -- It is declared the policy of the State to promote capital market
development and savings mobilization by establishing a legal and regulatory framework of retirement
plans for persons, comprised of voluntary personal savings and investments. The State recognizes the
potential contribution of PERA to long-term fiscal sustainability through the, provision of long-term
financing and reduction of social pension benefits.
SEC. 3. Definition of Terms. -- Unless the context requires otherwise, the following terms shall have the
following significance as used in this Act:
a. "Administrator" is an entity accredited by the Bureau of Internal Revenue (BIR), after pre-qualification
by the concerned Regulatory Authority. The Administrator shall be responsible for overseeing the PERA,
whose core functions shall include, but not limited to: reporting on contributions made to the account,
computing the values of investments, educating the Contributor, enforcing PERA contributions and
withdrawal limits, collecting appropriate taxes and penalties for the government, securing BIR Income
Tax Credit Certificates for the Contributor, consolidating reports on all investments, income, expenses
and withdrawals on the account and ensuring that PERA contributions are invested in accordance with
the prudential guidelines set by the Regulatory Authorities.
b. "Contributor" is any person with the capacity to contract and possesses a tax identification number.
The Contributor establishes and makes contributions to a PERA.
c. "Custodian" is a separate and distinct entity unrelated to the Administrator, accredited by the Bangko
Sentral ng Pilipinas, providing services in connection with the custodianship of funds and securities
comprising the PERA investments. The Custodian shall be responsible for receiving all funds in
connection with the PERA, maintaining custody of all original securities, evidence of deposits or other
evidence of investment. The Custodian shall operate independently from the Administrator. The
Custodian is required to report to the Contributor and the concerned Regulatory Authority at regular
intervals all financial transactions and all documents in its custody under a PERA.
d. "Early withdrawal" shall pertain to any withdrawal prior to the period of distribution as set forth under
Section 12 hereof.
e. "Investment Manager" is a. regulated person or entity authorized by a Contributor to make investment
decisions for his PERA. As such, it shall assume fiduciary duty and responsibility for PERA investments.
An Investment Manager shall act with utmost fidelity by observing policies directed towards
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confidentiality, scrupulous care, safety and prudent management of PERA funds.

f. "Personal Equity and Retirement Account (PERA)" refers to the voluntary retirement account
established by and for the .exclusive use and benefit of the Contributor for the purpose of being
invested solely in PERA investment products in the Philippines. The Contributor shall retain the
ownership, whether legal or beneficial, of funds placed therein, including all earnings of such
funds.
g. "PERA Investment Product" refers to a unit investment bust fund, mutual fund, entity contract,
insurance pension products, pre-need pension plan, shares of stock and other securities listed and
traded in a local exchange, exchange-traded bonds or any other investment product or outlet which the
concerned Regulatory Authority may allow for PERA purposes: Provided, however, That to qualify as a
PERA investment product under this Act, the product must be non-speculative, readily marketable, and
with a track record of regular income payments to investors.
The concerned Regulatory Authority must first approve the product before being granted tax-exempt
privileges by the BIR.
h. "Regulatory Authority" refers to the Bangko Sentral ng Pilipinas (BSP) as regards banks, other
supervised financial institutions and trust entities, the Securities and Exchange Commission (SEC) for
investment companies, investment houses, stockbrokerages and pre-need plan companies, and the
Office of the Insurance Commission (OIC) for insurance companies.
i. "Overseas Filipino" refers to (1) an individual citizen of the Philippines who is working or deriving
income from abroad, including one who retained or reacquired his Philippine citizenship under Republic
Act No. 9225, otherwise known as the "Citizenship Retention and Reacquisition Act of 2003"; or (2) the
legitimate spouse, whether or not said spouse is of Filipino ancestry, and the children of the Filipino
citizen mentioned in item (1) hereof.
SEC. 4. Establishment of a PERA. -- A Contributor may create and maintain a maximum of five (5)
PERA, at any one time: Provided, That the Contributor shall designate and maintain only one (1)
Administrator for all his PERA.
The Contributor shall make all investment decisions pertaining to his PERA. However, he has the option
of appointing an Investment Manager, either in writing or in electronic form, to make investment decisions
on his behalf without prior consultation.
SEC. 5. Maximum Annual PERA Contributions. -- A Contributor may make an aggregate maximum
contribution of One hundred thousand pesos (P100,000.00) or its equivalent in any convertible foreign
currency at the prevailing rate at the time of the actual contribution, to his/her PERA per year: Provided,
That if the Contributor is married, each of the spouses shall be entitled to make a maximum contribution
of One hundred thousand pesos (P100,000.00) or its equivalent in any convertible foreign currency per
year to his/her respective PERA Provided, further, That if the Contributor is an overseas Filipino, he shall
be allowed to make maximum contributions double the allowable maximum amount.
A Contributor has the option to contribute more than the maximum amount prescribed herein: Provided,
That the excess shall no longer be entitled to a tax credit of five percent (5%).
The Secretary of Finance may adjust the maximum contribution from time to time, taking into
consideration the present value of the said maximum contribution using the Consumer Price Index as
published by the National Statistics Office, fiscal position of the government and other pertinent factors.
SEC. 6. Employer's Contribution. -- A private employer may contribute to its employee's PERA to the
extent of the amount allowable to the Contributor: Provided, however, That the employer complies with
the mandatory Social Security System (SSS) contribution and retirement pay under the Labor Code of
the Philippines. Such contribution shall be allowed as a deduction from the employer's gross income. The
Contributor, however, retains the prerogative to make investment decisions pertaining to his PERA.
SEC. 7. Separate Asset. -- The PERA shall be kept separate from the other assets of an
Administrator/Custodian and shall not be part of the general assets of the Administrator/Custodian for
purposes of insolvency.
SEC. 8. Tax Treatment of Contributions. -- The Contributor shall be given an income tax credit
equivalent to five percent (5%) of the total PERA contribution: Provided, however, That in no instance
can there be any refund of the said tax credit arising from the PERA contributions. If the Contributor is an
overseas Filipino, he shall be entitled to claim tax credit from any tax payable to the national government
under the National Internal Revenue Code of 1997, as amended.
SEC. 9. Tax Treatment of Investment Income. -- All income earned from the investments and
reinvestments of the maximum amount allowed herein is tax exempt.
SEC. 10. Tax Treatment of Distributions. -- All distributions in accordance with Section 12 (Distribution
upon retirement/ death) hereof are tax exempt.
SEC. 11. Termination. -- Any premature termination shall be treated as an early withdrawal under
Section 13 hereof: Provided, That the penalties thereunder shall not apply if the entire proceeds
therefrom are immediately transferred to another PERA investment and/or another Administrator.
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SEC. 12. Distributions Upon Retirement/Death. -- Distributions may be made upon reaching the age of
fifty-five (55) years: Provided, That the Contributor has made contributions to the PERA for at least five
(5) years. The distribution shall be made in either lump sum or pension for a definite period or lifetime
pension, the choice of which shall be at the option of the Contributor. The Contributor, however, has the
option to continue the PERA. Complete distribution shall be made upon the death of the Contributor,
irrespective of the age of the Contributor at the time of his death.
SEC. 13. Penalty on Early Withdrawal. -- Any early withdrawal shall be subject to a penalty, the amount
of which would be determined by the Secretary of Finance and payable to the government: Provided,
That the amount of the penalty shall in no case be less than the tax incentives enjoyed by the
Contributor.
No early withdrawal penalty shall be imposed on any withdrawal of any funds for the following purposes:
For payment of accident or illness-related hospitalization in excess of thirty (30) days; and
For payment to a Contributor who has been subsequently rendered permanently totally disabled as
defined under the Employees Compensation Law, Social Security Law and Government Service
Insurance System Law.
SEC. 14. Non-Assignability. -- No portion of the assets of a PERA may be assigned, alienated,
pledged, encumbered, attached, garnished, seized or levied upon. PERA assets shall not be considered
assets of the Contributor for purposes of insolvency and estate taxes.
SEC. 15. Rules and Regulations. -- Consistent with the policy of promoting transparency in PERA
investment and thereby affording protection to the Contributor, the Department of Finance, the Bureau of
Internal Revenue and the concerned Regulatory Authorities, with the Bangko Sentral ng Pilipinas as lead
agency, shall coordinate to establish uniform rules and regulations pertaining to the following subject
matters:
a. Qualification and disqualification standards for Administrators, Custodians and Investment Managers,
including directors and officers thereof;
b. Qualified and/or eligible PERA investment products;
c. Valuation standards for PERA investments;
d. Disclosure requirements on the terms and conditions of the PERA investments;
e. Minimum requirements imposed on the Administrators as regards inculcating financial literacy in
investors;
f. Ascertainment of client suitability for PERA products;
g. Fees to be charged by the Administrator, Custodian or Investment Manager shall always be
reasonable and approved by the concerned Regulatory Authority;
h. Record-keeping, reporting and audit requirement of Administrators and Custodians pertaining to
records for all contributions, earnings and total account balances; and
i. Other pertinent matters to be determined by the Regulatory Authorities.
SEC. 16. Administration of Tax Incentives. -- The BIR shall issue the implementing rules and
regulations regarding all aspects of tax administration relating to PERA. The BIR shall coordinate the
qualification standards of the Administrator with the Regulatory Authorities.
SEC. 17. Penalty. -- A fine of not less than Fifty thousand pesos (P50,000.00) nor more than Two
hundred thousand pesos (P200,000.00) or imprisonment of not less than six (6) years and one (1) day to
not more than twelve (12) years or both such fine and imprisonment, at the discretion of the court, shall
be imposed upon any person, association, partnership or corporation, its officer, employee or agent, who,
acting alone or in connivance with others, shall:
a. Act as Administrator, Custodian or Investment Manager without being properly qualified or without
being granted prior accreditation by the concerned Regulatory Authority;
b . Invest the contribution without written or electronically authenticated authority from the Contributor, or
invest the contribution in contravention of the instructions of the Contributor;
c. Knowingly and willfully make any statement in any application, report, or document required to be filed
under this Act, which statement is false or misleading with respect to any material fact:
d. Misappropriate or convert, to the prejudice of the Contributor, contributions to and investments or
income from the PERA;
e. By gross negligence, cause any loss, conversion, or misappropriation of the contributions to, or
investments from, the PERA or
f. Violate any provision of this Act or rules and regulations issued pursuant to this Act.
Notwithstanding the foregoing, any willful violation by the accredited Administrator, Custodian or
Investment Manager of any of the provisions of this Act, or its implementing rules and regulations, or
other tern and conditions of the authority to act as Administrator, Custodian or Investment Manager may
be subject to the administrative sanctions provided for in applicable laws.
The above penalties shall be without prejudice to whatever civil and criminal liability provided for under
applicable laws for the same act or omission.
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SEC. 18. Abuse of the Tax Exemption and Privileges. -- Any person, natural or juridical, who unduly
avails of the tax exemption privileges herein granted, possibly by co-mingling PERA accounts in an
investment with other investments, when such person is not entitled hereto, shall be subject to the
penalties provided in Section 17 hereof. In addition, the offender shall refund to the government double
the amount of the tax exemptions and privileges enjoyed under this Act, plus interest of twelve percent
(12%) per year from the date of enjoyment of the tax exemptions and privileges to the date of actual
payment.
SEC. 19. Separability Clause. -- If any provision or part hereof is held invalid or unconstitutional, the
remainder of the law or the provision not otherwise affected shall remain valid and subsisting.
SEC. 20. Repealing Clause. -- All laws, decrees, orders, rules and regulations or parts thereof
inconsistent with this Act are hereby amended or modified accordingly.
SEC. 21. Effectivity. -- This Act shall take effect fifteen (15) days following its publication in a newspaper
of general circulation: Provided, That the tax incentives granted hereunder shall take effect on January 1,
2009.

RR 8-00 REVENUE REGULATIONS NO. 8-2000 issued November 22, 2000 amends specific provisions of RR
(See full list No. 2- 98 and RR No. 3-98 with respect to the "De Minimis" Benefits, Additional Compensation
of de Allowance (ACA), Representation and Transportation Allowance (RATA) and Personal Economic Relief
minimis Allowance (PERA). Said benefits/allowances received by employees are not considered as items of
benefits in income and, therefore, are not subject to income tax and, consequently, to the withholding tax.
the last
part) Effective the Taxable Year 2000, ACA will be classified as part of the "Other Benefits" excluded from
one's gross compensation income, provided that the total amount of such benefits does not exceed P
30,000. Items of "de minimis" benefits exempt from the fringe benefits tax are enumerated in the
Regulations.
RR-5-2011 Further amends RR Nos. 2-98 and 3-98, as last amended by RR No. 5-2008, with respect to "De Minimis
Benefits"
But take note that this was amended by RR-8-2012 as follows:

(e) Uniform and Clothing allowance not exceeding P5,000 per annum;
RR 17- implements the tax provisions of Republic Act No. 9505, otherwise known as the “Personal Equity and
2011 Retirement Account (PERA) Act of 2008”
The Qualified Employer’s Contribution to his/its employee’s PERA shall not form part of the employee’s
taxable gross income, hence, exempted from the withholding tax on income, whether withholding tax on
compensation or fringe benefits.
The employer can claim the actual amount of his/its Qualified Employer’s Contribution as a deduction
from his/its gross income, but only to the extent of the employer’s contribution that would complete the
maximum allowable PERA contribution of an employee. The Qualified Employer’s Contribution allowable
as deduction shall likewise be exempt from withholding tax on compensation, the provisions of Section
34(K) of the Tax Code notwithstanding.
For this purpose, the Administrator shall issue to the employer a certificate of the actual amount of
Qualified Employer’s Contributions
RR 8-2012 Further amends RR 2-98, as last amended by RR 5-2008 and 5-2011, relative to the “De Minimis
Benefit,” uniform and clothing allowance not exceeding P 5,000 per annum, which is exempt from Income
Tax on compensation as well as from fringe benefit tax.
RR 1-2015 Amended specific provisions pertaining to de minimis and fringe benefit tax
SECTION 1. Section 2.78.1 (A) (3) of RR 2-98, as last amended by RR 8- 2012, is hereby further
amended to read as follows:
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"Sec. 2.78.1. Withholding Tax on Compensation Income. —

(3) Facilities and privileges of relatively small value. —
(k) Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total annual monetary value received from both CBA
and productivity incentive schemes combined do not exceed ten thousand pesos (Php10,000.00) per
employee per taxable year;
SECTION 2. Section 2.33 (C) of RR 3-98, as last amended by RR 8-2012, is hereby further amended to
read as follows:
"Sec. 2.33. Special Treatment of Fringe Benefits. — (C) Fringe Benefits Not Subject to Fringe Benefit
Tax. — (k) Benefits received by an employee by virtue of a collective bargaining
agreement (CBA) and productivity incentive schemes provided that the total annual monetary value
received from both CBA and productivity incentive schemes combined, do not exceed ten thousand
pesos (Php10,000.00) per employee per taxable year;
DE MINIMIS BENEFITS (As of August 21, 2019)

De minimis benefits are benefits of relatively small values provided by the employers to the employee on top of the
basic compensation intended for the general welfare of the employees. Being of relatively small values, the same is not
being considered as a taxable compensation.
For the employer, the amount of de minimis provided is a deductible salaries expense, while for the employee, it would
constitute as an additional salary that is not subject to withholding tax on compensation.
1. Monetized unused vacation leave credits of private employees not exceeding 10 days during the year.
2. Monetized value of vacation and sick leave credits paid to government official and employees.
3. Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per semester or
P250 per month.
4. Rice subsidy of P2,000 or 1 sack of 50-kilogram rice per month amounting to not more than P2,000.
5. Uniform and clothing allowance not exceeding P6,000 per annum.
6. Actual medical assistance, e.g., medical allowance to cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000 per annum.
7. Laundry allowance not exceeding P300 per month.
8. Employees achievement awards, e.g. for length of service or safety achievement, which must be in the form of
tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding
P10,000 received by the employee under an established written plan which does not discriminate in favor of
highly paid employees;
9. Gifts made during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum,
10. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum
wage on a per region basis.
11. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity
incentive schemes provided that the total monetary value received from both CBA and productivity incentive
schemes combined do not exceed P10,000 per employee per taxable year.
All other benefits given by employers which are not included in the above enumeration shall not be considered de minimis
benefits, and hence, shall be subject to income tax as well as withholding tax on compensation income.
Please note also of the limitations as to amount because it is material to qualify for exemptions.
If you provide more than the limitations, the amount in excess of the limit would be taxable and subject to
withholding tax on compensation, if the recipient employee is a rank-and-file, or fringe benefits tax (FBT) of 35%
if a supervisory or managerial employee. This is however subject to the rule on the P90,000 amount for 13th
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month pay and other benefits where excess de minimis benefits may not be taxable if the total of such excess
plus the 13th month pay and other benefits is within the P90,000 limitation.
Ex. WAH – Work at Home Employee

- Connectivity allowance and mobility allowance, electricity allowance – very very small
- Not included in de minimis!!! EXCLUSIVE LIST- even if they are small amounts, furnished for healh and safety of
employees.
- All other benefits given by employers which are not included in the above enumeration shall not be considered de
minimis benefits, and hence, shall be subject to income tax as well as withholding tax on compensation
income.
4. Source of Income Rules
IDENTIFY WHAT TYPE OF INCOME

THEN SOURCE WHETHER IT WOULD BE Rule  where obligor resides
TAXABLE IN PH OR NOT
Ex. INTEREST INCOME Is money INTEREST INCOME? = interest income

Singapore bank lends to Philippine borrower must be assimilated to money lent! Must comply with
- Loan Agreement – Singapore bank will lend definition of interest
1M dollar to PH borrower ; subject to 10%
interest = 100,000 WHO IS OBLIGOR – domestic corporation – PH
- PH borrower asked to pay additional sourced income yung interest remitted to a foreign
charge of 10,000 Payable after 1 yr.
corporation (where obligor resides)
- PH entity pays Singapore bank 1,020,000.
Foreign corporation (resident or non-
resident)
What portion/s of 1,020,000 taxable?
- P10,000 (Non-residence corporation lends
from PH borrower)  non residence corp
earned interest from PH borrower 
Interest income derived from Philippine
source
- P10,000 additional charge for processing
the loan = not taxable as Ph sourced
income  Not interest. Paid for
performance of service being rendered.
- 1,000,000 LOAN AMOUNT Not interest.
This is return of capital, hence not
taxable
CIR v. Respondent Marubeni is a foreign corporation ONSHORE v. OFFSHORE
Marubeni organized under Japan laws and is registered to Assuming it did not validly avail of the amnesty under
Corporati engage in business in the Philippines. Petitioner the two EOs, it is still not liable for the deficiency
on CIR assessed respondent for deficient income, contractor’s tax because the income from the projects
(2001) branch profit remittance, contractor’s, and came from the “Offshore Portion” of the contracts.
commercial broker’s taxes based on two contracts The manufacturing of the machines and equipment
(with Philphos and National Development took place in Japan (Offshore) while all the supplies
Company) in the Philippines. for the projects were gathered and installed in the
Philippines (Onshore). They were already finished
WON MARUBENI IS LIABLE TO PAY THE products when shipped to the Philippines. Thus, they
INCOME, BRANCH PROFIT REMITTANCE, AND cannot be held liable for contractor’s tax.
CONTRACTOR’S TAXES  NO
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FOREIGN CORPORATION CANNOT BE TAXED

FOR INCOME SOURCES OUTSIDE PH
The two contracts entered into by Marubeni were
divided in two parts – Onshore Portion and Offshore
Portion. Respondent is an independent contractor
(activity consists essentially of the sale of all kinds of
services for a fee) and thus should pay contractor’s
tax (tax imposed upon the privilege of engaging in
business; generally in the nature of excise tax).
However, all the manufacturing and designing of
the machines and equipment took place in Japan
(Offshore) while all the supplies for the projects were
gathered and installed in the Philippines (Onshore).
They were already finished products when
shipped to the Philippines. Thus, not liable for
contractor’s tax.
CIR v BOAC, a British Government-owned Corporation, INCOME WAS DERIVED FROM PH, THUS,
BOAC was assessed by the CIR for tax deficiencies. TAXABLE
(1987) Although it was not carrying passengers and cargo For the source of income to be considered as coming
to and from the Philippines since it did not have from the Philippines, it is sufficient that the income
landing rights granted to it and the right to is derived from activity within the Philippines. In
Sale of operate by Civil Aeronautics Board, it BOAC’s case, the sale of tickets in the Philippines
tickets in maintained a general sales agent (Warner is the activity that produces the income. The ticket
PH, Barnes and later on Qantas Airways) in the sales were also made here in Philippine currency.
through Philippines which was responsible for selling The site of the source of payments is the
general BOAC tickets covering passengers and Philippines. The flow of wealth proceeded from, and
agent cargoes. occurred within, Philippine territory, enjoying the
protection accorded by the Philippine government.
BOAC paid under protest such tax deficiencies
and tried to claim a refund which was however Further, the Court explained that gross income
denied by CIR. BOAC filed in the CTA assailing the includes transactions of any business carried on
assessment and praying for a refund. CIR again for gain or profile, or gains, profits, and income
assessed them for deficiency income tax. The Tax derived from any source whatever.
Court reversed the CIR and held that the proceeds
of sales of BOAC passage tickets in the Philippines The passage documentations in this case were sold
by Warner Barnes and Company, Ltd., and later by in the Philippines and the revenue therefrom was
Qantas Airways, during the period in question, do derived from an activity regularly pursued within the
not constitute BOAC income from Philippine Philippines.
sources “since no service of carriage of
passengers or freight was performed by BOAC Even if the BOAC tickets sold covered the “transport
within the Philippines” and, therefore, said income of passengers and cargo to and from foreign cities,” it
is not subject to Philippine income tax cannot alter the fact that income from the sale of
tickets was derived from the Philippines.
WON THE REVENUE DERIVED BY BOAC FROM
SALE OF TICKETS IN THE PHILIPPINES FOR THE TEST OF TAXABILITY IS THE “SOURCE”
AIR TRANSPORTATION, WHILE HAVING NO AND THE SOURCE IS THAT ACTIVITY WHICH
LANDING RIGHTS HERE, CONSTITUTE INCOME PRODUCED THE INCOME
OF BOAC FROM PHILIPPINE SOURCES, AND,
ACCORDINGLY, TAXABLE  YES
Commiss Smith Kline has an underallocation of overhead SEC. 37 of the NIRC states that “there shall be
41
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ioner v. expenses from the head office for the year 1971; deducted the expenses, losses, and other deductions
CTA and this resulted in an income tax overpayment. It properly apportioned or allocated thereto and a
Smith then made a formal claim for refund. ratable part of any expenses, losses, or other
Kline & deductions which cannot definitely be allocated to
French Without awaiting the action of the CIR, it filed a some item of class of gross income. The remainder, if
Overseas petition for review with the CTA. CTA ruled in favor any, shall be included in full as net income from
(1984) of Smith Kline. sourced within the Philippines.”
Income WON THE UNDERALLOCATION OF OVERHEAD The Court held that the applicable law is Section 37
from EXPENSES MAY BE CONSIDERED AS of the old NIRC, which is reproduced in the new NIRC
sources ADDITIONAL DEDUCTIBLE EXPENSES  YES of 1977. The law states that when it comes to net
income from sources in the Philippines, from the
within PH
taxable gross income shall be deducted the
Allocation = Expense x PH gross expenses, losses and other deductions property
income/Worldwide gross income apportioned AND a ratable part of any expenses,
losses or other deductions which CANNOT definitely
Smith Kline and French Overseas Company is a be allocated to some item or class of the gross
multinational firm from Philadelphia. income. The remainder shall then be included as
part of the net income.
It paid its tax worth P511,247, but eventually it Just to clear out the example (example lang to ha
claimed for a REFUND that there was an para simple not the real figures in the case)
overpayment of P323,255.
Smith Kline argued that it failed to consider the  Basta income from ALL sources = 180,000.
share of the Philippine branch in the Income from Philippines = 36,000.
unallocated overhead expenses worth
P1,427,484. The CTA ruled in favor of the  Expenses = 78,000 divided into:
corporation so the CIR filed for the review of the
decision with the CA.  8,000 = expenses from Philippines
Issue/s: WON Smith Kline is entitled to a refund.  40,000 = expenses NOT from Philippines
Held:  30,000 = expense! remainder di alam san
YES. In ruling against the CIR, the Court explained galing – so yung ratable part niya yung
that expenses should be divided into 3 in idededuct to get the net income from the
computing for the taxable income: Philippines.
(1) that spent due to sources of income in the
 Rate is 36,000( income w/n) 180,000
Philippines,
(income all sources)= 1/5
(2) that NOT spent due to sources of income in
 So 1/5 of 30,000 is 6,000.
Philippines, and
o 6,000 plus the 8,000 (expense from PH)
(3) that which cannot be definitely allocated.
(yung expenses from Philippines) =
14,000.
For the 3rd kind, the ratable share must be o So 36,000 – 14,000 = 22,000 which is the
obtained which must be deducted from the taxable net income for the Philippine
taxable gross income. The rate between the branch TY LORD!
gross income from ALL sources and the gross
income from sources within the Philippines will
From the foregoing provision, it is manifest that
be used to obtain the ratable share which will be
deducted from the taxable income. Since Smith where an expense is clearly related to the
Kline failed to deduct the ratable share of the production PH-derived income or to PH
Philippine branch of the unallocated overhead operations, that expense can be deducted from
expenses from the taxable gross income, it is the gross income acquired in the PH without
entitled to a refund. resorting to appointment.
The overhead expenses incurred by the parent

company in connection with finance,
administration, and research and development,
all of which directly benefit its branches all over
the world, including the PH, fall under a different
category. There are items which cannot be
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definitely allocated or identified with the

operations of the PH branch. Under SEC. 37, Smith
Kline can claim as deduction a part of such expense
upon the ration of the local branch’s gross income to
the total gross income, worldwide, of the multinational
corporation.
Phil Petitioner, domestic corporation, entered into The reinsurance premiums were income created from
Guaranty reinsurance contracts with foreign insurance the undertaking of the foreign reinsurance companies
v. CIR companies not doing business in the PH. They to reinsure Phil Guaranty, the undertaking took place
(1965) agreed to cede to the foreign reinsurers a in the Philippines, so the insurance premiums
portion of the premiums of the underwritten came from sources WITHIN THE PHILIPPINES,
Gross insurance policies. The contracts were signed by and hence, subject to corporate income tax.
income petitioner in Manila and by the foreign insurers
from outside the PH. For years 1953 and 1954, they PLACE OF ACTIVITY IS CONTROLLING
sources ceded 1.5 million to the foreign reinsurers and it In this case, SC said that the activity creating the
within PH was excluded from its gross income when it filed income is performed or done in the Philippines. And
the ITR. It was assessed by the CIR for deficiency the foreign insurer’s place of business should not be
in the withholding tax on the ceded reinsurance confused with the place of the activity. What is
premiums. controlling is not the place of business but the
place of activity that created the income.
Petitioner Maintains that premiums are not income
from sources within the Philippines because:
 Foreign firms do not do business here
Do not do business here argument

WON REINSURANCE PREMIUMS ARE INCOME
FROM SOURCES WITHIN PH, AND
THEREFORE, SUBJECT TO TAX  YES
Howden Commonwealth Insurance Co., a domestic ACTIVITIES WERE UNDERTAKEN IN PH, THUS,
& Co., corporation, contracted to cede reinsurance TAXABLE
LTD v. premiums to 32 British insurance companies YES. The source of an income is the property, activity
not engaged in trade or business in the
CIR or service that produced the income. Reinsurance
Philippines. Pursuant to the reinsurance contract,
(1965) Commonwealth will cede portions of the premiums premiums remitted by domestic insurance
it receives for the insurances on the risks (fire, corporations to foreign reinsurance companies
marine, etc.) it has undertaken in the Philippines are considered income of the latter derived from
and in return the British insurance companies will sources within the Philippines because its source
indemnify Commonwealth in case of any liability is the undertaking (activity) to indemnify
incurred by the latter. Howden & Co., Ltd. acted as Commonwealth against liability. The undertaking
a broker for the 32 British corporations.
took place in the Philippines. (Para marami ka pa
The reinsurance contracts were prepared and masabi, check other reasons of the Court:
signed by the British reinsurers in England and the Commonwealth,
same were sent to Manila where Commonwealth - its liabilities, and the risks it insured are
signed them. (Contracts were perfected in the all in the Philippines;
Philippines.) Commonwealth remitted P798, 297.47 - the contracts were perfected the in the
reinsurance premiums to Howden. The former also Philippines because they were last
paid Holden’s P66,112.00 withholding income tax to
signed here;
the BIR. Invoking a ruling by the CIR, which
purportedly exempts from withholding tax the - there was a stipulation in the contract
reinsurance premiums received by foreign that Philippine laws shall govern the
insurance companies not authorized to do business agreement;
in the Philippines, Howden filed a claim for refund - What is being considered by the Tax
with the BIR. Howden further contends that the Code is “activity” not “business,”
reinsurance premiums came from sources place of business may be abroad but
outside the Philippines. In support to this
its activities are being done here,
argument, Howden alleges:
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o Contracts were prepared and signed abroad. hence taxable.)

Situs lies outside the Philippines.
o The foreign insurers are not engaged in business “ACTIVITY” v “BUSINESS”
in the Philippines. The premiums are their income
 An activity may consist of a single act, while
from their business, which are conducted in
business implies continuity of transactions.
England and, as such taxable in England.
A corporation in the Philippines may earn an
income although such corporation conducts all
WON PORTION OF PREMIUMS EARNED FROM its businesses abroad.
INSURANCES LOCALLY UNDERWRITTEN BY A  Section 24 of the Tax Code does not require a
DOMESTIC CORP, CEDED TO AND RECEIVED foreign corporation to be engaged in business
BY A NON-RESIDENT FOREIGN REINSURANCE in the Philippines in order for its income from
COMPANY, THRU A NON-RESIDENT FOREIGN sources within the Philippines to be taxable. It
subjects foreign corporations not doing business in
BROKER, PURSUANT TO REINSURANCE
the Philippines to tax for income from sources
CONTRACTS SIGNED ABROAD BUT SIGNED within the Philippines.
BY THE DOMESTIC CORP IN PH, SUBJECT TO  If by source of income is meant the business of the
INCOME TAX  YES taxpayer, foreign corporations not engaged in
business in the Philippines would be exempt from
WON THE REINSURANCE PREMIUMS ARE taxation on their income from sources within the
Philippines.
SUBJECT TO WITHHOLDING TAX  YES
2) YES. Reinsurance premiums, being income from

sources within the Philippines, are subject to
withholding income tax by express provision of law.
Subsection (b) of Section 53 subjects to withholding
tax the following: interest, dividends, rents, salaries,
wages, premiums, xxx. The word “premiums” is
neither qualified nor defined by the law itself, thus it
should mean income and should include all premiums
constituting income, whether they are insurance or
reinsurance premiums.
Since Section 53 subjects to withholding tax various

specified income, among them, “premiums,” the
generic connotation of each and every word or
phrase composing the enumeration in Subsection (b)
thereof is income. Perforce, the word “premiums,”
which is neither qualified nor defined by the law itself,
should mean income and should include all premiums
constituting income, whether they be insurance or
reinsurance premiums. Reinsurance premiums,
therefore, are determinable and periodical income:
determinable, because they can be calculated
accurately on the basis of the reinsurance contracts;
periodical, inasmuch as they were earned and
remitted from time to time.
Philamlif Petitioner PHILAMLIFE is a domestic corporation Under the Tax Code, rentals and royalties are part of
e who entered into a Management Services the gross income from sources within the Philippines.
Insuranc Agreement with American International o The various management services enumerated in
Reinsurance Co., Inc. (AIRCO), a non-resident the said Management Services Agreement will show
e v. CTA
foreign corporation with principal place of business that they can easily fall under any of the expanded
(1995) in Pembroke, Bermuda. It was agreed that AIRCO meaning of royalties. From the heading 'Investments'
shall perform for PHILAMLIFE certain investment, to 'Personnel', the services call for the supply by the
marketing, education and training, accounting and non-resident foreign corporation of technical and
auditing, corporate and personnel services, AIRCO commercial information, knowledge, advice,
assistance or services in connection with technical
management or administration of an insurance
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later merged with AIGI. business — a commercial undertaking.
CIR issued in favor of Philamlife tax credit - Therefore, the income derived for the
representing erroneous payment of withholding tax services performed by AIGI for
at source on remittances to AIGI for services PHILAMLIFE under the said
rendered abroad, but later cancelled the tax credit. management contract shall be
On the basis of that issuance, Philamlife filed a considered as income from services
claim for refund of a second erroneous tax within the Philippines.
payment.
The test of taxability is the SOURCE , and the
WON COMPENSATION FOR ADVISORY source of an income is that ACTIVITY which
SERVICES ADMITTEDLY PERFORMED produced the income. It is not the presence of
ABROAD BY THE PERSONNEL OF A FOREIGN any property from which one derives rentals and
CORPORATION NOT DOING BUSINESS IN THE royalties that is controlling, but rather, as
PHILIPPINES IS SUBJECT TO PHILIPPINE expressed under the expanded meaning of “royalties”
WITHHOLDING INCOME TAX  YES in Section 37(a), it includes “royalties for the supply of
scientific, technical, industrial, or commercial
knowledge, or information; and the technical advice,
assistance or services rendered in connection with
the technical management and administration of any
scientific, industrial or commercial undertaking,
venture, project or scheme”.
The Contract falls under the expanded meaning of

royalties. The income derived for the services
performed by AIGI for Philamlife under the
Agreement shall be considered as income from
services within the Philippines.
CIR v. Juliane Baier-Nickel, a non-resident German, is Pursuant to Sec 25 of NIRC, non-resident aliens,
Baier- the president of Jubanitex, a domestic whether or not engaged in trade or business, are
Nickel corporation engaged in the manufacturing, subject to the Philippine income taxation on their
(2006) marketing and selling of embroidered textile income received from all sources in the Philippines.
products.
“Source” is not a place, it is an activity or
Through Jubanitex’s general manager, Marina property. As such, it has a situs or location, and if
Guzman, the company appointed respondent as that situs or location is within the United States the
commission agent with 10% sales commission on resulting income is taxable to nonresident aliens and
all sales actually concluded and collected through foreign corporations. The source of an income is
her efforts. the property, activity or service that produced the
income. For the source of income to be considered
Respondent received P1,707,772. 64 as sales as coming from the Philippines, it is sufficient that the
commission from w/c Jubanitex deducted the 10% income is derived from activity within the Philippines.
withholding tax of P170, 777.26 and remitted to
BIR. Respondent filed her income tax return but The respondent was not able to prove the fact that
then claimed a refund from BIR for the P170K, the services she rendered were performed in
alleging this was mistakenly withheld by Germany. The settled rule is that tax refunds are in
Jubanitex and that her sales commission the nature of tax exemptions and are construed
income was compensation for services strictly against the taxpayer. She failed to discharge
rendered in Germany not Philippines and thus the burden of proving that her income was from
not taxable here. sources outside the Philippines and is exempt from
application of our income tax law and a right for a tax
WON RESPONDENT’S SALES COMMISSION refund.
INCOME IS TAXABLE IN THE PHILIPPINES 
YES
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Soriano Cia, petitioner, sold tractors to United Africa, Delivery to the carrier is delivery to the buyer
Cia v. Co. (Behn, Meyer & Co., Ltd. vs. Yangco, 38 Phil., 602;
CIR UAC hired Tex Taylor as inspector of the tractor 46 Am. Jur. 605). True that this rule yields to
(1955) before purchasing. The tractors were stored in US evidence of a contrary intent between the parties, but
military bases in the Philippines. there is here no proof to show that petitioner and its
foreign buyer intended otherwise, that is, that delivery
BIR: Petitioner imported the tractors from the army and the passing of title to its buyer should take place
bases; that they were subsequently sold to its right in the army bases where the tractors were
foreign buyer within the Philippines; and that title located.
passed upon delivery to the carrier f.a.s. Manila.
On the contrary, petitioner itself has admitted that
Petitioner: It did not import the 57 tractors in Tex Taylor (who is now alleged to have accepted
question for the Foreign Liquidation delivery of the tractors in behalf of the United
Commission because title to the same passed Africa Co., Ltd.) has no power or authority
to its foreign buyer while the goods were still at whatever to do so.
the foreign bases, and that they passed Philippine
territory merely in transit to pier, Manila, where they The Court noted that the sale of the tractors was
were delivered f.a.s.; hence its sale of the tractors consummated in the Philippines for title was
was not domestic and therefore not liable for the passed to the foreign buyer at the pier of Manila;
payment of sales tax. hence the situs of the sale is Philippines and it is
taxable in this country.
WON PETITIONER IS LIABLE FOR THE
PAYMENT OF PERCENTAGE OR SALES TAX Soriano made delivery of the tractors at the pier in
ON ITS GROSS SALES OF THE TRACTORS TO Manila. Hence, it was only at Manila that the goods
THE UNITED AFRICA CO., LTD. UNDER SEC. were delivered, and title passed to the buyer; and
186 OF THE NIRC  YES from their removal from the bases until their
delivery at shipside, title to the tractors was in the
Section 186. Percentage tax on sales of other seller.
articles.—There is levied, assessed and collected
on every original sale, barter, exchange, and similar
transaction intended to transfer ownership a tax
equivalent to five per centum of the gross selling
price or gross value in money of the articles so
sold, bartered, exchanged, or transferred, such tax
to be paid by the manufacturer, producer, or
importer.
Quill Quill is a Delaware corporation The Court said that North Dakota’s imposition of the
Corp. v. with warehouses in Illinois, California, and use tax did not constitute a breach of the Due
North Georgia. Quill sells office equipment and supplies; Process Clause because the Quill Corporation had
Dakota it solicits business through catalogs and flyers, sufficient contact with the State’s residents and
(1992) advertisements in national periodicals, and benefited from the state's tax revenue.
telephone calls.
Thus, so long as the commercial actor’s activity
Quill maintained no offices or warehouses in North is purposefully directed towards residents of the
Dakota. None of its employees worked or taxing State and the tax is related to the benefits
resided in North Dakota. received from the State, the actor’s physical
However, Quill's North Dakota customer base presence is not necessary to establish the nexus
numbered approximately 3,000 patrons and sufficient to impose the tax.
accounted for nearly $1,000,000 in annual sales.
The company filled these orders via mail or However, it found the use tax to be unconstitutional
common carrier from out-of-state distribution because it interfered with interstate commerce,
centers. rendering it a violation of the Commerce Clause.
Thus, a State whose only connection with the
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NORTH DAKOTA LAW: imposes a use tax on all vendor is through mail or common carrier lacks
property purchased for storage, use, or the nexus required by the Commerce Clause to
consumption within the state that requires impose the tax. Consequently, the Court reversed
every “retailer” to collect the tax from its the North Dakota Supreme Court's decision by ruling
customers and remit it to the state. in favor of the Quill Corporation.
The statute defines a “retailer” as any person who

“engages in regular or systematic solicitation” of a
consumer market in the state.
WON A VENDOR WHOSE ONLY CONNECTION

WITH A STATE IS THROUGH COMMON
CARRIER OR THE MAIL SYSTEM IS FREE
FROM PAYING USE TAX BECAUSE THE
VENDOR LACKS A PROPER CONNECTION
WITH THE TAXING STATE AS REQUIRED BY
THE DUE PROCESS CLAUSE  NO
WON A VENDOR WHOSE ONLY CONNECTION

WITH A STATE IS THROUGH A COMMON
CARRIER OR U.S. MAIL IS EXEMPT FROM USE
TAX BECAUSE THE VENDOR LACKS PROPER
CONNECTION WITH THE TAXING STATE AS
REQUIRED BY THE COMMERCE CLAUSE 
YES
Vodafone On February 2007, Vodafone International The government has no jurisdiction over Vodafone’s
Internatio Holdings B.V (Vodafone or VIH), a Dutch entity, purchase of mobile assets in India as the
nal had acquired 100 percent shares in CGP transaction took place in Cayman Islands between
(Holdings) Limited (CGP), a Cayman Islands
Holdings HTIL & Vodafone.
company for USD 11.1 billion from Hutchinson
v. Union Telecommunications International Limited
of India (HTIL). Sale of CGP share by HTIL to Vodafone or VIH
(2012) does not amount to transfer of capital assets
CGP [HEL Indian company] (Cayman Islands Co) within the meaning of Section 2 (14) of the Income
 HTIL VODAFONE (Dutch Tax Act and thereby all the rights and entitlements
that flow from shareholder agreement etc. that form
CGP, through various intermediate companies
integral part of share of CGP do not attract capital
or contractual arrangements controlled 67% of
Hutchison Essar Limited (HEL), an Indian gains tax.
company.
- NO. Charge to capital gains under Section
The acquisition resulted in Vodafone acquiring 9(1)(i) of the Act arises on existence of three
control over CGP and its downstream subsidiaries elements, viz, transfer, existence of a capital
including, ultimately, HEL. HEL was a joint venture asset and situation of such asset in India. The
between the Hutchinson group and the Essar legislature has not used the words ‘indirect
group. It had obtained telecom licenses to provide transfer’ in Section 9(1)(i) of the Act. If the
cellular telephony in different circles in India from word ‘indirect’ is read into Section 9(1)(i) of the
November 1994. On September 2007, the tax Act, then the phrase ‘capital asset situate in
department issued a show-cause notice to India’ would be rendered nugatory. Section
Vodafone to explain why tax was not withheld 9(1)(i) of the Act does not have ‘look through’
on payments made to HTIL in relation to the provisions, and it cannot be extended to cover
above transaction. indirect transfers of capital assets/ property
situated in India. The proposals contained in
The tax department contended that the the Direct Taxes Code Bill, 2010, on taxation
transaction of transfer of shares in CGP had the of off-shore share transactions indicate that
effect of indirect transfer of assets situated in indirect transfers are not covered by Section
India. 9(1)(i) of the Act. A legal fiction has a limited
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The tax authorities sought to tax capital gain scope and it cannot be expanded by giving
arising from sale of share capital of CGP on the purposive interpretation, particularly if the
ground that CGP had underlying Indian Assets. result of such interpretation is to transform the
concept of chargeability, which is also there in
WON THE INDIAN REVENUE AUTHORITIES Section 9(1)(i) of the Act. Accordingly, the
HAD THE JURISDICTION TO TAX AN Supreme Court concluded that the transfer of
OFFSHORE TRANSACTION OF TRANSFER OF the share in CGP did not result in the transfer
SHARES BETWEEN TWO NON-RESIDENT of a capital asset situated in India, and gains
from such transfer could not be subject to
COMPANIES WHEREBY THE CONTROLLING
Indian tax.
INTEREST OF AN INDIAN RESIDENT COMPANY - NO. The extinguishment of such rights under the
IS ACQUIRED BY VIRTUE OF THIS Share Purchase Agreement (SPA) resulted in a
TRANSACTION  NO taxable transfer of a capital asset situated in
India. In this context, the Supreme Court
reiterated the ‘look at’ principle enunciated in
Ramsay case, in which it was held that the
Revenue or the Court must look at a document
or a transaction in a context to which it properly
belongs. It is the task of the Revenue/ Court to
ascertain the legal nature of the transaction and
while doing so it has to look at the entire
transaction as a whole, and not adopt a
dissecting approach. By applying the ‘look at’
test discussed above, the Supreme Court held
that extinguishment took place because of the
transfer of the CGP share and not by virtue of
various clauses of SPA. The Supreme Court
went on to hold that where a structure has
existed for a considerable length of time and
where the Court is satisfied that the transaction
satisfies all the parameters of ‘participation in
investment’, then in such a case, the Court need
not go into questions such as de facto control
vs. legal control, legal rights vs. practical rights,
etc in the context of determining taxability.
Under the Indian Companies Act, 1956, the situs
of the shares would be where the company is
incorporated and where its shares can be
transferred. In the present case, it was asserted
that transfer of CGP shares were recorded in
Cayman Island and this was not disputed by the
tax authorities. Thus, Supreme Court also
rejected the argument of the Revenue that since
CGP was a mere holding company, the situs of
its share was was situated in India where its
underlying assets were located.
RAMO 1- SUBJECT: Audit Guidelines and Procedures on the Proper Determination of the Income Tax Liability of
95 Philippine Branches and Liaison Offices of Multi-National Enterprises (MNEs) Engaged in Soliciting Orders,
Purchaser, Service Contracts, Trading, Construction and Other Activities in the Philippines
TO: All Internal Revenue Officers and Others Concerned
IV. GUIDELINES
1. The Philippine income tax due from soliciting orders, purchaser, service contracts, trading,
construction and other activities of the Philippine branches and liaison offices of MNEs will be
ascertained using the following formula.
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For solicitation and trading activities:

{(Worldwide Operating Sales to the Philippines attribution tax)}
{(Income X Worldwide Sales X rate X rate)}
For construction and other activities:

plus {(Net Income from construction and other activities X tax rate)}
2. In implementing the above formula, the following terms shall be construed to mean as follows:
A. Worldwide (W/W) shall include head office accounts and those of branches located in
different countries but shall exclude subsidiary accounts.
B. W/W Operating Income shall include the Gross Income minus Selling General &
Administrative expenses. Operating Income does not include non- operating and
extraordinary items like interest expense, exchange profit/loss capital gains/losses or other
income/loss not related not related to operation.
C. Sales to the Philippines shall be defined as the aggregated amount of exports and offshore
transactions to the Philippines by the Head Office, all branches and liaison offices and shall
include the amount of indent transactions from which commissions are generated. These
shall also include imported materials and equipment of construction projects undertaken in
the Philippines, but shall exclude local service income from construction projects or onshore
income from local construction.
D. W/W Sales shall consist of domestic, export, import and offshore transactions which include
nor only principal transactions but also indent transactions from which commissions are
generated.
E. Attribution rate shall mean a rate of 75% to be applied against formula.
F. The tax rate to be applied shall be in accordance with Section 25(a) of the NIRC which is
35%.
G. Net income on construction shall consist of local service income from construction projects
income from construction projects less the costs associated with local construction projects
including the cost of locally purchased materials equipment, if any.
H. Net income on all other activities shall consist of income such as branches and liaison
offices of MNEs are engaged in, net of costs and expenses associated with such income.
3. In the application of the formula, no offsetting of losses from one line of business to the detriment of
the other line of business shall be allowed. This would mean that the tax due from each line of
business shall be computed independently from the other line of business.
RAMO 4- ISSUED BY: Commissioner Bienvenido A. Tan, Jr.
86
SUBJECT: Audit Guidelines in the Allocation of Home Office Overhead Expenses Under Section 37(b) of
the National Internal Revenue Code.
In order to avoid delay and conflict in the determination of Philippine sources taxable net income of foreign
taxpayers for purposes of Philippine income tax, this Revenue Audit Memorandum is issued.
1. Background
1.1 In computing net income from sources within the Philippines, Section 37(b) provides that from the gross
income from sources within the Philippines ". . . there shall be deducted the expenses, losses and other
deductions properly allocated thereto and a ratable part of any expenses, interests and losses and other
deductions effectively connected with the business or trade conducted exclusively within the Philippines
which cannot be definitely allocated to some items or class of gross income . . . "
1.2 These deductions are difficult to verify because substantial amounts thereof are incurred in the head
49
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office or elsewhere and the corresponding supporting documents and books of accounts are not accessible
to local taxing authorities.
1.3 Heretofore only an audit certificate is presented to substantiate the deductions incurred abroad which
are allocated and pro-rated to Philippine source gross income
1.4 In implementing the above provision of the National Internal Revenue Code, there is a need for
adequate and satisfactory proof and explanations in order that the claimed deductions of the foreign
taxpayer may be allowed for income tax purposes.
2. Audit Procedure
2.1 Functional analysis — At the start of investigation there should be a detailed examination of the
functions performed both by the Home Office and the Local Branch. For this purpose, an organization and
functional chart of the home office and local branch should be secured.
2.1.1 The functions should be determined and then listed. Who does what? What is required to do it? Who
needs whom for what?
2.1.2 After having listed the functions performed by each entity, the functions themselves must be analyzed.
Could anyone else perform these functions? How difficult are they? What skill, equipment and processes
are needed?
2.2 On the basis of the functional analysis, the claimed deduction properly allocable can now be determined
by applying the tests of (a) relevance (necessary) to the local branch and (b) reasonable (ordinary) charges
keeping always in mind the arm's length principle in transactions between related parties.
2.3 As to the deductions which cannot be definitely allocated, the following are required:
2.3.1 Breakdown or Schedule of Home or Foreign Office expenses being pro-rated, together with an
explanation of the nature of each expense. Take note of deductions which are directly allocable to income
earned outside the Philippines.
2.3.2 Basis of pro-ration — (a) Determine if the basis and method of pro-ration are being applied
consistently from year to year. (b) Is the same amount of Home Office expenses being allocated world-
wide?
3. In all instances, be on the lookout for:

a. Charges applicable to newly opened foreign branches but are being claimed as deductions by the
Philippine branch;
b. Functions are being performed for some branches but not for others, and yet no adjustments are made on
the allocation;
c. or any other scheme of over-allocating costs to the Philippine branch.
4. All pertinent provisions of these Audit Guidelines applicable in the investigations of subsidiaries by multi-
national companies should be observed by all internal revenue officers
concerned.
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5. Deductions
Business Expenses
RA Expanded Breastfeeding Promotion Act
10028
Section The law provides that the expenses incurred by a private health and non-health facility, establishment or
s 3 & 14 institution, in complying with the provisions of this Act, shall be deductible expenses for income tax
purposes up to twice the actual amount incurred. Provided:
1. That the deduction shall apply for the taxable period when the expenses were incurred;
2. That all health and non-health facilities, establishments and institutions shall comply with the
provisions of this Act within six (6) months after its approval;
3. That such facilities, establishments or institutions shall secure a "Working Mother-Baby-Friendly
Certificate" from the Department of Health to be filed with the Bureau of Internal Revenue, before
they can avail of the incentive.
RA Jewelry Industry Development Act of 1998
8502
The law provides for a deduction from taxable income of fifty percent (50%) of expenses incurred in training
schemes in connection with the Act and which shall be deductible during the financial year the expenses
were incurred.
RA Adopt-a-School Act of 1998
8525
Section Adopt-a-School Program. – There is hereby established the "Adopt-a-School Program" which will allow
s 1 to 5 private entities to assist a public school, whether elementary, secondary, or tertiary, preferably located in
any of the twenty (20) poorest provinces identified by the Presidential Council for Countryside Development
or any other government agency tasked with identifying the poorest provinces in, but not limited to, the
following areas: staff and faculty development for training and further education; construction of facilities;
upgrading of existing facilities, provision of books, publications and other instructional materials; and
modernization of instructional technologies.
The law provides expenses incurred by the adopting entity for the "Adopt-A-School Program" shall be
allowed an additional deduction from the gross income equivalent to fifty percent (50%) of such expenses.
RA Magna Carta for Disabled Persons
7277
Section The law provides that sales discounts given to persons with disabilities shall be deductible from gross
8 income subject to certain conditions.
Other Republic Act 9999 (Free Legal Assistance Act) RA No. 9994 (Expanded Senior Citizens Act) in RR
Special 7-2010 [July 20, 2010]
Laws The law provides for that a lawyer or professional
that partnerships rendering actual free legal services as The law provides that discounts given to senior
provide defined by the Supreme Court, shall be entitled to citizens on certain goods and services shall be
for an allowable deduction from the gross income, the deductible from gross income. Also, private
deducti amount that could have been collected for the establishments employing senior citizens shall be
ble actual free legal services rendered or up to ten entitled to additional deductions from gross income
busines percent (10%) of the gross income derived from the equivalent to fifteen (15%) of the total amount paid as
s actual performance of the legal profession, salaries and wages to senior citizens.
expens whichever is lower.
e
CIR v. Isabela Cultural Corporation (ICC) was assessed by EXPENSES SHALL BE DEDUCTIBLE IN THE
Isabela the BIR for deficiency income which arose from YEAR IT WAS INCURRED
Cultural BIR’s disallowance of ICC’s claimed expense ICC is using the accrual method of accounting.
Corpor deductions for professional and security services RAMO No. 1-2000 provides that under the accrual
ation billed to and paid by ICC in 1986: method, expenses not being claimed as deductions in
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(2007) 1. SGV auditing services which was incurred the current year when they are incurred cannot be
in 1985 claimed as deduction from the income of the
2. Legal services of the law firm Bengzon succeeding year. The accrual of income and expense
incurred in 1984 and 1985 is permitted when the all events test has been met.
3. Security Services of El Tigre incurred in This test requires:
1986 1. fixing of a right to income or liability to pay;
and
WON THE EXPENSE DEDUCTIONS OF THE ICC 2. the availability of the reasonable accurate
FOR PROFESSIONAL AND SECURITY determination of such income or liability.
SERVICES SHOULD BE ALLOWED — NO FOR
LAW FIRM AND AUDITING SERVICES; YES FOR However, the test does not demand that the
SECURITY SERVICES amount of income or liability be known
absolutely, only that a taxpayer has at his disposal
the information necessary to compute the amount
with reasonable accuracy. In this case, ICC could
have exercised reasonable diligence in ascertaining
the expenses for professional services. The expenses
for security services should be allowed since it was
incurred in 1986.
ING ING was assessed of deficiency documentary Taxpayers with pending tax cases may avail
Bank v. stamp tax (1996-1997), deficiency onshore tax themselves of the tax amnesty program under RA
CIR (1996), and deficiency withholding tax (1996-1997) 9480.
(2015) by the BIR as affirmed by the CTA. While the case
was pending in the SC, ING filed a manifestation However, it is still liable for deficiency withholding tax.
stating that it availed of the government’s tax In addition, an expense, whether the same is paid
amnesty program under RA 9480 with respect to its or payable, shall be allowed as deduction only if
deficiency documentary stamp tax and deficiency it’s shown that the tax required to be deducted
onshore tax liabilities. Therefore, it is still liable for and withheld was paid to the BIR. Every form of
deficiency withholding tax for bonus given in the compensation for personal services, including
years 1996-1997. bonuses, is subject to income tax, and consequently,
to withholding tax. The law and implementing
WON ING BANK MAY AVAIL ITSELF OF THE regulations require the employer to deduct and pay
TAX AMNESTY  YES the income tax on compensation paid to its
employees, either actually or constructively. Every
WON ING BANK IS LIABLE FOR DEFICIENCY person required to deduct and withhold the tax from
WITHHOLDING TAX ON ACCRUED BONUSES the compensation of an employee is liable for the
FOR THE TAXABLE YEARS 1996 AND 1997  payment of such tax whether or not collected from the
YES employee. In this case, ING already recognized a
definite liability on its part considering that it had
deducted as business expense from its gross income
the accrued bonuses due to its employees. In this
sense, there was already a constructive payment for
income tax purposes as these accrued bonuses were
already allotted or made available to its officers and
employees.
CIR v. General Foods filed its ITR for fiscal year ending Things to be considered for the reasonableness of an
General Feb 28, 1985 where it claimed as deduction, among advertising expense: type and size of business in
Foods other business expenses, the amount of about 9.46 which TP is engaged in, volume and amount of net
(2003) million pesos for media advertising for “Tang.” CIR earnings, nature of expenditure itself, intent of
disallowed 50% of the deduction, and assessed taxpayer, general economic conditions. SC said that
Busines Gen Foods deficiency income taxes. CA reversed the claim for media expense was ½ of its total claim
s the decision of CIR and CTA saying that the for marketing expenses. It is inordinately large.
expens deduction is proper. Even when necessary, it cannot be considered an
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es ordinary expense deductible under Section 29(a)

WON THE SUBJECT MEDIA ADVERTISING (1)(A) of the NIRC.
EXPENSE FOR “TANG” INCURRED BY THE
RESPONDENT CORPORATION WAS AN Two kinds of advertising: (1) to stimulate the current
ORDINARY AND NECESSARY EXPENSE FULLY sale of merchandise; or (2) to stimulate the future
DEDUCTIBLE UNDER THE NIRC  NO sale of merchandise.
2nd type - include the creation or maintenance of

some form of goodwill for the TP’s trade or business.
The subject advertising expense was of the 2 nd kind.
The amount was staggering, and it was admitted that
the expense was incurred in order to protect
respondent corporations brand franchise.
Protection of brand franchise is analogous to
maintenance of goodwill or title to one’s property 
this is a capital expenditure which should be
spread out over reasonable period of time.
CIR v. Lancaster is a domestic corporation engaged in the SC ruled that the cancellation and withdrawal of the
Lancast production of tobacco. BIR issued a LOA deficiency tax assessment was proper. The general
er authorizing its revenue officers to examine rule is that taxable income shall be computed upon
(2017) Lancaster’s books of accounts and other the basis of taxpayer’s annual accounting period
accounting records for all internal revenue taxes (fiscal year or calendar year). The deductions
due from taxable year 1998 to an unspecified date. provided in NIRC shall be taken for the taxable
After the examination, the BIR issued a PAN which year in which ‘paid or accrued’ or ‘paid or
states that Lancaster did an overstatement of its incurred’ dependent upon the method of
purchases for the fiscal year April 1998 to March accounting upon the basis of which the net
1999; and cited the disallowance of purchases of income is computed. NIRC enumerated methods of
tobacco from farmers for the months of accounting the law expressly recognizes. Any of
February and March 1998 as deductions against these methods may be employed by any taxpayer so
income for the FY April 1998 to March 1999. long as it reflects its income properly and method is
Lancaster replied contending that it had used an used regularly. As such, other methods are
entire “tobacco cropping season” to determine its approved by CIR even when not expressly
total purchases covering a one-year period from mentioned in NIRC as long as it would correctly
October 1 to September 30 of the following year; reflect the taxpayer’s income. One such method is
that it has been adopting the 6-month timing the “crop method of accounting.” Lancaster, as a
difference to conform to the matching concept. It business engaged in the production and marketing of
also argued that the February and March 1998 tobacco, is justified in adopting the crop method.
purchases should not have been disallowed. It Considering that the crop year of Lancaster starts
concluded that they correctly posted the subject from October up to September of the following year, it
purchases in the fiscal year ending March 1999 as follows that ALL of its expenses in the crop
it was the only in this year that the gross income production made within the crop year Oct-Sept 1998,
from the crop was realized. Lancaster received from including the Feb and March 1998 purchases, are
the BIR a FAN, which assessed it a deficiency rightfully deductible for income tax purposes in the
income tax of P11,496,770.18, as a consequence year when the gross income from the crops are
of the disallowance of purchases claimed for the FY realized. The matching concept, one of the GAAP,
March 31, 1999. Lancaster filed a petition for review directs that the expenses are to be reported in the
before CTA Division. CTA Division granted the same period that related revenues are earned. It
petition filed by Lancaster. CTA En Banc affirmed. attempts to match revenue with expenses that
helped earned it.
WON THE CANCELLATION AND WITHDRAWAL
OF THE DEFICIENCY TAX ASSESSMENT WAS DOCTRINE: Crop year basis is a method applicable
PROPER  YES only to farmers engaged in the production of crops,
which take more than a year from the time of planting
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to the process of gathering and disposal. This method

enjoins the recognition of the expense (or the
deduction of the cost) of crop production in the year
that the crops are sold (when income is realized).
Aguinal Aguinaldo is a domestic corp engaged in the PROFIT FROM SALE OF MUNTINLUPA LAND IS
do manufacture of fishing nets (tax-exempt industry) TAXABLE
Industri and manufacture of furniture. Each business is It must be stressed however that at the administrative
es handled by different divisions, with separate books level, the petitioner implicitly admitted that the profit it
Corp. v. of accounts. Aguinaldo acquired a parcel of land in derived from the sale of its Muntinlupa land, a capital
CIR Muntinlupa as site of the fishing net factory. When it asset, was a taxable gain — which was precisely the
(1982) found a more suitable land in Marikina Heights, it reason why for tax purposes the petitioner deducted
sold the Muntinlupa land and derived profit from the therefrom the questioned bonus to its corporate
sale which was entered in the books of the fishing officers as a supposed item of expense incurred for
nets division as miscellaneous income to the sale of the said land. Up to the CA decision,
distinguish it from its tax-exempt income. Aguinaldo had always implicitly admitted that the
disputed capital gain was taxable, although subject to
Petitioner filed 2 separate ITRs. After investigation, the deduction of the bonus paid to its officers.
BIR found out that the fishing nets division
deducted from its gross income the additional BONUS GIVEN TO OFFICERS IS TAXABLE
renumeration paid to the officers of petitioner. It cannot be deemed a deductible expense for tax
This amount was said to be taken from the net profit purposes, even if the sale could be a transaction for
of an isolated transaction (sale of the Muntinlupa carrying on the trade or business of the petitioner.
land) not in the course of or carrying on of The sale was effected through a broker who was paid
petitioner’s trade or business. a commission for his services. There is no evidence
of any service actually rendered by petitioner’s
WON THE PROFIT DERIVED FROM THE SALE officers, which could be the basis of bonus grant.
OF THE MUNTINLUPA LAND IS NOT TAXABLE
FOR IT IS TAX-EXEMPT INCOME CONSIDERING
THAT ITS FISH NETS DIVISION ENJOYS TAX
EXEMPTION AS A NEW AND NECESSARY
INDUSTRY  NO
WON THE BONUS GIVEN TO THE OFFICERS

ARE ORDINARY AND NECESSARY EXPENSES
THAT ARE DEDUCTIBLE FOR INCOME TAX
PURPOSES  NO
Atlas CIR assessed against Atlas deficiency income The expenditure paid for services carrying on the
Consoli taxes for 1957 and 1958. Atlas contends that the selling campaign in an effort to sell Atlas’ additional
dated amount paid in 1958 as annual public relations capital stock is not an ordinary expense. Capital
Mining expenses is a deductible expense from gross expenditures (such as recapitalization and
v. CIR income. Since it paid the services of a public reorganization expenses, the cost of obtaining stock
(1981) relations firm, it made an ordinary and necessary subscription, promotion expenses and commission or
business expense in order to compete with other fees paid for the sale of stock organization) are not
corporation also interested in the investment market deductible.
in the US. The aim was to create a favorable image
and goodwill to gain or maintain their patronage. Ordinarily, an expense will be considered
“necessary” where the expenditure is appropriate
WON ATLAS CAN CLAIM THE AMOUNT PAID and helpful in the development of the taxpayer’s
FOR THE SERVICES OF A PUBLIC RELATIONS business. It is “ordinary” when it connotes a
FIRM AS A DEDUCTION  NO payment which is normal in relation to the business of
the taxpayer and the surrounding circumstances. The
term “ordinary” does not require that the payments be
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habitual or normal in the sense that the same

taxpayer will have to make them often; the payment
may be unique or non-recurring to the particular
taxpayer affected.
Zamora Mariano Zamora, owner of the Bay View Hotel and Only half should be deductible. Mrs. Mariano did not
v. CIR Farmacia Zamora, Manila, filed his income tax present receipt to support the deduction.
(1963) returns for the years 1951 and 1952. The CIR found
that he claimed deductions which were not Representation expenses fall under the category of
allowable. The CTA ruled that only half of the business expenses which are allowable deductions
promotion expenses of petitioner should be allowed from gross income, if they meet the conditions
as a deduction. Mrs. Mariano in her application for prescribed by law, particularly section 30 (a) [1], of
dollar allocation said that her trip to the U.S. was for the Tax Code; that to be deductible, said business
both business and medical purposes. expenses must be ordinary and necessary
expenses paid or incurred in carrying on any
WON CTA ERRED IN DISALLOWING THE trade or business; that those expenses must also
CLAIMED PROMOTION EXPENSES INCURRED meet the further test of reasonableness in amount;
BY PETITIONER’S WIFE FOR PROMOTION OF that accordingly, it is not possible to determine the
THE BAY VIEW HOTEL  NO actual amount covered by supporting papers and the
amount without supporting papers, the court should
determine from all available data, the amount
properly deductible as representation expenses.
C.M. Hoskins owns 99.6% of the stocks of Petitioner The case before us is similar to previous cases of
Hoskin corporation. Hoskins also receives a 50% share of disallowances as deductible items of officers’ extra
s & Co. the sales commissions earned by petitioner, fees, bonuses and commissions, upheld by this Court
v. CIR besides his monthly salary of P3,750.00 amounting as not being within the purview of ordinary and
(1969) to an annual compensation of P45,000.00 and an necessary expenses and not passing the test of
annual salary bonus of P40,000.00, plus free use of reasonable compensation.
the company car and receipt of other similar
allowances and benefits. The total amount received TEST OF REASONABLE COMPENSATION
is P99,977.91. “It is a general rule that bonuses to employees made
in good faith and as additional compensation for the
WON PAYMENT TO HOSKINS OF THE SUM services actually rendered by the employees are
P99,977.91 AS 50% SHARE OF SUPERVISION deductible, provided such payments, when added to
FEES CAN BE TREATED AS DEDUCTIBLE the stipulated salaries, do not exceed a reasonable
ORDINARY AND NECESSARY EXPENSE  NO compensation for the services rendered.”
Basta sinasabi ni Petitioner corporation is that its
payment to its principal stockholder is an ordinary ELEMENTS OF THE TEST OF REASONABLE
and necessary expense that could be deducted. COMPENSATION
BIR does not agree. Yan ‘yong issue. 1. the payment of the bonuses is in fact
compensation;
2. it must be for personal services actually
rendered; and
3. the bonuses, when added to the salaries, are
‘reasonable’ . . . when measured by the
amount and quality of the services performed
with relation to the business of the particular
taxpayer.
There is no fixed test for determining the

reasonableness of a given bonus as compensation.
In determining whether the particular salary or
compensation payment is reasonable, the situation
must be considered as whole. Petitioner’s case fails
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to pass the test.

Calano This is a petition to review the decision of the CTA EXPENSES WERE EXCESSIVE AND NOT
c v. CIR affirming an assessment of by the CIR as JUSTIFIED, THUS, NOT DEDUCTIBLE
(1961) amusement tax and surcharge due on a boxing and Calanoc denied having received the stadium fee
wrestling exhibition held by Calanoc. To solicit and P1,000, which was not included in the receipts. And
receive contributions for the orphans and destitute that even if he did, he could not be made to pay
children of the Child Welfare Workers Club of the almost seven times the amount as amusement tax.
Social Welfare Commission (SWC), Calanoc Evidence was submitted, however, that the said
promoted a boxing and wrestling exhibition. The stadium fee of P1,000, was paid by the O-SO
CIR found that the gross sales generated by the Beverages directly to the stadium management for
exhibition amounted to P26,553.00; the advertisement privileges on the day of the exhibition.
expenditures incurred was P25,157.62; and the net Since the fee was paid by the concessionaire,
profit was only P1,375.30. Upon examination of the Calanoc had no right to include the P1,000
receipts, the CIR also found the following items of stadium fee among the items of his expenses. It
expenditures: (a) P461.65 for police protection; (b) results, therefore, that P1,000 went into Calanoc’s
P460.00 for gifts; (c) P1,880.05 for parties; and (d) pocket unaccounted. Furthermore he admitted that
several items for representation. Calanoc remitted he could not justify the other expenses, such as
to SWC P1,375.30 only. Based on its findings, the those for police protection and gifts. He claims
CIR assessed Calanoc an amusement tax of further that the accountant who prepared the
P7,378.57. statement of receipts was already dead and could no
longer be questioned on the items contained in said
WON THE EXPENSES CAN BE ALLOWED AS statement. Most of the items of expenditures
DEDUCTIONS  NO contained in the statement submitted to the CIR
were either exorbitant or not supported by
receipts. The payment of P461.65 for police
protection was illegal as it was a consideration given
by Calanoc to the police for the performance by the
latter of the functions required of them to be rendered
by law. The expenditures of P460 for gifts, P1,880.05
for parties, and other items for representation were
rather excessive, considering that the purpose of the
exhibition was for a charitable cause.
Kuenzle Kuenzle & Streiff for the years 1953, 1954 and 1955 Bonuses to employees made in good faith and as
& filed its income tax return, declaring losses. CIR additional compensation for the services actually
Striffe filed for deficiency of income taxes for the said rendered by the employees are deductible, provided
v. CIR years in the amounts of P40,455.00, P11,248.00 such payments, when added to the stipulated
(1959) and P16,228.00, respectively, arising from the salaries, do not exceed a reasonable compensation
disallowance, as deductible expenses, of the for the services rendered. The condition precedents
bonuses paid by the corporation to its officers, upon to the deduction of bonuses to employees are:
the ground that they were not ordinary, nor 1. the payment of the bonuses is in fact
necessary, nor reasonable expenses within the compensation (YES);
purview of Section 30(a) (1) of the National Internal 2. it must be for personal services actually
Revenue Code. rendered (YES);
3. bonuses, when added to the salaries, are
WON THE BONUSES IN QUESTION WERE ‘reasonable’ ... when measured by the
REASONABLE AND JUST TO BE ALLOWED AS amount and quality of the services performed
DEDUCTIONS  NO with relation to the business of the particular
taxpayer (NO)
There is no fixed test for determining the

reasonableness of a given bonus as compensation.
This depends upon many factors, one of them being
the amount and quality of the services performed with
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relation to the business. Other tests suggested are:

payment must be made in good faith; the character of
the taxpayer’s business, the volume and amount of its
net earnings, its locality, the type and extent of the
services rendered, the salary policy of the
corporation; the size of the particular business; the
employees’ qualifications and contributions to the
business venture; and general economic conditions.
However, in determining whether the particular salary
or compensation payment is reasonable, the situation
must be considered as a whole.
In this case, no evidence nor has petitioner ever

made the claim that all or some of the officers were
gifted with some special talent, or had undergone
some extraordinary training, or had accomplished any
particular task, that contributed materially to the
success of petitioner’s business during the taxable
years in question; all the other employees received
no pay increase in the said years; the bonuses were
paid despite the fact that it had suffered net losses for
3 years. Furthermore the corporation cannot use the
excuse that it is salary paid to an employee because
the CIR does not question the basic salaries paid by
petitioner to the officers and employees, but
disallowed only the bonuses paid to petitioner’s top
officers at the end of the taxable years in question.
Pilmico The law, thus, intends for Sections 29 and 238 of the
-Mauri Pilmico-Mauri Foods Corporation, domestic corp 1977 NIRC to be read together, and not for one
Foods engaged in trade and business in the Philippines, provision to be accorded preference over the other.
was assessed deficiency income tax. After its
Corp v.
protest, sCIR reduced the tax assessed It is undisputed that among the evidence adduced by
CIR PMFC on it behalf are the official receipts of alleged
. In their appeal before the CTA, the CTA allowed purchases of raw materials. Thus, the CTA cannot be
certain deductions but did not include a portion of faulted for making references to the same, and for
the claimed total business expenses deductions applying Section 238 of the 1977 NIRC in rendering
because of PMFC’s failure to support it with its judgment. Required or not, the official receipts
required invoices. The CA’s legal basis to disallow were submitted by PMFC as evidence. Inevitably, the
the deductions was Sec. 238, of the NIRC which said receipts were subjected to scrutiny, and the CTA
imposed a responsibility upon the purchaser to exhaustively explained why it had found them
keep and preserve the original copy of the invoice wanting.
or receipt for a period of three years from the close
of the taxable year in which such invoice or receipt Let it, however, be noted that in Atlas, the Court
was issued. According to CTA, there were likewise declaredthat:y
discrepancies in the name of the sellers and
purchasers indicated in the receipts casting doubts In addition, not only must the taxpayer meet the
as to their authenticity. Considering that the official business test, he must substantially prove by
receipts and sales invoices presented by [PMFC] evidence or records the deductions claimed
failed to comply with the requirements of Section under the law, otherwise, the same will be
238 of the NIRC of 1977, the disallowance by the disallowed. The mere allegation of the taxpayer that
[CIR] of the claimed deduction for raw materials is an item of expense is ordinary and necessary does
proper. not justify its deduction.
PMFC comes before the SC asserting that It is, thus, clear that Section 29 of the 1977 NIRC
in determining the deductibility of the purchase does not exempt the taxpayer from substantiating
of raw materials from gross income: claims for deductions. While official receipts are not
- Section 29 of the 1977 NIRC is the
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applicable provision. According to the the only pieces of evidence which can prove
said section, for the deduction to be deductible expenses, if presented, they shall be
allowed, the expenses must be (a) both subjected to examination.
ordinary and necessary; (b) incurred in
carrying on a trade or business; and (c) PMFC submitted official receipts as among its
paid or incurred within the taxable year. evidence, and the CTA doubted their veracity. PMFC
PMFC, thus, claims that prior to the was, however, unable to persuasively explain and
promulgation of the 1997 NIRC, the law prove through other documents the discrepancies in
does not require the production of the said receipts. Consequently, the CTA disallowed
official receipts to prove an expense. the deductions claimed, and in its ruling, invoked
- Section 29 imposes less stringent Section 238 of the 1977 NIRC considering that official
requirements and the presentation of receipts are matters provided for in the said section.
official receipts as evidence of the
claimed deductions dispensable.
- PMFC further posits that the mandatory
nature of the submission of official
receipts as proof is a mere innovation
in the 1997 NIRC, which cannot be
applied retroactively.
WHETHER THE NATURE OF EVIDENCE

REQUIRED TO PROVE AN ORDINARY
EXPENSE LIKE RAW MATERIALS IS
GOVERNED BY SECTION 29 OF THE 1977
NATIONAL INTERNAL REVENUE CODE (NIRC)
AND NOT BY SECTION 238 AS FOUND BY THE
CTA? –NO. Sections 29 and 238 of the 1977 NIRC
to be read together, and not for one provision to be
accorded preference over the other.
RR 10- Q: IS THERE A CEILING ON ENTERTAINMENT, CEILING ON EAR EXPENSES

2002 AMUSEMENT AND RECREATIONAL (EAR) There shall be allowed a deduction from gross
EXPENSES? income for entertainment, amusement and recreation
expense in an amount equivalent to the actual
A: Yes. RR 10-2002 (JULY 10, 2002) provides that: entertainment, amusement and recreation
1. Sellers of goods or properties – 0.5% of expense paid or incurred within the taxable year by
their net sales as representation expenses the taxpayer, but in no case shall such deduction
2. Sellers of services – 1% of their net exceed:
revenues as representation expenses. a. 0.50% of net sales for taxpayers engaged in
However, when supporting documents reflect a sale of goods or properties
lower amount, then such lower amount shall be b. 1% of net revenue for taxpayers engaged in
used. sale of services, including exercise of
profession and use or lease of properties
However, if the taxpayer is deriving income from both
sale of goods/properties and services, the allowable
entertainment, amusement and recreation
expense shall be determined based on an
apportionment formula.
APPORTIONMENT FORMULA
Net Sales/Net Revenue x Actual
Expense
Total Net Sales and Net
Revenue
RR 1- RR 1-2009 prescribes the rules and regulations to implement RA No. 9442, An Act Amending RA No. 7277,
2009 Otherwise Known as the Magna Carta for Persons with Disability, relative to the tax privileges of persons
with disability and tax incentives for establishments granting sales discount.
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Section 3 provides for the establishments where a PWD may claim 20% discount relative to sale of goods or
services for their exclusive use or enjoyment.
Section 4 provides for the availment by establishments of sales discounts as deduction from their gross
income.
Rules:
1. Deducted from gross income after deducting the cost of goods sold or service;
2. Deduction from gross income for the same taxable year that the discount is granted;
3. Only the sales exclusively used, consumed or enjoyed by the PWD shall be eligible for the
deductible sales discount;
4. The gross selling price and the sales discount must be separately indicated in the sales invoice or
official receipt issued by the establishment;
5. Only the actual amount of the sales discount granted (not exceeding 20% of the gross selling price)
can be deducted from the gross income;
The business establishment is required to keep separate and accurate records of sales
RR 7- RR No.7-2010 provides that establishments granting discounts to Senior Citizens can deduct such discounts
2010 from their gross income for the same taxable year. The discounts granted by the seller of qualified goods
and services. shall be treated as an ordinary and necessary expenses deductible from the gross income of
the seller falling under the category of itemized deductions, and can only be claimed if the seller does not
opt for the Optional Standard Deduction during the taxable quarter/year. (See #5 for conditions for the
deduction)
It also provides that private establishments employing Senior Citizens shall be entitled to additional
deduction from their gross income equivalent to 15% of the total amount paid as salaries and wages to
Senior Citizen.
Interest (as amended by RA 9337)

Paper Paper Industries claimed as deductions against Paper Industries is entitled to its claimed deduction
Industri gross income interest payments on loans for on income tax for interest payments on loans for,
es the purchase of machinery and equipment in among other things, the purchase of machinery and
Corpor 1977. The CIR disallowed the deduction on the equipment actually used in the registered operations
ation v. ground that because the loans had been incurred of Paper Industries. Under Sec. 30 of the 1977 Tax
CA for the purchase of machinery and equipment, the Code, the general is that the amount of interest paid
(1995) interest payments on the said loans should have within the taxable year on indebtedness (interest
been capitalized instead and claimed as a expenses) may be deducted from gross income. This
depreciation deduction taking into account the certainly includes interest paid under loans incurred in
adjusted basis of the machinery and equipment connection with the carrying on of the business of the
(original acquisition cost plus interest charges) over taxpayer. Such interest payments were legally due
the useful life of such assets. Both the CTA and the and demandable under the terms of such loans, and
CA sustained the position of PICOP and held that in fact paid by Paper Industries during the tax year.
the interest deduction claimed by PICOP was The Tax Code is also silent which deduction of
proper and allowable. In the instant petition, the CIR interest should apply (deduction against gross income
insists on its original position. OR depreciation deduction) and thus PICOP has the
right to elect, but not entitled to both deductions at the
WON PICOP IS ENTITLED TO DEDUCTIONS ON same time.
INCOME TAX FOR THE INTEREST ON THE
LOANS IT PROCURED FOR THE PURCHASE OF
MACHINERY AND EQUIPMENT  YES
CIR v. Respondent conveyed by way of gifts to her 4 Under the law, for interest to be deductible, it must be
Vda. De children real property. CIR appraised the real shown that there be an indebtedness, that there
Prieto property donated for gift tax purposes and should be interest upon it, and that what is claimed as
(1960) assessed donor’s gift tax, interest, and compromise an interest deduction should have been paid or
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thereon. Of the total sum paid was total interest on accrued within the year. It is here conceded that the
account of delinquency. This amount was claimed interest paid by respondent was in consequence of
as deduction in the ITR but was disallowed and the late payment of her donor’s tax, and the same
even assessed deficiency income tax and interest, was paid within the year it is sought to be declared.
surcharge, and compromise for the late payment. The only question to be determined, as stated by the
parties, is whether or not such interest was paid upon
WON THE INTEREST ON DELINQUENCY IS an indebtedness within the contemplation of section
DEDUCTIBLE  YES 30 (b) (1) of the Tax Code. The interest paid by
respondent for the late payment of her donor’s
tax is deductible from her gross income under
Sec. 30 (b).
In conclusion, we are of the opinion and so hold that

although interest payment for delinquent taxes is not
deductible as tax under Section 30(c) of the Tax
Code and section 80 of the Income Tax Regulations,
the taxpayer is not precluded thereby from claiming
said interest payment as deduction under section
30(b) of the same Code.
RR 13- REQUIREMENTS FOR THE DEDUCTIBILITY OF INTEREST EXPENSE FROM THE GROSS INCOME OF
2000 A CORPORATION OR AN INDIVIDUAL ENGAGED IN TRADE, BUSINESS, OR IN THE PRACTICE OF
PROFESSION
The following are the requisites for the deductibility of interest expense from gross income:
1. There must be an indebtedness;
2. There should be an interest expense paid or incurred upon such indebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the taxpayer’s trade, business or profession;
5. The interest expense must have been paid or incurred during the taxable year;
6. The interest must have been stipulated in writing;
7. The interest must be legally due;
8. The interest payment arrangement must not be between related taxpayers;
9. The interest must not be incurred to finance petroleum operations; and
10. In case of interest incurred to acquire property used in trade, business, or exercise of profession,
the same was not treated as a capital expenditure.
BIR Pursuant to Section 34(B) of the Tax Code of 1997, the amount of interest expense paid or incurred by a
Ruling taxpayer within a taxable year on indebtedness in connection with his trade, business or exercise of
006-00 profession shall be allowed as a deduction from his gross income, the said interest expense, however,
shall be reduced if the taxpayer has derived certain interest income which had been subjected to
Interest final withholding tax. The said reduction shall be equal to the percentages of the interest income earned
arbitrag depending on the year when the interest income was earned. This limitation shall apply regardless of
e whether or not a tax arbitrage scheme was entered into by the taxpayer or regardless of the date of the
interest bearing loan and the date when the investment was made, for as long as, during the taxable year,
there is an interest expense incurred on one side and an interest income earned on the other side, which
interest income had been subjected to final withholding tax.
Taxes
CIR v. The respondents, V. E. Lednicky and Maria Valero An alien resident’s right to deduct income taxes he
Lednick Lednicky, are husband and wife, respectively, both paid to foreign government from the taxpayer's gross
y American citizens residing in the Philippines, and income is given only as an alternative or substitute to
(1964) have derived all their income from Philippine his right to claim a tax credit for such foreign income
sources for the taxable years in question. The taxes under section 30 (c) (3) and (4)f. In effect,
respondents Lednickys filed an amended income unless the alien resident has a right to claim such tax
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tax return for 1956. The amendment consists in a credit if he so chooses, he is precluded from
claimed deduction of P205,939.24 paid in 1956 deducting the foreign income taxes from his gross
to the United States government as federal income. This is to prevent the taxpayer from claiming
income tax for 1956. Simultaneously with the filing twice the benefits of his payment of foreign taxes, by
of the amended return, the respondents requested deduction from gross income (subs. c-1) and by tax
the refund of P112,437.90, which was disallowed by credit (subs. c- 3).
the BIR.
Finally, to allow an alien resident to deduct from his
WON A US CITIZEN RESIDING IN THE PH, WHO gross income whatever taxes he pays to his own
DERIVES INCOME WHOLLY FROM SOURCES government amounts to conferring on the latter the
WITHIN THE PH, MAY DEDUCT FROM HIS power to reduce the tax income of the Philippine
GROSS INCOME THE INCOME TAXES HE HAS government simply by increasing the tax rates on the
PAID TO THE US FOR THE TAXABLE YEAR  alien resident. Everytime the rate of taxation imposed
NO upon an alien resident is increased by his own
government, his deduction from Philippine taxes
would correspondingly increase, and the proceeds for
the Philippines diminished, thereby subordinating our
own taxes to those levied by a foreign government.
Such a result is incompatible with the status of the
Philippines as an independent and sovereign state
BIR A Co., a VAT-registered domestic corporation, Under Section 112 (A) of the Tax Code, unutilized
Ruling enters into VAT zero-rated transactions in the creditable input taxes attributable to VAT zero-
123-13 ordinary course of its business. Since its rated sales can only be recovered through the
transactions do not result in any output VAT liability, application for refund or tax credit. Nowhere in the
A Co. is not able to apply or utilize its input VAT on Tax Code can a specific provision be found expressly
purchases from various suppliers. A Co. intended to providing for another mode of recovery of unutilized
file a claim for refund or tax credit of its unutilized input VAT, such as through outright deduction or
input VAT but was not able to do so due to the expense for income tax purposes.
expiration of the two-year period to file the claim.
WON A CO. CAN EXPENSE OUTRIGHT THE

UNUTILIZED INPUT VAT AFTER THE
EXPIRATION OF THE 2-YEAR PERIOD TO FILE
A CLAIM FOR REFUND  NO
Losses
Tambu BIR issued several assessment notices and The rule that tax deductions, being in the nature of
nting demand letters assessing Tambunting for tax exemptions, are to be construed in strictissimi
Pawnsh deficiency percentage tax and income tax. juris against the taxpayer is well settled. Corollary to
op v. Tambunting filed an administrative protest and later this rule is the principle that when a taxpayer claims a
CIR a petition for review because of the BIR’s inaction. deduction, he must point to some specific provision of
(2013) Tambunting argues that the CTA should have the statute in which that deduction is authorized and
allowed its deductions because the CTA had must be able to prove that he is entitled to the
allowed deductions for ordinary and necessary deduction which the law allows. An item of
expenses on the basis of cash vouchers issued by expenditure, therefore, must fall squarely within the
the taxpayer or certifications issued by the payees language of the law in order to be deductible A mere
evidencing receipt of interest on loans as well as averment that the taxpayer has incurred a loss does
agreements relating to the imposition of interest; not automatically warrant a deduction from its gross
that it had thus shown beyond doubt that it had income.
incurred the losses in its auction sales. Petitioner
submits that based on the “subasta” books, it was As the CTA En Banc held, Tambunting did not
able to show beyond doubt that it incurred the properly prove that it had incurred losses. The
amount of losses on auction sale claimed as subasta books it presented were not the proper
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deduction from its gross income for the taxable year evidence of such losses from the auctions because
1997. they did not reflect the true amounts of the proceeds
of the auctions due to certain items having been left
WON PETITIONERS SHOULD BE ALLOWED TO unsold after the auctions.
HAVE FURTHER DEDUCTIONS  NO
RR 12- SUBSTANTIATION REQUIREMENTS FOR LOSSES ARISING FROM CASUALTY, ROBBERY, THEFT
77 OR EMBEZZLEMENT
This Revenue Regulation provides for the substantiation requirements for losses arising from casualty,
robbery, theft, or embezzlement. Loss from fires, storms or other casualty, robbery, theft, and
embezzlement is allowed as deduction for the taxable year in which the loss is sustained. There are 2
requirements for substantiation:
1. declaration of loss filed with the CIR or his deputies;
2. proof of the elements of loss claimed, the actual nature and occurrence of the event and the amount
of the loss.
Taxpayer claiming deduction shall file a sworn declaration of loss with the nearest RDO within 45 days
from occurrence. Declaration of loss is subject to verification and is not sufficient proof of loss. It must be
accompanied with evidence gathered immediately after the event causing the loss. The amount is limited
to the difference of the value of the property immediately before the casualty and its value
immediately after. This shall not exceed the cost or other adjusted basis of the property or depreciated cost
in case it is used in business, reduced by any insurance or compensation received.
FORMULA FOR COMPUTATION

Value Before - Value After - Insurance Received = Deductible Loss
RMO REQUIREMENTS FOR THE FILING OF CLAIMS OF CASUALTY LOSS
31-2009 1. Sworn declaration of loss – file within 45 days after the event, stating: (a) time and nature of the
event that gave rise to the losses (b) description and location of the damaged property (c) items
needed to compute the loss such as the cost or other basis of the property, depreciation allowed,
value of the property before and after the event and cost of repair. Such declaration must also be
supported by the following documents: (a) the financial statement for the year immediately
preceding the event (b) copies of the insurance policies, if any, for the property.
2. Proof of the elements of the loss claimed such as: (a) photographs of the property before and after
the typhoon (b) documentary evidence to determine the cost or value of the damage properties such
as cancelled checks, vouchers, etc (c) insurance policy if there is any (d) police report in case of
robbery/ theft/ looting.
Failure to report a theft or robbery to the police may be held against the taxpayer, but a mere police report is
not conclusive proof of the loss. All documents and other evidence shall be subject to verification by the
concerned Bureau office, kept by the taxpayer as part of his tax records and be made available to revenue
officers upon audit and declaration of loss.
REQUISITES FOR DEDUCTIBILITY

1. A taxpayer engaged in trade or business may claim, as business deductions, casualty losses
incurred for properties actually used in the business that were damaged and reported as losses in
the declaration with the BIR
2. Properties reported as casualty losses must have been properly reported as part of the taxpayer’s
assets in the accounting records and financial statements in the year immediately preceding the
occurrence of the loss, with the costs of acquisition clearly established and recorded
3. For recovery through insurance claims, it shall be covered by RR NO. 12-77. The amount of loss
shall be compensated by insurance coverage should not be claimed as a deductible loss
4. The deduction of assets as capital losses must be properly recorded in accounting reports with the
adjustment of the applicable accounts
5. The restoration of the damaged property, or the acquisition of new property to replace it, must be
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properly recorded and recognized as: (a) repairs expense (b) capitalized asset. The nature of the
transaction, value of the amounts involved and other factors shall be taken into account.
BIR Porcelana Mariwasa, Inc. (PMI) had existing US The annual increase in value of an asset is not
Ruling dollar loans from Noritake and Toyota. In 1989, the taxable income because such increase has not yet
206-90 parties agreed to convert the dollar denominated been realize. The increase in value could only be
loans into pesos at the prevailing exchange rate on taxed when a disposition of the property occurred
Forex June 1989. The agreement was submitted to the which was of such a nature as to constitute a
Losses Central Bank in 1990. realization of such gain. The same conclusion
obtains as to losses. The annual decline in the value
WON THE FOREIGN EXCHANGE LOSS of the property is not normally allowable as a
INCURRED IS DEDUCTIBLE LOSS FOR THE deduction. Hence, to be allowable, the loss must be
YEAR 1990  NO realized. When foreign currency acquired in
connection with a transaction in the regular course of
business is disposed, ordinary gain or loss results
from the fluctuations. The loss is deductible only
for the year it is actually sustained.
BIR Query on whether foreign exchange losses which The annual increase in value of an asset is not
Ruling have accrued by reason of devaluation are taxable income because the increase is not yet
144-85 deductible for income tax purposes. When the realized. The increase in value could only be taxed
losses arose from matured but unremitted principal when there is a disposition of the property which
Forex payments on loans affected by debt restructuring would constitute a realization of that gain (there is
Losses program in the Philippines. severance of gain from the original capital invested in
the property). Same conclusion obtains as to
losses. The annual decrease in value is not
allowable as a loss. To be allowed as a deduction,
loss must be realized.
Bad Debts
Philex Philex entered into an agreement with Baguio Gold ADVANCES NOT CONSIDERED AS “DEBTS”
Mining for the former to manage and operate the latter’s The advances were not “debts” of Baguio Gold to
Corp. v. mining claim. In the course of managing and petitioner inasmuch as the latter was under no
CIR operating the project, Philex made advances of unconditional obligation to return the same to the
(2008) cash and property; however, the mine suffered former under the “Power of Attorney.” As for the
continuing losses over the years which resulted to amounts that petitioner paid as guarantor to Baguio
Philex’s withdrawal as manager of the mine and Gold’s creditors, we find no reason to depart from the
eventual cessation of operations. In its ITR, Philex tax court’s factual finding that Baguio Gold’s debts
deducted from its gross income the loss on were not yet due and demandable at the time that
settlement of receivables from Baguio against petitioner paid the same. Verily, petitioner pre-paid
reserves and allowances. BIR, however, Baguio Gold’s outstanding loans to its bank creditors
disallowed the amount as deduction for bad debt and this conclusion is supported by the evidence on
and assessed deficiency income tax. record.
WON THE LOSS ON SETTLEMENT AND In sum, petitioner cannot claim the advances as a
RECEIVABLES MAY BE CONSIDERED BAD bad debt deduction from its gross income. Deductions
DEBT  NO for income tax purposes partake of the nature of tax
exemptions and are strictly construed against the
taxpayer, who must prove by convincing evidence
that he is entitled to the deduction claimed. In this
case, petitioner failed to substantiate its assertion
that the advances were subsisting debts of
Baguio Gold that could be deducted from its
gross income. Consequently, it could not claim the
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advances as a valid bad debt deduction.

Philippi PRC was assessed to pay a deficiency tax for PRC was not able to support its contention. A
ne 1985. PRC protested that the amounts are bad taxpayer has to prove that he exerted diligent efforts
Refinin debts and interest expense which are allowable and to collect the debts by:
g legal deductions. It was elevated to the CA but was 1. sending statement of accounts;
Compa dismissed for failing to satisfy the requirements of 2. sending collection letters
ny v. worthlessness of a debt. 3. giving the account to a lawyer for collection;
CA and
(1996) WON BAD DEBTS ARE MET TO BE 4. filing a collection case in court
DEDUCTIBLE AS ASSESSED BY THE CA  NO The only evidentiary support given by PRC was the
explanation posited by its financial
adviser/accountant.
Herman Petitioner-taxpayer Fernandez Hermanos questions The CTA did not err, the court agrees with its
os v. the tax deficiency assessed by the CIR during 1950 decision. PMM was still in operation during the time
CIR to 1954 and 1957. The contention was that the they decided to write-off the advances as bad debts.
(1969) “loan”/advances it extended to its subsidiary We sustain the government’s position that these
company, Palawan Manganese Mines Inc. (PMM) advances were INVESTMENTS and not loans
Advanc should be considered as a bad debt and should considering that they were extended when the
es were be deducted to its income tax return. The loan capital of PMM was only P100,000 and PMM was to
investm was extended during 1945-1952, in the amount of pay 15% of its net profits, and did not pertain as
ent and 353,134.25 PHP, all of which were written off payments for the advances.
not a because petitioner company did not expect to
loan recover said amounts. The CTA did not consider
the advances as bad debts since PMM was still in
operation when petitioner gave the advances.
WON THE CTA ERRED IN NOT RECOGNIZING

THE WRITE-OFF IN 1951 AS A BAD DEBT AND
DEDUCTIBLE IN PETITIONER’S INCOME TAX 
NO
RR 5-99 REQUISITES FOR VALID DEDUCTION OF BAD DEBTS
Implements Section 34(E) of the Tax Code of 1997 relative to the requirements for deductibility of bad debts
from gross income of a corporation or an individual engaged in trade or business or a professional engaged
in the practice of his profession.
The requisites for valid deduction of bad debts from gross income are:
a. there must be an existing indebtedness due to the taxpayer which must be valid and legally
demandable;
b. the same must be connected with the taxpayer's trade, business or practice of profession;
c. the same must not be sustained in a transaction entered into between related parties enumerated
under Section 36(B) of the Tax Code of 1997;
d. the same must be actually charged off the books of accounts of the taxpayer as of the end of the
taxable year; and
e. the same must be actually ascertained to be worthless and uncollectible as of the end of the taxable
year.
The recovery of bad debts previously allowed as deduction in the preceding year or years will be 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.
Depreciation
Basilan Basilan Estates, Inc. claimed deductions for the The income tax law does not authorize the
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v. CIR depreciation of its assets on the basis of their depreciation of an asset beyond its acquisition
(1967) acquisition cost. As of January 1, 1950 it changed cost. Hence, a deduction over and above such cost
the depreciable value of said assets by increasing it cannot be claimed and allowed. The reason is that
to conform with the increase in cost for their deductions from gross income are privileges, not
replacement. Accordingly, from 1950 to 1953 it matters of right. They are not created by implication
deducted from gross income the value of but upon clear expression in the law.
depreciation computed on the reappraised
value. CIR disallowed the deductions claimed by The recovery, free of income tax, of an amount more
petitioner, consequently assessing the latter of than the invested capital in an asset will transgress
deficiency income taxes. the underlying purpose of a depreciation allowance.
For then what the taxpayer would recover will be, not
WON THE DEPRECIATION SHALL BE only the acquisition cost, but also some profit.
DETERMINED ON THE ACQUISITION COST Recovery in due time thru depreciation of investment
RATHER THAN THE REAPPRAISED VALUE OF made is the philosophy behind depreciation
ASSETS  YES allowance; the idea of profit on the investment made
has never been the underlying reason for the
allowance of a deduction for depreciation.
Limpan Limpan Investment Corp is a domestic corporation Petitioner admitted through witness that it indeed had
Investm engaged in the business of leasing real properties. undeclared income. Thus, it has become incumbent
ent Among its real properties are lots and buildings in upon them to prove their excuses by clear and
Corpor Manila and Pasay City acquired from Isabelo Lim convincing evidence, which it has failed to do. With
ation v. and his mother. After filing tax returns for 1956, regard the 1957 rent deposited with the court, and
CIR 1957, the examiners of BIR discovered that the withdrawn only in 1958, the court viewed the
(1966) corporation has understated its rental incomes by corporation as having constructively received said
20k and 81k during said years as well as claimed rents. The non-collection was the petitioner’s fault
excessive depreciation amounting to 20k and since it refused to accept the rent, and not due to
16k. The CIR demanded payment for deficiency tax nonpayment of lessees. Hence, although the
and surcharge. Petitioners argue that these corporation did not actually receive the rent, it is
amounts were either deposited with the court by the deemed to have constructively received them.
tenants or have yet to be received.
Furthermore, it has been declared that depreciation is
WON THERE WAS UNDECLARED INCOME  a question of fact and is not measured by theoretical
YES yardstick, but should be determined by a
consideration of actual facts, and the findings of the
WON THE DEPRECIATION CLAIMED BY Tax Court in this respect should not be disturbed
PETITIONER WAS EXCESSIVE  YES when not shown to be arbitrary or in abuse of
discretion, and petitioner has not shown any
arbitrariness or abuse of discretion in the part of the
Tax Court in finding that petitioner claimed excessive
depreciation in its returns.
It appearing that the Tax Court applied rates of

depreciation in accordance with Bulletin “F” of the
U.S. Federal Internal Revenue Service, which this
Court pronounced as having strong persuasive effect
in this jurisdiction, for having been the result of
scientific studies and observation for a long period in
the United States, after whose Income Tax Law ours
is patterned, the foregoing error is devoid of merit.
RR 12- RULES ON THE DEDUCTIBILITY OF DEPRECIATION EXPENSES AS IT RELATES TO PURCHASE OF
2012 VEHICLES AND OTHER EXPENSES RELATED THERETO, AND INPUT TAXES ALLOWED THEREFOR
1. No deduction from gross income for depreciation shall be allowed unless the taxpayer substantiates
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the purchase with sufficient evidence, such as official receipts or other adequate records which
contain the following among other
a. specific motor vehicle identification number, chassis number or other registrable
identification numbers of the vehicle
b. the total price of the specific vehicle subject of depreciation
c. direct connection or relation of the vehicle
to the development, management, operation and/or conduct of the trade or business or profession
of the taxpayers
2. Only 1 vehicle for land transport is allowed for the use of an official or employee (not exceeding
2.4M) c. No depreciation shall be allowed for yachts, helicopters, airplanes, aircrafts and land
vehicles which exceed the above threshold amount
3. All maintenance expenses on account of non- depreciable vehicles for taxation purposes are
disallowed in its entirety
4. The input taxes on the purchase of non-depreciable vehicles and all input taxes on maintenance
expenses incurred thereon are likewise disallowed for taxation purposes.
Depletion
Consoli The Company, Consolidated Mines, Inc., is a For the Mine Cost, the evidence presented by the
dated domestic corporation engaged in mining. It had filed Company is insufficient to prove the cost of
Mines, its income tax returns for 1951, 1952, 1953 and development that it alleges. Thus, the original figure
Inc. v. 1956. In 1957 examiners of the BIR investigated the assessed by the Commissioner stands. For the Ore
CTA income tax returns filed by the Company because Deposit, the geological report appears clear enough;
(1974) its auditor, Felipe Ollada claimed the refund of the the estimated float of 200,000 tons consisting of
sum of P107,472.00 representing alleged pieces of ore that had broken loose and become
overpayments of income taxes for the year 1951. detached by erosion from their original position could
After the investigation the examiners reported that hardly be viewed as still forming part of the total
the depletion and depreciation expenses had estimated ore deposit. Having already been broken
been overcharged and that the Company had up into numerous small pieces and practically
overstated its claim for depletion. In view of said rendered useless for mining purposes, the same
reports, the Commissioner of Internal Revenue sent could not appreciably increase the ore potentials of
the Company a letter of demand requiring it to pay the Company’s mines. Thus, the Court modifies the
certain deficiency income taxes. original figure assessed by the petitioner and by the
respondent. The rate of depletion per ton of the ore
WON THE CTA USED THE CORRECT RATE OF deposit mined and sold by the Company is P0.6196
MINE DEPLETION  NO per ton.
WON THE DISALLOWANCE BY THE CTA FOR The Company failed to itemize and/or substantiate
THE DEPRECIATION CHARGES CLAIMED BY with definite proof that the Commissioner’s own
THE COMPANY AS DEDUCTIONS FROM ITS method of determining depreciation is
GROSS INCOME IS CORRECT  YES unreasonable or inaccurate.
Charitable and Other Contributions

RA University of the Philippines Charter of 2008
9500
Section SEC. 25. Tax Exemptions. - The provisions of any general or special law to the contrary notwithstanding:
25 a) All revenues and assets of the University of the Philippines used for educational purposes or in
support thereof shall be exempt from all taxes and duties;
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b) Gifts and donations of real and personal properties of all kinds shall be exempt from the donor's tax
and the same shall be considered as allowable deductions from the gross income of the donor, in
accordance with the provisions of the National Internal Revenue Code of 1997, as
amended: Provided, That the allowable deductions shall be equivalent to 150 percent of the value of
such donation. Valuation of assistance other than money shall be based on the acquisition cost of
the property. Such valuation shall take into consideration the depreciated value of property in case
said property has been used;
c) Importation of economic, technical, vocational, scientific, philosophical, historical and cultural books,
supplies and materials duly certified by the Board, including scientific and educational computer and
software equipment, shall be exempt from customs duties;
d) The University shall only pay 0% value-added tax for all transactions subject to this tax; and
e) All academic awards shall be exempt from taxes
RA National Book Development Trust Fund Act
9521
Section SEC. 3. The National Book Development Trust Fund. - A National Book Development Trust Fund,
3 hereafter referred to as the Fund, is hereby established exclusively for the support and promotion of Filipino
authorship especially in science and technology and in subject areas wherein locally authored books are
either few or nonexistent. The Fund shall be subject to the following;
a) The contribution to the Fund shall be sourced from the following:
1) The amount of Fifty million pesos (P50,000,000.00) shall be allotted in the annual General
Appropriation Act (GAA) for the next five (5) years starting from the enactment of this law;
2) The amount of Fifty million pesos (P50,000,000.00) shall be taken from the Philippine
Amusement and Gaming Corporation (PAGCOR) fund at Five million pesos (P5,000,000.00)
per month for ten (10) months;
3) Another amount of Fifty million pesos (P50,000,000.00) shall be taken from the Philippine
Charity Sweepstakes Office (PCSO) at Five million pesos (P5,000,000.00) per month for ten
(10) months;
b) Only the interest drawn from the Fund from sources cited in Section 3 (a1), (a2) and (a3) shall be
awarded as grants to promote Filipino authorship and to support the completion of local manuscripts
or research works for publication;
c) The grants can be awarded only after one (1) year from the organization of the Fund, and the grants
shall be awarded equitably among the regions.
d) Government corporations are hereby authorized to give grants to the Fund at their discretion;
e) The private portion of the Fund shall be raised from donations and other conveyances including
funds, materials, property and services, by gratuitous title;
f) Contributions to the Fund shall be exempt from the donor's tax and the same shall be considered as
allowable deductions from the gross income of the donor, in accordance with the provisions of the
National Internal Revenue Code of 1997, as amended: Provided, That the allowable deductions
shall be equivalent to one hundred fifty percent (150%) of the value of such donation;
g) The National Book Development Board(NBDB) shall be the administrator of the Fund;
h) For the sound and judicious management of the Fund, the NBDB shall appoint a government
financial institution, with sound track record on fund management, as portfolio manager of the Fund,
subject to guidelines promulgated by the NBDB; and
i) The NBDB shall prepare the implementing guidelines and decision-making mechanisms, subject to
the following:
1) No part of the seed capital of the Fun, including earnings thereof, shall be used to underwrite
overhead expenses for the administration; and
2) There shall be an external auditor to perform an annual audit of the Fund's performance.
BIR Conservation International, an international Sec. 34(H) of the Tax Code of 1997, which talks of
Ruling organization with home offices abroad, applied for Charitable and Other Contributions, specifically
19-01 certification with Philippine Council for NGO mentions “accredited domestic corporation or
Certification (PCNC) to be granted status as a associations” and “non-government organizations.”
donee institution, but since its members are based On the other hand, subparagraph (2)(c) of the same
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overseas, fundamental issues regarding Section of the Tax Code defines a “nongovernment
governance cannot be fully addressed by the BIR’s organization” to mean a non-profit domestic
evaluation process. corporation.
WON INTERNATIONAL ORGANIZATIONS WITH Revenue Regulation No. 13-98 was issued to
HOME OFFICES BASED ABROAD ARE implement Sec. 34(H), and it provides that a non-
QUALIFIED TO BE GRANTED DONEE stock, non-profit corporation or organization must be
INSTITUTION STATUS  NO created or organized under Philippine Laws and that
an NGO must be a non-profit domestic corporation.
The BIR opines that a foreign corporation, like

Conservative International, whether resident or non-
resident, cannot be accredited as donee institution.
Research and Development

3M 3M Phil. is a subsidiary of 3M-St. Paul, a non- Central Bank Circular No. 393: Regulations
Philippi resident foreign corporation. 3M Phil. is the Governing Royalties/Rentals provides that royalties
nes, exclusive importer, manufacturer, wholesaler, and hall be paid only on commodities manufactured by
Inc. v. distributor in the PH of all products of 3M-St. Paul. the licensee under the royalty agreement; and that
CIR To enable it to manufacture, package, market, sell, the royalty/rental contracts involving manufacturing
(1988) and install the highly specialized products of its royalty shall not exceed 5% of the wholesale price of
parent company, 3M Phil. entered with 3M-St. Paul the commodities manufactured under the royalty
a Service Information and Technical Assistance agreement. Clearly, no royalty is payable on the
Agreement and Patent and Trademark License wholesale price of finished products imported.
Agreement, under which 3M Phil. agreed to pay a
technical service of 3% and a royalty of 2% of its Although the NIRC allows payments of royalty to be
net sales. In its deductions for 1974, the CIR only deducted from gross income as business expenses,
allowed deductions for royalties and technical CB Circular No. 393 defines which royalty payments
service fees for locally manufactured goods; are proper. Hence, improper payments of royalty
deductions for finished products imported were are not deductible as legitimate business
disallowed. The improper deduction was treated by expenses.
the CIR as disguised dividend or income.
WON THE ENTIRE AMOUNT OF ROYALTIES

AND TECHNICAL SERVICE FEES PAID TO 3M-
ST. PAUL MAY BE CLAIMED AS DEDUCTION
FOR BUSINESS EXPENSES  NO
Additional Requirements for Deductibility
RMO GUIDELINES TO BE OBSERVED BY THE REVENUE OFFICERS FOR THE ALLOWANCE OR
38-83 DISALLOWANCE OF ITEMS OF DEDUCTIONS REFERRED TO IN SECTION 30(1)
An amount claimed as deductions on which a tax is supposed to have been withheld under Section 54 and
93 shall be allowed if in the course of his audit/investigation, the examiner discovers that:
1. No withholding of creditable or final tax was made but payee reported the income and the
withholding agent/taxpayer pays during the original audit and investigation the surcharges, interest
and penalties incident to the failure to withhold the tax
2. No withholding of creditable or final tax was made and recipient- payee failed to report the income
on due date thereof, but the withholding agent pays during the original audit and investigation the
amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to
his failure to withhold
3. Withholding agent erroneously underwithheld the tax but pays during the original audit and
investigation the difference in the amount supposed to have been withheld, inclusive of surcharges,
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interest and penalties incident to such error

Items of deductions disallowed due to non-compliance with Section 30(1), the deficiency income tax
assessment for which had been issued before the effectivity of the Revenue may be allowed upon payment
not later than May 15, 1984 of the withholding tax required and supposed to have been withheld and/or
surcharges, interest and penalties. However, no refund or credit arising from such re-allowance of a
previously disallowed deduction shall be granted.
RR 12- SEC 2.58.5 OF RR 2-98 IS AMENDED
2013
Sec. 2.58.5. Requirements for Deductibility. — Any income payment which is otherwise deductible under the
Code shall be allowed as a deduction from the payor’s gross income only if it is shown that the income tax
required to be withheld has been paid to the Bureau in accordance with Secs. 57 and 58 of the Code.
No deduction will also be allowed notwithstanding payments of withholding tax at the time of the audit
investigation or reinvestigation/reconsideration in cases no withholding of tax was made in accordance with
Secs. 57 and 58 of the Code.
Optional Standard Deduction

RR 2- The GPP is not a taxable entity for income tax purposes since it is only acting as a “pass-through”
2010 entity where its income is ultimately taxed to the partners comprising it.
The individual partner can still claim deductions incurred or paid by him that contributed to the earning of the
income taxable to him. The following rules shall govern:
a. If the GPP availed of the itemized deduction its net income, the partners may still claim itemized
deduction from said share, provided, that, in claiming itemized deductions, the partner is precluded
from claiming the same expenses already claimed by the GPP. If the GPP availed of itemized
deduction, the partners are not allowed to claim the OSD from their share in the net income
because the OSD is a proxy for all the items of deductions allowed in arriving at taxable income.
b. If the GPP avails of OSD, the partners can no longer claim further deduction from their share in the
said net income for the ff. reasons:
1. The partners’ distributive share in the GPP is treated as his gross income not his gross
sales/receipts and the 40% OSD allowed to individuals is specifically mandated to be
deducted not from his gross income but from his gross sales/receipts; and
2. The OSD being in lieu of the itemized deductions allowed in computing taxable income as
defined under Section 31 of the NIRC, it will answer for both the items of deduction allowed
to the GPP and its partners.
c. Since one-layer of Income Tax is imposed on the income of the GPP and the individual partners
where the law had placed the statutory incidence of the tax in the hands of the latter, the type of
deduction chosen by the GPP must be the same type of deduction that can be availed of the by
partners.
1. i) If the GPP claims itemized deductions, all items of deduction allowed can be claimed
both at the level of the GPP and at the level of the partner in order to determine the taxable
income.
2. ii) If the GPP opt to claim the OSD, the individual partners are deemed to have availed also
fo the OSD because the OSD is in lieu of the itemized deductions that can be claimed in
computing taxable income.
d. If the partner also derives other gross income from trade, business, or practice of profession apart
and distinct from his share in the net income of the GPP, the deduction that he can claim from his
other gross income would follow the same deduction availed of from his partnership income as
explained in the foregoing rules. Provided that if the GPP opts for the OSD, the individual partner
may still claim 40% of its gross income from trade, business, or practice of profession, but not to
include his share from the net income of the GPP .
The taxpayer should signify his intention in the return to claim OSD, otherwise he is considered to have
availed of itemized deductions. Once election is made, it shall be irrevocable for the taxable year for which
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the return is made. Any taxpayer who is required by fails to file the quarterly ITR for the 1st Quarter shall be
considered as having availed of the itemized deductions option.
An individual taxpayer who is entitled and has claimed the OSD shall not be required to submit his return
with financial statements otherwise required in the NIRC. But he must keep such records pertaining to his
gross sales or gross receipts. In the case of a corporation, it is still required to submit its financial statements
when it files its annual return and keep such records pertaining to its gross income.
RR 16- IMPLEMENTING THE PROVISIONS OF SECTION 34 (L) OF THE TAX CODE, AS AMENDED BY SEC. 3
2008 OF RA 9504, DEALING ON THE OPTIONAL STANDARD DEDUCTION ALLOWED TO INDIVIDUALS
Section AND CORPORATIONS IN COMPUTING THEIR TAXABLE INCOME
s 1 to 7
The following may be allowed to claim OSD in lieu of the itemized deductions (i.e., items of ordinary and
necessary expenses allowed under Sections 34 (A) to (J) and (M), Section 37, other special laws, if
applicable):
1. Individuals
i. Resident Citizen
ii. Non-resident Citizen
iii. Resident Alien
iv. Taxable Estates and Trust
The OSD allowed to individual taxpayers shall be a maximum of forty percent (40%) of gross sales or gross
receipts during the taxable year.
2. Corporations
i. Domestic Corporation
ii. Resident Foreign Corporation
Corporate taxpayers subject to tax under Section 27(A) and 28(A)(1) of the Code, as amended, the OSD
allowed shall be in an amount not exceeding forty percent (40%) of their gross income.
NOLCO
Paper Picop entered into a merger agreement with the To allow the deduction claimed by Picop would be to
Industri Rustan Pulp and Paper Mills, Inc. (RPPM) and permit one corporation or enterprise, Picop, to benefit
es Rustan Manufacturing Corporation (RMC). Under from the operating losses accumulated by another
Corpor this agreement, the rights, properties, privileges, corporation or enterprise, RPPM. RA 5186 introduced
ation v. powers and franchises of RPPM and RMC were to the carry-over of net operating losses as a very
CA be transferred, assigned and conveyed to Picop as special incentive to be granted only to registered
(1995) the surviving corporation. The CIR disallowed all pioneer enterprises and only with respect to their
the deductions claimed on the basis of RPPM’s registered operations. The statutory purpose here
losses, apparently on two (2) grounds. Firstly, the may be seen to be the encouragement of the
previous losses were incurred by “another establishment and continued operation of pioneer
taxpayer,” RPPM, and not by Picop in connection industries by allowing the registered enterprise to
with Picop’s own registered operations. The CIR accumulate its operating losses which may be
took the view that Picop, RPPM and RMC were expected during the early years of the enterprise and
merged into one (1) corporate personality only on to permit the enterprise to offset such losses against
12 January 1978, upon approval of the merger income earned by it in later years after successful
agreement by the BOI. establishment and regular operations. We consider
that the statutory purpose can be served only if
WON THE NOLCO OF RPPM CAN BE CLAIMED the accumulated operating losses are carried
BY PICOP AFTER THE MERGER BETWEEN THE over and charged off against income
COMPANIES  NO subsequently earned and accumulated by the
same enterprise engaged in the same registered
operations.
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It is thus clear that under our law, and outside the

special realm of BOI-registered enterprises, there
is no such thing as a carry-over of net operating
loss. To the contrary, losses must be deducted
against current income in the taxable year when
such losses were incurred. Moreover, such
losses may be charged off only against income
earned in the same taxable year when the losses
were incurred.
RR 14- IMPLEMENTS CERTAIN PROVISIONS IN THE TAX CODE RELATIVE TO THE ALLOWANCE OF
01 NOLCO AS DEDUCTION FROM GROSS INCOME
Only net operating losses accumulated by a qualified taxpayer beginning January 1, 1998 may be carried
over as a deduction from gross income to the next three (3) immediately succeeding taxable years
following the year of such loss. For mines other than oil and gas wells, a net operating loss (realized
without the benefit of incentives provided for under the Omnibus Investments Code of 1997) incurred in any
of its first ten (10) years of operation may be carried over as a deduction from taxable income for the next
five (5) years immediately following the year of such loss.
Any individual, including estates and trusts, engaged in trade or business or in the exercise of profession,
and domestic and resident foreign corporations are entitled to deduct NOLCO from gross income. Those
who are not entitled to claim deduction of NOLCO are: 1) Offshore Banking Unit of a foreign banking
corporation, and Foreign Currency Deposit Unit of a domestic or foreign banking corporation, duly
authorized as such by the Bangko Sentral ng Pilpinas; 2) enterprises registered with the Board of
Investments (BOI), with respect to its BOI-registered activity enjoying the Income Tax Holiday incentive; 3)
enterprises registered with the Philippine Economic Zone Authority (PEZA), with respect to its PEZA-
registered business activity; 4) enterprises registered under the Bases Conversion and Development Act of
1992; 5) foreign corporations engaged in international shipping or air carriage business in the Philippines;
and 6) any person, natural or juridical, enjoying exemption from income tax, pursuant to the provisions of the
Code or any special law, with respect to its operation during the period for which the aforesaid exemption is
applicable.
An individual who claims the 10% optional standard deduction shall not simultaneously claim
deduction of the NOLCO, provided that the three-year reglementary period shall continue to run
notwithstanding the fact that the said individual availed of the 10% optional standard deduction during the
said period. In the case of corporations, the three-year reglementary period on the carry-over of NOLCO
shall also continue to run notwithstanding the fact that it has paid its income tax under the “Minimum
Corporate Income Tax” computation. NOLCO shall be availed of on a “first-in, first-out” basis.
BIR This involves a letter requesting for a confirmation Pursuant to the Section 34 (D) (3) of the Tax Code
Ruling on the matter of the application of tax implications and considering that the consolidation of the
30-00 of a proposed integration plan affecting several operations of the Group Companies under a single
companies. The boards of directors of Republic, management structure is for a bonafide business
Fortune, Zeus and Iligan (Group) approved a purpose, and there is no substantial change of
proposal to integrate their cement business ownership, the net operating loss carry-over of
operations and activities. The proposed integration Republic, Fortune, MPCC and Iligan are preserved
consists of the consolidation in Republic of the and may be carried over and claimed as a deduction
investments in shares by several companies from their respective gross income for purposes of
including the “Group” by exchanging such computing the income tax using the normal income
investments with new shares being original tax rate and without prejudice to the applicability of
issuances, of Republic, based on the Share Swap the rule on the Minimum Corporate Income Tax
Ratios approved by the Boards of Republic, (MCIT).
Fortunes, Zeus and Iligan. To simplify, they wanted
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to transfer their respective Fortune, Zeus and Iligan

shares to Republic in exchange for Republic
shares. The letter requests, among others,
(pertinent to the topic assigned), that it be
confirmed that the net operating losses of each
of Republic, Fortune, MPCC and Iligan are
preserved after the proposed share swap and
may be carried over and claimed as a deduction
from their respective gross income, pursuant to
Section 34(D)(3) of the Tax Code, because there
is no substantial change in the ownership of
either Republic or Fortune or MPCC or Iligan.
WON THE NET OPERATING LOSSES OF EACH

OF REPUBLIC, FORTUNE, MPCC AND ILIGAN
ARE PRESERVED AFTER THE PROPOSED
SHARE SWAP AND MAY BE CARRIED OVER
AND CLAIMED AS A DEDUCTION FROM THEIR
RESPECTIVE GROSS INCOME, PURSUANT TO
SECTION 34(D)(3) OF THE TAX CODE,
BECAUSE THERE IS NO SUBSTANTIAL
CHANGE IN THE OWNERSHIP OF EITHER
REPUBLIC OR FORTUNE OR MPC OR ILIGAN 
YES
Non-Deductible Expenses
Esso ESSO deducted from its gross income for 1959, as In ruling for the CIR, the Court provided that they are
Standar part of its ordinary and necessary business neither taxes nor necessary expenses. Margin fees
d expenses, the amount it had spent for drilling and are not taxes because they are not imposed as a
Eastern exploration of its petroleum concessions. The CIR revenue measure but as a police measure whose
v. CIR disallowed the claim on the ground that the proceeds are applied to strengthen the country’s
(1989) expenses should be capitalized and might be international reserves. Thus, the fee was imposed by
written off as a loss only when a “dry hole” should the State in the exercise of its POLICE POWER and
result. Hence, ESSO filed an amended return NOT taxation power. Neither are they necessary and
where it asked for the refund of P323,270 by reason ordinary business expenses. Hence, not deductible.
of its abandonment, as dry holes, of several of its oil
wells. It also claimed as ordinary and necessary An expense is considered necessary where the
expenses in the same return amount expenditure is helpful in the development of the
representing margin fees it had paid to the taxpayer’s business. It is ordinary when it connotes a
Central Bank on its profit remittances to its New payment which is normal in relation to the business of
York Office. the taxpayer and the surrounding circumstances. The
expenditure being ordinary and necessary is
WON THE MARGIN FEES ARE TAXES OR determined based on its nature – the extent and
NECESSARY EXPENSES WHICH ARE permanency of the work accomplished by the
DEDUCTIBLE FROM ITS GROSS INCOME  NO expenditure. In this case, ESSO was unable to show
that the remittance to the head office of part of its
profits was made in furtherance of its own trade or
business. It merely presumed that all corporate
expenses are necessary and appropriate in the
absence of a showing that they are illegal or ultra
vires; which is erroneous. Claims for deductions are a
matter of legislative grace and do not turn on mere
equitable considerations.
RR 2 SECTION 119. Personal, living, and family expenses. — Personal, living, and family expenses are not
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Section deductible. Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and not
119-122 deductible. Premiums paid for life insurance by the insured are not deductible. In the case of a professional
man who rents a property for residential purposes, but incidentally receives his clients, patients, or callers in
connection with his professional work (his place of business being elsewhere), no part of the rent is
deductible as a business expense. If however, he uses part of the house for his office, such portion of the
rent as is properly attributable to such office is deductible. Where the father is legally entitled to the services
of his minor children, any allowances which he gives them, whether said to be in consideration of services or
otherwise, are not allowable deductions in his return of income. Alimony, and an allowance paid under a
separation agreement are not deductible from gross income.
SECTION 120. Capital expenditures. — No deduction from gross income may be made for any amounts
paid out for new buildings or for permanent improvements or betterments made to increase the value of the
taxpayer's property, or for any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance for depreciation or depletion or other allowance is or has been made.
Amounts expended for securing a copyright and plates, which remain the property of the person making the
payments, are investments of capital. The cost of defending or perfecting title to property constitutes a part
of the cost of the property and is not a deductible expense. The amount expended for architect's services is
part of the cost of the building. Commissions paid in purchasing securities are a part of the cost of such
securities. Commissions paid in selling securities are an offset against the selling price. Expenses of the
administration of an estate, such as court costs, attorney's fees, and executor's commissions, are
chargeable against the "corpus" of the estate and are not allowable deductions. Amounts to be assessed
and paid under an agreement between bondholders or shareholders of a corporation, to be used in a
reorganization of the corporation, are investments of capital and not deductible for any purpose in return of
income. In the case of a corporation, expenses for organization, such as incorporation fees, attorney's fees
and accountants' charges, are ordinarily capital expenditures; but where such expenditures are limited to
purely incidental expenses, a taxpayer may charge such items against income in the year in which they are
incurred. A holding company which guarantees dividends at a specified rate on the stock of a subsidiary
corporation for the purpose of securing new capital for the subsidiary and increasing the value of its
stockholdings in the subsidiary may not deduct amounts paid in carrying out this guaranty in computing its
net income, but such payments may be added to the cost of its stock in the subsidiary.
SECTION 121. Premiums on life insurance of employees. — Any amounts paid for premiums on any life
insurance policy covering the life of an officer or employee or of any person financially interested in the
business of the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy are not
deductible.
SECTION 122. Losses from sales or exchanges of property. — No deduction is allowed in respect of
losses from sales or exchanges of property, directly or indirectly —
a) Between members of a family. As used in Section 31, the family of an individual shall include only
his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal
descendants;
b) Except in the case of distributions in liquidation, between an individual and a corporation more than
fifty per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for
such individual;
c) Except in the case of distributions in liquidation, between two corporations more than 50 per cent in
value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same
individual, if either one of such corporations with respect to the taxable year of the corporation
preceding the date of the sale
or exchange was, under the law applicable to such taxable year, a personal holding company or a
foreign personal holding company;
d) Between a grantor and a fiduciary of any trust;
e) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor
with respect to each trust; or
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f) Between a fiduciary of a trust and a beneficiary of such trust. (Section 32 of the Code).
6. Individuals
Passive Income
RR 01- RR 1-2011 defines the tax treatment of income earnings and money remittances of an Overseas Contract
2011 Worker (OCW) or Overseas Filipino Worker (OFW).
An OCW or OFW’s income arising out of his overseas employment is exempt from income tax. However, if
an OCW or OFW has income earnings from business activities or properties within the Philippines, such
income earnings are subject to PH income tax as follows:
For Passive Income [Section 24(B)]:

i. 20% Final Tax on Interest Income from any currency bank deposit and yield or any monetary benefit
from deposit substitutes and from trust funds and similar arrangements;
ii. 20% Final Tax on any royalties;
iii. 10% Final Tax on any royalty related on books, as well as literary works and musical compositions;
iv. 20% Final Tax on prizes (except prizes amounting to P 10,000 or less which shall be subject to
regular Income Tax rate of 5 -32%) and other winnings (except Philippine Charity Sweepstakes and
Lotto Winnings);
v. Exemption from 7.5% Final Tax on interest income from a depository bank under the expanded
foreign currency deposit system upon presentation of proof of non-residency such as Overseas
Employment Certificate (OEC) or Seaman's Book. However, if the account is jointly in the name of
the overseas contract worker or a Filipino seaman, and an individual (spouse or dependent) who is
living in the Philippines, 50% of the interest income from such bank deposit will be treated as
exempt while the other 50% shall be subject to a Final Withholding Tax of 7.5%;
vi. 10% Final Tax on cash or property dividends
vii. 5%/10% Final Tax on net capital gains realized on sale, barter, exchange or other disposition of
shares of stock in a domestic corporation (except shares sold or disposed of through the stock
exchange);
viii. 6% Final Tax on capital gains from the sale, exchange or other disposition of real property located in
the Philippines classified as capital assets based on gross selling price or current fair market value,
whichever is higher; and
ix. 5%/12%/20% Final Tax on interest income from long-term deposits or investment in the form of
savings, common or individual trust funds, deposit substitutes, investment management accounts
and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas, which was pre-terminated by the holder before the 5th year.
RR 14- Proper Tax Treatment of Interest Income Earnings on Financial Instruments and Other Related Transactions
2012
Interest income derived from long term deposits or investment certificates – exempt from income tax
provided that depositor or investor is an individual citizen (resident or non-resident), a resident alien or NRA-
ETB; long term deposit should be under the name of the individual; in the form of savings, common, or
individual trust funds, deposit substitutes, investment management accounts, and other investments
evidenced by certificates prescribed by BSP, issued by banks only, maturity period of not less than 5 years,
must be in denominations of 10k, should not be terminated by investor before the 5th year
Interest income derived from depository bank under expanded foreign currency deposit system –
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subject to final withholding tax of 7.5% if income is received by citizens, RA, domestic corporations and
resident foreign corporation, income of non-residents whether individuals or corporations, shall be exempt
from income tax.
*Check the entirety of the RR, ALL provisions are important

Capital Gains Tax
SMI-ED SMI-ED is a PEZA-registered corp, constructed ASSETS INVOLVED ARE CAPITAL ASSETS
Philippi buildings and purchased machineries and The properties involved in this case include
nes equipment. However, it failed to commence petitioner’s buildings, equipment, and machineries.
Technol operations and was temporarily closed. It sold its They are not among the exclusions enumerated in
ogy v. buildings and some of its installed machineries and Section 39(A)(1) of the National Internal Revenue
CIR equipment to Ibiden, another PEZA-registered Code of 1997. None of the properties were used in
(2014) enterprise. SMI-ED was then dissolved. In its ITR, petitioner’s trade or ordinary course of business
SMI-ED subjected the entire gross sales of its because petitioner never commenced operations.
properties to 5% final tax on PEZA registered corps. They were not part of the inventory. None of them
SMI-ED later on filed an administrative claim for were stocks in trade. Based on the definition of
refund alleging that it was erroneously paid. capital assets under Section 39 of the National
Internal Revenue Code of 1997, they are capital
WON PETITIONER IS ENTITLED TO BENEFITS assets.
GIVEN TO PEZA-REGISTERED ENTERPRISE –
NO Since they are capital assets, does it mean that they
are subject to CGT ? NO.
Petitioner is not entitled to benefits given to PEZA-
registered enterprises, including the 5% preferential There is a difference between individual and
tax rate under Republic Act No. 7916 or the Special corporate CGT on the sale of real properties.
Economic Zone Act of 1995. This is because it  Individuals are taxed on capital gains from
never began its operation. the sale of all real properties located in the
Philippines and classified as capital assets.
Essentially, the purpose of Republic Act No. 7916 is  Domestic corporations – the CGT is
to promote development and encourage imposed only on the presumed gain realized
investments and business activities that will from the sale of lands and/or buildings.
generate employment. Giving fiscal incentives to
businesses is one of the means devised to achieve Therefore, only the presumed gain from the sale of
this purpose. It comes with the expectation that petitioner’s buildings may be subjected to the 6%
persons who will avail these incentives will capital gains tax. The income from the sale of
contribute to the purpose’s achievement. Hence, petitioner’s machineries and equipment is subject to
to avail the fiscal incentives under Republic Act No. the provisions on normal corporate income tax.
7916, the law did not say that mere PEZA
registration is sufficient. HOWEVER, the petitioner is still NOT liable for the
income tax because it has not commenced its
WON PROPERTIES MAY BE SUBJECTED TO operations and incurred a net loss of around
CGT – YES P2.2Billion. In addition, since more than a decade
have lapsed, the BIR can no longer assess petitioner
for deficiency CGT, if later found to be liable in
excess of the amount claimed for refund. The BIR is
ordered to refund SMI-Ed the amount of 5% final tax
paid to the BIR, less the 6% CGT on the sale of its
land and building. Because of the lapse of the
prescriptive period, any CGT accrued from the sale of
its land and building that is in excess of the 5% final
tax paid may no longer be recovered.
Suprem Supreme Transliner obtained a loan from BPI with a REDEMPTION PRICE DOES NOT INCLUDE CGT
e 714- sqm lot as collateral. Because of non-payment There is no legal basis for the inclusion of this charge
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Transli of the loan, the mortgage was extrajudicially in the redemption price. The term sale in Section
ner v. foreclosed and lot was sold to the bank as the 24(a)(17) of the NIRC includes pacto de retro and
BPI highest bidder. Before the expiration of the 1-year other forms of conditional sale. These include
(2011) redemption period, the mortgagors notified the bank mortgage foreclosure sales (judicial and extrajudicial).
of their intention to redeem the property. The In a foreclosure sale, there is no actual transfer of the
mortgagors then filed a complaint against the bank mortgaged real property until after the expiration of
to recover unlawful and excessive charges, but the the one- year redemption period as provided in Act
bank asserted that the redemption price is valid, No. 3135 and title thereto is consolidated in the name
legal, and in accordance with documents duly of the mortgagee in case of non-redemption. The
signed by the mortgagors. issuance of the Certificate of Sale does not by
itself transfer ownership.
WON THE FORECLOSING MORTGAGEE
SHOULD PAY CGT UPON THE EXECUTION OF Considering that herein Supreme Transliner
THE CERTIFICATE OF SALE, AND IF PAID BY exercised their right of redemption before the
THE MORTGAGEE, WHETHER THE SAME expiration of the statutory one-year period, BPI Fanily
SHOULD BE SHOULDERED BY THE savings is not liable to pay the capital gains tax due
REDEMPTIONER – NO on the extrajudicial foreclosure sale.
RR No. 4-99 Sec. 3. Capital Gains Tax

(1) in case the mortgagor exercises his right of
redemption within one year from the issuance of the
certificate of sale, no capital gains tax shall be
imposed because no capital gains has been derived
by the mortgagor and no sale or transfer of real
property was realized.
There was no actual transfer of title from the owners-

mortgagors to the foreclosing bank. Hence, the
inclusion of the said charge in the total redemption
price was unwarranted and the corresponding
amount paid by the petitioners-mortgagors should be
returned to them.
DPWH Petitioner Republic of the Philippines, represented CGT due on the sale of real property is a liability for
v. by the DPWH, filed a Complaint for expropriation the account of the seller, not the buyer, who generally
Soriano against respondent Soriano, the registered owner of would shoulder the tax. Accordingly, the BIR, in its
(2015) a parcel of land. RTC ruled that the Republic should BIR Ruling No. 476-2013, constituted the DPWH as a
pay the consequential damages including taxes for withholding agent to withhold the six percent (6%)
Seller is the transfer of the property (including CGT and final withholding tax in the expropriation of real
the one DST). Petitioner is alleging that CGT must be paid property for infrastructure projects. As far as the
liable by the Respondent as the “seller”. government is concerned the CGT remains a liability
for CGT of the seller (respondent) since it is a tax on the
W/N CGT SHOULD BE PAID BY THE SELLER – seller's gain from the sale of the real estate.
YES
RR 8-98 REVENUE REGULATIONS NO. 8-98 issued September 2, 1998 amends pertinent portions of Revenue
Regulations Nos. 11-96 and 2-98 relative to the tax treatment of the sale, transfer or exchange of real
property. Specifically, the Capital Gains Tax (CGT) Return will be filed by the seller within 30 days following
each sale or disposition of real property.
Payment of the CGT will be made to an Authorized Agent Bank (AAB) located within the Revenue District
Office (RDO) having jurisdiction over the place where the property being transferred is located. Creditable
withholding taxes, on the other hand, deducted and withheld by the withholding agent/buyer on the sale,
transfer or exchange or real property classified as ordinary asset will be paid by the withholding agent/buyer
upon filing of the return with the AAB located within the RDO having jurisdiction over the place where the
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property being transferred is located. Payment will have to be done within 10 days following the end of the
month in which the transaction occurred, provided, however, that taxes withheld in December will be filed on
or before January 25 of the following year.
RR 4-99 RR 4-99 amends Revenue Memorandum Order No. 6-92 relative to the payment of CGT and DST on
extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies.
Where the right of redemption of the mortgagor exists, the certificate of title of the mortgagor will not be
cancelled yet even if the property had already been subjected to foreclosure sale. Instead, only a brief
memorandum will be annotated at the back of the certificate of title, and the cancellation of the title and
the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the
mortgagor will redeem or not the mortgaged property within one year from the issuance of the certificate of
sale. Thus, no transfer of title to the highest bidder can be effected yet until and after the lapse of the one-
year period from the issuance of the said certificate of sale. In case the mortgagor exercises his right of
redemption within one year from the issuance of the certificate of sale, no CGT will be imposed because no
capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. In
case of non-redemption, the CGT on the foreclosure sale shall become due based on the bid price of the
highest bidder, but only upon the expiration of the one-year period of redemption, and will be paid within 30
days from the expiration of the said one-year redemption period. The corresponding DST will be levied,
collected and paid by the person making, signing, issuing, accepting or transferring the real property
wherever the document is made, signed, issued, accepted or transferred where the property is situated in
the Philippines.
RR 13- REVENUE REGULATIONS NO. 13-99 prescribes the regulations for the exemption of a citizen or a resident
99 alien individual from the payment of the 6% Capital Gains Tax on the sale, exchange or disposition of his
principal residence.
CGT
exempt 1. In order for a person to be exempted from the payment of the tax, he should submit,
on together with the required documents, a Sworn Declaration of his intent to avail of the tax
principal exemption to the Revenue District Office having jurisdiction over the location of his principal residence
residen within (30) days from the date of the sale, exchange or disposition of the principal residence.
ce 2. The proceeds from the sale, exchange or disposition of the principal residence must be
fully utilized in acquiring or constructing the new principal residence within eighteen (18) calendar
months from the date of the sale, exchange or disposition. In case the entire proceeds of the sale is
not utilized for the purchase or construction of a new principal residence, the Capital Gains Tax will be
computed based on the formula specified in the Regulations.
3. If the seller fails to utilize the proceeds of sale or disposition in full or in part within the 18-
month reglementary period, his right of exemption from the Capital Gains Tax did not arise on the
extent of the unutilized amount, in which event, the tax due thereon will immediately become due
and demandable on the 31st day after the date of the sale, exchange or disposition of the principal
residence.
4. If the individual taxpayer's principal residence is disposed in exchange for a condominium
unit, the disposition of the taxpayer's principal residence will not be subjected to the Capital Gains Tax
herein prescribed, provided that the said condominium unit received in the exchange will be used by
the taxpayer-transferor as his new principal residence.
RR 14- REVENUE REGULATIONS NO. 14-2000 issued December 29, 2000 amends Sections 3(2), 3 and 6 of RR
2000 No. 13-99 relative to the sale, exchange or disposition by a natural person of his "principal residence".
The residential address shown in the latest income tax return filed by the vendor/transferor immediately
preceding the date of sale of said real property shall be treated, for purposes of these Regulations, as a
conclusive presumption about his true residential address, the certification of the Barangay Chairman, or
Building Administrator (in case of condominium unit), to the contrary notwithstanding, in accordance with the
doctrine of admission against interest or the principle of estoppel.
The seller/transferor's compliance with the preliminary conditions for exemption from the 6% capital gains
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tax under Sec. 3(1) and (2) of the Regulations will be sufficient basis for the RDO to approve and issue the
Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCC) of the principal residence
sold, exchanged or disposed by the aforesaid taxpayer. Said CAR or TCC shall state that the said sale,
exchange or disposition of the taxpayer's principal residence is exempt from capital gains tax pursuant to
Sec. 24 (D)(2) of the Tax Code, but subject to compliance with the post-reporting requirements imposed
under Sec. 3(3) of the Regulations.
RR 06- This revenue regulation was promulgated to harmonize and consolidate the rules relative to the imposition
2008 of tax for the sale, barter, exchange or other disposition of shares of stock of domestic corporations
that are listed and traded through the Local Stock Exchange or disposition of shares through Initial
Public Offering (IPO) or disposition of shares through the Local Stock Exchange.
Some definitions: (for other definitions, check the regulation)

1. Local stock exchange (LSE) - refers to any domestic organization, association, or group of
persons, whether incorporated or unincorporated, licensed or unlicensed, which constitutes,
maintains, or provides a marketplace or facilities for bringing together purchasers and sellers of
stocks, and includes the market place and the market facilities maintained by such exchange.
“Exchange” is an organized domestic marketplace or facility that brings together buyers and sellers
and executes trades of securities and/or commodities, duly registered with the Securities and
Exchange Commission.
2. Initial Public Offering - a public offering f shares of stock made for the first time in the Local Stock
Exchange.
3. Primary Offering - original sale made to the investing public by the issuer corporation of its
unissued Shares of Stock.
4. Secondary Offering - an offer for sale to the investing public by existing shareholders f their
securities which is conducted during an IPO or follow-on/follow-through offering.
5. Follow-on/Follow-through Offering of Shares - offering of shares tot he investing public
subsequent to an IPO.
6. Shares Listed and Traded Through the LSE - for purposes of these Regulations, refers to all
sales, trades or transactions of listed Shares of Stock executed through the trading system and/or
facilities of the Local Stock Exchange.
7. Net Capital Gain - excess of the gains from sales or exchanges of capital assets over losses from
such sales or exchanges.
8. Closely-held Corporation - means corporation at least fifty percent (50%) in value of the
outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all
classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20)
individuals. (For the rules in determining whether Corp is considered closely-held corp, check the
regulation)
Sec. 3. Persons liable to the tax:

1. Individual taxpayers whether its zen or alien;
2. Corporate taxpayer, whether domestic or foreign; and
3. Other taxpayers not falling under (a) and (b) above, such as estate, trust, trust funds and pensio
funds, among others
Sec. 4 Persons not liable to the tax:
1. Dealers in securities (merchant of stocks or certificates)
2. Investor in shares of stock in a mutual fund company, as defined in Section 22 (BB) of the Tax
Code, as amended, and Sec. 2(s) of these Regulations, in connection with the gains
realized by said investor upon redemption of said shares of stock in a mutual fund company ;
and
3. All other persons, whether natural or juridical, who are specifically exempt from national internal
revenue taxes under existing investment incentives and other special laws.
Sec. 5. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK LISTED AND TRADED THROUGH
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THE LOCAL STOCK EXCHANGE. — There shall be levied, assessed and collected on every sale, barter,
exchange or other disposition of Shares of Stock Listed and Traded through the Local Stock Exchange
other than the sale by a dealer of securities, under the following rules:
A. Tax Rate.— A stock transaction tax at the rate of 1/2 of 1% based on the amount determined in
subsection (b) hereunder.
B. Tax Base. — Gross selling price or gross value in money of the shares of stock sold, bartered,
exchanged or otherwise disposed which shall be assumed and paid by the seller or transferor
through the remittance of the stock transaction tax by the seller or transferor’s broker.
SEC.6. SALE, BARTER OR EXCHANGE, OR ISSUANCE OF SHARES OF STOCK THROUGH IPO. —

There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through
IPO of shares of stock in closely held corporations, under the following rules:
A. Tax Rates. — A tax at the rates provided hereunder shall be imposed based on subsection (b) in
accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed
to the total outstanding shares of stock after the listing in the Local Stock Exchange:
Proportion of Disposed Shares to Outstanding Tax Rate

Shares
Up to 25% 4%
Over 25% but not over 33 ⅓% 2%
Over 33 ⅓% 1%
B. Tax Base. — Gross selling price or gross value in money of the shares of stock sold, bartered,
exchanged or otherwise disposed of.
Sec. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A LOCAL
STOCK EXCHANGE.
A. Tax Rate. — Afinal tax at the rates prescribed below is hereby imposed on the sale, barter or
exchange of shares of stock not traded through the LSE.
Amount of Capital Gain Tax Rate
Not over P100k 5%
On any amount in excess of P100k 10%

B. Tax Base. The tax imposed in Subsection (a) above shall be upon the net capital gains realized
during the taxable year from the sale, barter, exchange or disposition of shares of stock, except
shares sold or disposed of through the Local Stock Exchange which is covered by the provisions of
Secs. 5 and 6 above.
Determination of Gain or Loss from Sale or Disposition of Shares of Stock. The gain from the sale or
other disposition of shares of stock shall be the excess of the amount realized therefrom over the basis or
adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for
determining loss over the amount realized. The amount realized from the sale or other disposition of
property shall be the sum of money received plus the fair market value of the property (other than money)
received, if any.
Basis for Determining Gain or Loss from Sale or Disposition of Shares of Stock - Gain or loss from the
sale, barter or exchange of property, for a valuable consideration, shall be determined by deducting from
the amount of consideration contracted to be paid, the vendor/transferor’s basis for the property sold or
disposed plus expenses of sale/disposition, if any.
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If the property is acquired by purchase, the basis is the cost of such property. The cost basis for
determining the capital gains or losses for shares of stock acquired through purchase shall be governed by
the following rules:
1. If the shares of stock can be identified, then the cost shall be the actual purchase price plus all costs
of acquisition, such as commissions, documentary stamp taxes, transfer fees, etc.
2. If the shares of stock cannot be properly identified, then the cost to be assigned shall be computed
on the basis of the first- in first-out (FIFO) method.
3. If books of accounts are maintained by the seller where every transaction of a particular stock is
recorded, then the moving average method shall be applied rather than the FIFO method.
4. In general, stock dividend received shall be assigned with a cost basis which shall be determined
by allocating the cost of the original shares of stock to the total number shares held after receipt of
stock dividends (i.e., the original shares plus the shares of stock received as stock dividends).
Limitation of Capital Losses - For sale, barter, exchange or other forms of disposition of shares of stock
subject to the 5%/10% capital gains tax on the net capital gain during the taxable year, the capital losses
realized from this type of transaction during the taxable year are deductible only to the extent of capital gains
from the same type of transaction during the same period. If the transferor of the shares is an individual, the
rule on holding period and capital loss carry-over will not apply.
Shares of Stock Becoming Worthless - Losses from shares of stock, held as capital asset, which have
become worthless during the taxable year shall be treated as capital loss as of the end of the year.
However, this loss is not deductible against the capital gains realized from the sale, barter, exchange or
other forms of disposition of shares of stock during the taxable year, but must be claimed against other
capital gains to the extent provided for under Section 34 of the Tax Code, as amended. For the 5% and
10% net capital gains tax to apply, there must be an actual disposition of shares of stock held as capital
asset, and the capital gain and capital loss used as the basis in determining net capital gain, must be
derived and incurred respectively, from a sale, barter, exchange or other disposition of shares of stock.
Sec. 8. Taxation of Surrender of Shares by the Investor Upon Dissolution of the Corporation and
Liquidation of Assets and Liabilities of Said Corporation. Upon surrender by the investor of the shares
in exchange for cash and property distributed by the issuing corporation upon its dissolution and liquidation
of all assets and liabilities, the investor shall recognize either capital gain or capital loss upon such surrender
of shares computed by comparing the cash and fair market value of property received against the cost of the
investment in shares. The difference between the sum of the cash and the fair market value of property
received and the cost of the investment in shares shall represent the capital gain or capital loss from the
investment, whichever is applicable. If the investor is an individual, the rule on holding period shall apply and
the percentage of taxable capital gain or deductible capital loss shall depend on the number of months or
years the shares are held by the investor. Section 39 of the Tax Code, as amended, shall herein apply in all
possible situations.
The capital gain or loss derived therefrom shall be subject to the regular income tax rates imposed under the
Tax Code, as amended, on individual taxpayers or to the corporate income tax rate, in case of corporations.
Sec. 9. Taxation of Shares Redeemed for Cancellation or Retirement. When preferred shares are
redeemed at a time when the issuing corporation is still in its “going-concern” and is not contemplating in
dissolving or liquidating its assets and liabilities, capital gain or capital loss upon redemption shall be
recognized on the basis of the difference between the amount/value received at the time of redemption and
the cost of the preferred shares. Similarly, the capital gain or loss derived shall be subject to the regular
income tax rates imposed under the Tax Code, as amended, on individual taxpayers or to the corporate
income tax rate, in case of corporations. This section, however, does not cover situations where a
corporation voluntarily buys back its own shares, in which it becomes treasury shares. Otherwise, if the
shares are not listed and traded through the Local Stock Exchange, it is subject to the 5% and 10% net
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capital gains tax.
Tax on Shares of Stock Not Traded through the LSE: Persons deriving capital gains from the sale or
exchange of listed shares of stock not traded through the LSE shall file a return within 30 days after each
transaction and a final consolidated return of all transactions.
RR No. Amended certain provisions of RR 6-2008 prescribing rules on the taxation of sale, barter, exchange, or
6-2013 other disposition of shares of stock held as capital assets.
Fair market value of the shares of stock shall be:
In case of shares of stock not listed and traded in the local stock exchanges, the value of the shares of stock
at the time of sale shall be the fair market value. In determining the value of the shares, the Adjusted Net
Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of
adjusted asset minus the liability values is the indicated value of the equity. The appraised value of real
property at the time of sale shall be the higher of--
1. The fair market value as determined by the Commissione, or
2. The fair market value as shown in the schedule of value fixed by the Provincial and City Assessors,
or
3. The fair market value as determined by the Independent Appraiser
RMC In order to transfer shares of stock not traded in the Stock Exchange, it is necessary to secure a Certificate
37-2012 Authorizing Registration (CAR). The receipts of payment of tax should be filed with and recorded by the
Secretary of the Corporation.
BIR Jamie Avila requests exemption from payment of No donation had taken place when the spouses
Ruling donor’s tax on the transfer of the title of their house adjudicated to themselves separately the properties
DA 029- and lot to Atty. Ferrer (counsel) by virtue of Court which belong to their community property/conjugal
08 decision declaring his marriage null and void. partnership as a consequence of the liquidation of
partnership. The parties merely segregated and
PM Reyes: adjudicated for their own individual and separate
If title to property is transferred to one spouse as a ownership the properties which, from the celebration
result of a court decision in an annulment case, is of their marriage, rightfully belong to them equally. In
the transfer subject to capital gains tax? the instant case, since the parties merely
No. In BIR Ruling DA-029-08 [JANUARY 23, appropriated to themselves their respective shares in
2008], title to a house and lot was transferred to the the community property, particularly, the wife waiving
husband by virtue of a decision of the court all her right and share to the husband over their
declaring his marriage with his wife null and void. In house and lot, such appropriation of the properties
BIR Ruling DA 287-07 [MAY 8, 2007], title to a covered by the MOA is not subject to donor's tax
condominium unit was transferred to the wife as a as there is no donative intent in this case.
result of an agreement to distribute communal
property executed in the course of annulment Moreover, the transfer of the title of the subject
proceedings. In both BIR Rulings, the CIR held that property to Jaime Avila is not also subject to capital
the transfer of the title of the subject properties are gains tax, as such transfer is equivalent to a
not subject to capital gains tax, as such transfers conveyance but without monetary consideration,
are equivalent to a conveyance but without made in accordance with the Court's Decision
monetary consideration, made in accordance with granting parties agreement for the distribution of
the Court's Decision granting parties agreement for communal property (BIR Ruling No. DA-092-01 dated
the distribution of communal property. May 6, 2001). Neither is the said transfer subject to
documentary stamp tax since the monetary
consideration in the conveyance of said condominium
unit from which the tax shall be based is wanting.
BIR Puyat Jacinto & Santos Law Officers sent a letter Based on BIR Ruling DA 435-00, no donation takes
Ruling requesting a ruling that the transfer of title to a place when former spouses appropriate to
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DA 287- condominium unit pursuant to an agreement to themselves the properties which belong to their
07 distribute communal property from one spouse to community property as a consequence of the
another, which was executed in the course of liquidation of the partnership. The parties merely
proceedings for the annulment of the spouses’ segregated and adjudicated for their own individual
marriage and which was later approved by the and separate ownership the properties which, from
court, is not subject to donor’s tax, capital gains tax, the celebration of their marriage, rightfully belong to
or documentary stamp tax. them equally. Since the parties merely appropriated
their respective shares in the community property,
such appropriation of the properties covered by the
Agreement on distribution is not subject to donor’s
tax.
The transfer of the condominium unit is not subject to

capital gains tax, as such transfer is equivalent to a
conveyance but without any monetary consideration,
made in compliance with the court’s decision granting
the parties’ agreement for the distribution of
communal property. Neither is the transfer subject to
DST since the monetary consideration in the
conveyance from which the tax shall be based is
wanting.
OCWs/Senior Citizens/Disabled/Employees of Foreign Governments
RA SEC. 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:
9257, (c) exemption from the payment of individual income taxes: Provided, That their annual taxable income
Section does not exceed the poverty level as determined by the National Economic and Development Authority
4(c) (NEDA) for that year;
M.E. ME Holding Corp filed its ITR claiming the 20% The SC affirmed the decision of the CTA and the CA
Holding sales discount it granted to qualified senior citizens. in that the sales discount should indeed be claimed
s ME filed the return under protest as it treated the as a tax credit and not as a deduction. The SC
Corpor discount as a deduction following RR 2-94. ME likewise affirmed that the cash slips were the best
ation v. contends, however, that the discount should be evidence under the circumstances thus amounts not
CIR & treated as a tax credit as provided by RA 7432. supported by these were not considered in the claim.
CTA The CTA agreed with ME that the law is SC took ME’s side when it held that the sales
(2008) unequivocal that the discount should be claimed as discount granted should be based on the actual
a tax credit, and that the law prevails over the discount and not on the acquisition cost of the
administrative issuance. However, the CTA medicine as it held in Bicolandia Drug Corporation
approved the refund for a lesser amount as it (formerly Elmas Drug Corporation) v. CIR. However,
limited this to only those that were supported by the SC did not grant the claim as a refund as, again,
cash slips. RA 7432 provided for a tax credit and not a refund.
ME was entitled to a tax credit for the amount based
WON THE 20% SALES DISCOUNT MUST BE on the actual discount supported by cash slips.
TREATED AS TAX CREDIT? – YES
DOCTRINE: RA 7432, the applicable law, is
unequivocal that the 20% sales discount to senior
citizens be claimed by an establishment owner as a
tax credit. RR 2-94 that considers the discount as a
mere deduction clashes with RA 7432 is deemed a
nullity.
In Bicolandia Drug Corporation (formerly Elmas Drug

Corporation) v. CIR, the Court interpreted the term
"cost" found in Sec 4 (a) of RA 7432 as referring to
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the amount of the 20% discount extended by a

private establishment to senior citizens in their
purchase of medicines. The Court categorically said
that it is the Government that should fully shoulder
the cost of the sales discount granted to senior
citizens.
Manila Petitioners assail the constitutionality of Section 4 of The 20% senior citizen discount is an exercise of
Memori Republic Act (RA) No. 7432, as amended by RA police power.
al v. 9257, and the implementing rules and regulations The 20% discount is intended to improve the welfare
DSWD issued by the DSWD and DOF insofar as these of senior citizens who, at their age, are less likely to
(2013) allow business establishments to claim the 20% be gainfully employed, more prone to illnesses and
discount given to senior citizens as a tax deduction. other disabilities, and, thus, in need of subsidy in
Petitioners posit that the tax deduction scheme purchasing basic commodities. It may not be amiss to
contravenes Article III, Section 9 of the Constitution, mention also that the discount serves to honor senior
which provides that: "private property shall not be citizens who presumably spent the productive years
taken for public use without just compensation." of their lives on contributing to the development and
progress of the nation. This distinct cultural Filipino
IS THE 20% DISCOUNT VALID? – YES practice of honoring the elderly is an integral part of
this law. As to its nature and effects, the 20%
The validity of the 20% senior citizen discount and discount is a regulation affecting the ability of private
tax deduction scheme under RA 9257 has already establishments to price their products and services
been settled in CARLOS SUPERDRUG relative to a special class of individuals, senior
CORPORATION and the Court finds no compelling citizens, for which the Constitution affords preferential
reason to overturn, modify, or abandon the ruling in concern.
the same.
In turn, this affects the amount of profits or
income/gross sales that a private establishment can
derive from senior citizens. The subject regulation
may be said to be similar to, but with substantial
distinctions from, price control or rate of return on
investment control laws which are traditionally
regarded as police power measures. The 20%
discount may be properly viewed as belonging to the
category of price regulatory measures which affect
the profitability of establishments subjected thereto
DOCTRINE:
Thus, even if the current law, through its tax
deduction scheme (which abandoned the tax credit
scheme under the previous law), does not provide for
a peso for peso reimbursement of the 20% discount
given by private establishments, no constitutional
infirmity obtains because, being a valid exercise of
police power, payment of just compensation is not
warranted.
RR 1- IRR of RA 9442 or An Act Amending RA 7277, Otherwise Known as the Magna Carta for Persons with
2009 Disability
PWDs entitled to 20% discount on the following:
1. hotels and similar lodging establishments and restaurants
2. sports and recreation centers
3. theaters, cinema houses, concert halls, circuses, carnivals, and other similar places of culture,
leisure and amusement
4. all drugstores regarding the purchase of medicine
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5. medical and dental privileges in government and private facilities

6. domestic air and sea transportation except promotional fare
7. land transportation privileges
Establishments granting sales discounts to PWDs on their sale of goods or services shall be entitled to
deduct said sales discounts from their gross income subject to the following conditions:
1. the sales discount shall be deducted from gross income after deducting the cost of goods sold or
cost of service
2. the cost of the sales discount shall be allowed as a deduction from gross income on the same
taxable year as the discount was given
3. only that portion of the gross sales exclusively used, consumed, and enjoyed by the PWD shall be
eligible for the discount
4. the gross selling price and sales discount must be separately indicated in the sales invoice or official
receipt
5. only the actual amount of the sales discount granted or a sales discount not exceeding 20% of the
gross selling price or gross receipt can be deducted from gross income
6. the business establishment is required to keep separate and accurate records of sales
RR 7- Implements the tax privileges provisions of RA No. 9994, otherwise known as the "Expanded Senior
2010 Citizens Act of 2010", and prescribes the guidelines for the availment thereof
Qualified Senior citizens deriving returnable income during the taxable year, whether from compensation or
otherwise are required to file their ITR and pay the tax as they file the return. However, if the returnable
income of a SC is in the nature of compensation income but he qualifies as a minimum wage earner under
RA9504, he shall be exempt from income tax on the said compensation income subject to the rules
applicable to minimum wage earners. If the aggregate amount of gross income earned by the SC during the
taxable year does not exceed the amount of his personal exemptions, he shall be exempt from IT and shall
not be required to file an ITR.
RR 1- (Partially discussed above)
2011 B) Business Taxes:
An OCW or OFW may be subjected to 12% Value Added Tax (VAT) if in the course of his trade or business,
he sells, barters exchanges, leases goods or properties, renders services in the Philippines or imports
goods into the Philippines pursuant to Sections 106 to 108 of the National Internal Revenue Code of 1997,
as amended. However, if gross annual sales and/or receipts do not exceed the amount of one million five
hundred thousand pesos (P1,500,000) and he opted not to register as a VAT taxpayer, he shall be liable to
pay instead 3% percentage tax of his gross quarterly sales or receipts.
C) Other Taxes and Fees:

Section 35 of Republic Act No. 8042 otherwise known as the "Migrant Workers and Overseas Filipinos Act
of 1995," as amended by Sec 22 of Republic Act No. 10022, provides that all migrant workers shall be
exempt from the payment of travel tax and airport-fee upon proper showing of proof entitlement (i.e.
Overseas Employment Certificate [OEC]) issued by the POEA.
The remittances of all OCWs or OFWs, upon showing of the OEC or valid Overseas Workers Welfare
Administration (OWWA) Membership Certificate by the OCWs or OFW beneficiary or recipient, shall be
exempt from the payment of documentary stamp tax (DST) as imposed under Section 181 of the National
Internal Revenue Code of 1997, as amended. For this purpose, in addition to the original copy, a duplicate
copy or a certified true copy of the valid proof of entitlement referred to above shall be secured by the OCW
or OFW from the POEA or OWWA, which shall be held and used by his/her beneficiary in the availment of
the DST exemption.
In case of OCWs or OFWs whose remittances are sent through the banking system, credited to
beneficiaries or recipient's account in the Philippines and withdrawn through an automatic teller machine
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(ATM), it shall be the responsibility of the OCW or OFW to show the valid proof of entitlement when making
arrangement that for his/her remittance transfers.
A proof of entitlement that is no longer valid shall not entitle an OCW or OFW to any DST tax exemption.
RMC REVENUE MEMORANDUM CIRCULAR NO. 31-2013 issued on April 12, 2013 prescribes the guidelines on
31-2013 the taxation of compensation income of Philippine nationals and alien individuals employed by foreign
governments/ embassies/ diplomatic missions and international organizations situated in the Philippines.
As an exemption to the general rule, it is noted that most international agreements which grant Withholding
Tax immunity to foreign governments/ embassies/ diplomatic missions and international organizations also
provide exemption to their officials and employees who are foreign nationals and/or non-Philippine residents
from paying Income Taxes on their salaries and other emoluments.
The tax consequence of compensation income received by those employed by foreign

governments/embassies/ diplomatic missions situated in the Philippines hinges on the provisions of the duly
recognized international agreements or local laws granting tax privileges to employees of said institutions.
The exemption should only cover those individuals who were expressly and unequivocally identified
in said international agreements or laws. Those not covered shall be subject to the general rule on
taxability of Philippine nationals and alien individuals. Thus with respect to those not exempted by the
provisions of applicable international agreements or laws, although their compensation income is exempt
from Withholding Tax under the international agreements or the Withholding Tax Regulations, they are not
relieved of their duty to report their compensation income to the BIR and pay the taxes due thereon pursuant
to Section 24 of the Tax Code of 1997, as amended.
The tax treatment of the following Philippine nationals and alien individuals on compensation income
received by them from foreign governments/embassies and missions and international organizations are
specified in the Circular:
a) Those employed by foreign embassies/diplomatic missions
b) Those employed by aid agencies of foreign governments (i.e. JICA, AUSAID, etc.)
c) Those employed by the United Nations and its specialized agencies (i.e. IMF, WHO, etc.)
d) Those employed by organizations covered by separate international agreements or specific
provisions of law (i.e. ADB, IRRI, etc.)
e) Employees of other aid agencies or international organizations
Philippine nationals and alien individuals who were not granted tax exemption or immunities under duly
recognized international agreements or local laws shall file their annual Income Tax returns on or before the
15th day of April each year using BIR Form No. 1700 or 1701, as may be applicable, declaring therein the
amount of their respective compensation income for the preceding taxable year for services rendered or
performed for such foreign government embassy/diplomatic mission, agency or international organization.
The annual Income Tax return shall be filed with the Revenue District Office (RDO), Authorized Agent Bank
(AAB) or other proper office which has jurisdiction over the employee’s legal residence or principal place of
business. It may be filed with the RDO or AAB where the principal office of his/her employer is
situated.Failure of the covered taxpayers to file the annual Income Tax returns and to pay the Income Tax
due thereon constitutes a violation of Sections 254 and 255 of the Tax.
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7. Partnership
RMC Clarifying the Tax Implications and Recording of Upon receipt of the cash deposits/advances from the
089-12 Deposits/Advances Made by Clients of General client, the GPP shall issue an official receipt. The
Partnerships for Expenses amount received shall be booked as income of the
GPP and form part of the GPP’s gross receipts and
Background: GPPs (such as accounting or law subject to VAT, if applicable. The GPP shall record
firms) usually require their clients to deposit a sum the expenses it incurred and paid on behalf of the
of money for them to be used to cover necessary client as its own expenses, for Income Tax purposes,
expenses and/or pay in advance the necessary if the official receipt/invoice issued by the third party is
expenses on behalf of their Client. The deposits in the name of the GPP. Said expenses, supported by
shall thereafter be liquidated, and the advances official receipts/invoices issued by the third party
made by the GPPs shall thereafter be paid by the establishments in the name of the GPP, may be
client. When the Firm bills the client for professional claimed by the latter as deductions from its gross
fees, such deposits is taken into account in the income. Conversely, these expenses may not be
computation. claimed as deductions from the gross income of the
client.
However, since the ORs/ Invoices covering these
expenses incurred on behalf of the client are issued All payments made by the client to the GPP shall be
by the third party establishments in the name of the allowed as deduction from its gross income as
Firm, instances occur when these expenses are professional fee/s provided that they are duly
claimed as deductions to gross income by both the substantiated by official receipts issued by the GPP
Firm and the Client. As a result, the same expense pursuant to Section 34(A)(1) of the Tax Code.
is twice claimed as deductions.
The GPP and client are not precluded from availing of
the Optional Standard Deduction provided under the
existing tax laws, rules, and regulations. The
summary of transactions and the corresponding pro-
forma entries in the Books of Account of the GPP and
the client (for Cash Basis and Accrual Basis of
Accounting) are specified in the Circular.
RR 2- What are the rules in the determination of the amount of OSD of GPPs?
2010 RR 2-2010 [FEBRUARY 18, 2010] amended Sections 6 to 7 of RR 16-2008 with respect to the
determination of the OSD of GPPs.
A GPP is not subject to income tax but the partners shall be liable to pay income tax on their separate and
individual capabilities for their respective distributive share in the net income of the GPP.
For purposes of computing the distributive share of the partners, the net income of the GPP shall be
computed in the same manner as a corporation. The GPP may claim itemized deductions or in lieu
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thereof may opt to avail of the OSD allowed to corporations. The net income determined by either claiming
the itemized deductions or OSD from the GPP’s gross income is the distributable net income from which the
share of each partner is determined.
If the GPP availed of the itemized deductions in computing its net income, a partner may still claim itemized
deductions from his share in the net income of the partnership. However, if the GPP availed of the OSD in
computing its net income, the partner can no longer claim further deduction from his share in the said net
income.
8. Corporations
Domestic Corporations
China China Bank (CBC) paid its gross receipt tax (GRT) "Gross receipts" refer to the total, as opposed to the
Bankin amounting to about 93M. It included in its GRT the net income. These are, therefore, the total receipts
g 20% final withholding tax on its passive interest before any deduction for the expenses of
Corpor income. It claimed for a refund after CTA rendered management. The amount of interest income
ation v. its Asia Bank decision saying that the final withheld, in payment of the 20% final withholding tax,
CIR withholding tax does not form part of the GRT. Asia forms part of the bank’s gross receipts in computing
(2013) Bank decision was subsequently reversed in the GRT on banks.
another case.
The exclusion of the final withholding tax from gross
WHETHER THE 20% FINAL TAX WITHHELD ON receipts operates as a tax exemption which the law
A BANK’S PASSIVE INCOME SHOULD BE must expressly grant. No law provides for such
INCLUDED IN THE COMPUTATION OF THE GRT exemption. In sum, all the aforementioned cases are
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– YES one in saying that "gross receipts" comprise "the

entire receipts without any deduction." Clearly, then,
the 20% final withholding tax should form part of
petitioner’s total gross receipts for purposes of
computing the GRT.
Banco The case involves the proper tax treatment of the
de Oro discount or interest income arising from the ₱ 35 In this case, it may seem that there was only one
v. CIR billion worth of 10-year zero-coupon treasury bonds lender — RCBC on behalf of CODE-NGO — to whom
(2015) issued by the Bureau of Treasury on October 18, the PEACE Bonds were issued at the time of
2001 (denominated as the Poverty Eradication and origination. However, a reading of the underwriting
Alleviation Certificates or the PEA Ce Bonds by the agreement and RCBC term sheet reveals that the
Caucus of Development NGO Networks). settlement dates for the sale and distribution by
RCBC Capital (as underwriter for CODE-NGO) of the
On October 7, 2011, the Commissioner of Internal PEACE Bonds to various undisclosed investors.
Revenue issued BIR Ruling No. 370-20111 (2011
BIR Ruling), declaring that the PEACe Bonds being At this point, however, we do not know as to how
deposit substitutes are subject to the 20% final many investors the PEACE Bonds were sold to by
withholding tax. Pursuant to this ruling, the RCBC Capital. Should there have been a
Secretary of Finance directed the Bureau of simultaneous sale to 20 or more lenders/investors,
Treasury to withhold a 20% final tax from the face the PEACE Bonds are deemed deposit substitutes
value of the PEACe Bonds upon their payment at within the meaning of Section 22(Y) of the 1997
maturity on October 18, 2011. National Internal Revenue Code and RCBC
Capital/CODE-NGO would have been obliged to pay
WHETHER THE PEACE BONDS ARE "DEPOSIT the 20%final withholding tax on the interest or
SUBSTITUTES" AND THUS SUBJECT TO 20% discount from the PEACE Bonds.
FINAL WITHHOLDING TAX UNDER THE 1997
NATIONAL INTERNAL REVENUE CODE – NO The obligation to withhold the 20% final tax on the
corresponding interest from the PEACE Bonds would
It must be emphasized, however, that debt likewise be required of any lender/investor had the
instruments that do not qualify as deposit latter turned around and sold said PEACE Bonds,
substitutes under the 1997 National Internal whether in whole or part, simultaneously to 20 or
Revenue Code are subject to the regular income more lenders or investors.
tax.
It is to be noted that under Section 24 of the 1997
Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of National Internal Revenue Code, interest income
the 1997 National Internal Revenue Code, a final received by individuals from longterm deposits or
withholding tax at the rate of 20% is imposed on investments with a holding period of not less than 5
interest on any currency bank deposit and yield or years is exempt from the final tax.
any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements. Thus, should the PEACe Bonds be found to be within
the coverage of deposit substitutes, the proper
DEPOSIT SUBSTITUTE procedure was for the Bureau of Treasury to pay the
Under Section 22(Y), deposit substitute is an face value of the PEACe Bonds to the bondholders
alternative form of obtaining funds from the public and for the Bureau of Internal Revenue to collect the
(the term 'public' means borrowing from 20 or more unpaid final withholding tax directly from RCBC
individual or corporate lenders at any one time. Capital/CODE-NGO, or any lender or investor if such
be the case, as the withholding agents.
NUMBER OF LENDERS  DETERMINING
FACTOR
Hence, the number of lenders is determinative of
whether a debt instrument should be considered a
deposit substitute and consequently subject to the
20% final withholding tax. Furthermore the phrase
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“at any one time” for purposes of determining the

“20 or more lenders” would mean every transaction
executed in the primary or secondary market in
connection with the purchase or sale of securities.
RR 4-99 Repeated (See above)
RR 6- Repeated (See above)
2008
Resident Foreign Corporation
Air New Petitioner, Air New Zealand, is a foreign corporation Since petitioner admitted that it sells passage
Zealand organized and existing under the laws of New documents in the Philippines through its sales agent,
v. CIR Zealand with principal office at New Zealand. As an Aerotel, and that it derives revenues from the conduct
(2008) off-line international air carrier having no landing of its business activity regularly pursued within the
rights in the Philippines, petitioner does not Philippines, petitioner is a resident foreign corporation
maintain flight operations to and from the engaged in trade or business in the Philippines and
Philippines. Likewise, it is not registered with the must be subject to income tax applying Article 8(2) of
SEC and is not licensed to do business in the the RP-New Zealand Tax Treaty, it shall be subject to
Philippines. Petitioner, though, has a general sales an income tax equivalent to 1 1/2% on the profits
agent in the Philippines, Aerotel Limited derived from sources within the Philippines. Since, as
Corporation (Aerotel), which sells passage found by the Court in Division, petitioner already paid
documents for compensation or commission its income tax liabilities for taxable year 2002 at the
covering off-line flights of petitioner. Petitioner filed, rate of 1 1/2% of its gross income, the payment is
through Aerotel, its Quarterly Income Tax Returns correct and therefore no refundable amount is due.
for the First and Second Quarters of taxable year
2002 and paid the amount due. On February 5, Absence of flight operations to and from the
2003, petitioner filed a formal claim for refund with Philippines is not determinative of the source of
the respondent CIR. For the recovery of the amount income for purposes of ascertaining income tax
allegedly representing erroneously paid tax on liability. It is sufficient that the income is derived from
Gross Philippine Billings for the First and Second activity within the Philippine territory.
Quarters of taxable year 2002.
For the source of income to be considered as coming
WHETHER AIR NZ IS ENGAGED IN TRADE OR from the Philippines, it is sufficient that the income is
BUSINESS IN PH SUBJECT TO CORPORATE derived from activity within the Philippines. In BOAC's
INCOME TAX ON RESIDENT FOREIGN CORP case, the sale of tickets in the Philippines is the
EITHER AT 32% UNDER SECTION 28(A)(1) OF activity that produces the income. The tickets
NIRC OF 1997 OR AT 1 ½% UNDER RP-NZ TAX exchanged hands here and payments for fares were
TREATY – YES, liable under RP-NZ Tax Treaty. also made here in Philippine currency. Since
petitioner admitted that it sells passage documents in
the Philippines through its sales agent, Aerotel, and
that it derives revenues from the conduct of its
business activity regularly pursued within the
Philippines, petitioner is a resident foreign corporation
engaged in trade or business in the Philippines and
must be subject to income tax.
CIR v. BOAC is a 100% British Government-owned BOAC is a resident foreign corporation
BOAC corporation engaged in international airline During the periods of the assessment, it maintained a
(1987) business and is a member of the Interline Air general sales agent in the Philippines. The agent was
Transport Association, and thus, it operates air in charge of:
transportation service and sells transportation i. Selling and issuing tickets
tickets over the routes of the other airline members. ii. Breaking down the trip into a series of trips
From 1959-1971, BOAC had no landing rights for corresponding to a different airline company
traffic purposes in the Philippines and thus did not iii. Receiving the fare
carry passenger and/or cargo to or from the iv. Allocating the payment to the various airline
Philippines but maintained a general sales agent in companies on the basis of their participation
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the Philippines – Warner Barnes & Co. Ltd, and in the services rendered through the mode of
later Qantas Airways – which was responsible for interline settlement of the IATA Agreement
selling BOAC tickets covering passenger and
cargos. The CIR assessed deficiency income taxes The activities were in the exercise of the functions
against BOAC. normally incident to and for the purpose and object of
its organization as an international air carrier. Thus,
WON BOAC DERIVED INCOME FROM THE BOAC is engaged in business in the Philippines
SALES OF TICKETS IN THE PHILIPPINES through a local agent, and, as a resident foreign
WHILE HAVING NO LANDING RIGHTS - YES corporation, it is subject to income tax.
WON BOAC IS A RESIDENT FOREIGN PD 68, in relation to PD 1355, ensures that

CORPORATION DOING BUSINESS IN THE international airlines are taxed on their income from
PHILIPPINES - YES Philippine sources. The 2 1/2% tax on gross
Philippine billings is an income tax. If it had been
FOREIGN CORPORATION CONSIDERED AS intended as an excise or percentage tax, it would
DOING BUSINESS IN THE PH have been placed under Title V of the Tax Code
The terms “doing”, “engaging in”, “transacting” covering taxes on business.
business imply a continuity of commercial
dealings and contemplates the performance of acts In this case, the sale of BOAC tickets in the
or works normally incident to and for the purpose Philippines is the activity that produces the income,
and object of the business. since the payments and the giving of the tickets were
made in the Philippines.
In order that a foreign corporation may be regarded a. Even though the income from the sale of
as doing business within a State, there must be international transportation tickets is not one of
continuity of conduct and intention to establish the items of gross income as enumerated in
a continuous business such as the appointment the Tax Code, the enumeration is not
of a local agent, and not one of a temporary exclusive, and thus it is considered as taxable
character. income.
b. The absence of flight operations is not
determinative of the source income. The
income was derived from the sale of tickets,
which is a business activity regularly pursued
within the Philippines.
United United Airlines is a foreign corporation organized Here, the subject of claim for tax refund is the tax
Airlines and existing under the laws of Delaware, USA, paid on passenger revenue for 1999 at the time when
v. CIR engaged in the international airline business. United petitioner was still operating cargo flights originating
(2010) then filed a claim for income tax refund for from the PH although it had ceased passenger flight
passenger tickets sold in the PH with uplifts that operations. The CTA found that United had underpaid
however did not originate from the PH. It argued its GPB tax for 1999 because it had made deductions
that since it no longer operated passenger flights from its gross cargo revenues in the ITR it filed for
originating from the PH beginning 1998, its 1999, the amount of underpayment even greater than
passenger revenues for 1999-2001 cannot be the refund sought for erroneously paid GPB tax on
considered as income from sourced within the PH, passenger revenues for the same taxable period.
and hence should be subject to income tax under
Art. 9 of the RP-US Tax Treaty. CA ruled adversely, If an international air carrier maintains flights to and
reasoning that gross revenue from carriage of from the PH, it shall be taxed at the rate of 2 1/2% of
cargoes from the PH is still considered as Gross its GPB, while international air carriers that do not
Philippine Billings. have flights to and from the PH but nonetheless earn
WON UNITED AIRLINES IS ENTITLED TO income from other activities in the country will be
REFUND – NO taxed at the rate of 32% of such income.
RR 15- This RR governs 1) the imposition of Income Tax on the Gross Philippine Billings, Common Carrier’s Tax,
2002 and Other Income of International Air Carriers and 2) the manner of claiming deductions on Travel
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Expenses and Freight Charges incurred.
International Air Carriers with flights originating from the Philippines are subject to the Gross Philippine
Billings Tax of 2.5% (which is advantageous for them), regardless of whether the passage documents are
sold here or abroad. The fact of passage documents being sold here or abroad does, however, have an
implication in the manner of computing the gross revenue to which the tax rate would be applied. (Sec 5)
Originating from the Philippines” has a technical definition. Only the portion of the flight originating from the
Philippines to the place of final destination is subject to the Gross Philippine Billings tax rate.
Basic Illustration:
- One Way Ticket: Manila → San Francisco—Revenue from the whole trip is subject to Gross
Philippine Billings tax rate.
- Return Trip: Manila → San Francisco → Manila—Revenue from the flight from San Francisco back
to Manila is not subject to Gross Philippine Billings Tax rate.
An International carrier shall refer to a foreign airline corporation doing business in the Philippines having
been granted landing rights in any Philippine port to perform international air transportation
services/activities or flight operations anywhere in the world.
RR 14- Proper Tax Treatment of Interest Income Earnings on Financial Instruments and Other Related Transactions
2012
SUMMARY: (from PM Reyes)
Proper tax treatment on individual taxpayers of income derived from interests:
1. Interest from Philippine currency bank deposits and yield from deposit substitute and from trust funds
or similar arrangements
a. Final tax in case of citizens, resident aliens, and non-resident aliens engaged in trade or
business is 20%
b. Non-resident aliens not engaged in trade or business, the amount received shall form part
of their gross income subject to flat 25% income tax
2. Interest income derived from government debts instruments and securities
a. They are considered deposit substitutes. The same tax treatment as above is applied
3. Interest derived from long term deposits or investments
a. They are exempt from tax, provided the following requisites are met:
i. Depositor is an individual citizen (resident or nonresident), a resident alien or non-
resident alien engaged in trade or business in the PH
ii. The long-term deposit or investment certificates under name of the individual
iii. The long term deposits or investments must be in the form of savings, common or
individual trust funds, deposit substitutes, etc evidenced by certificates in the BSP
iv. The long-term deposits must be issued by banks only
v. The long-term deposits must have a maturity period of not less than 5 years
vi. The long-term deposits must be in denominations of 10,000 and other BSP
prescribed denomination
vii. The long-term deposits must not be pre-terminated
viii. Except those specifically exempted by law, any other income such as gains from
trading, forex gain shall not be covered by income tax exemption
b. If the deposit or investment is pre-terminated, a final tax shall be imposed on the entire
income
i. 4 to less than 5 years - 5%
ii. 3 to less than 4 years - 12%
iii. If less than 3 years - 20%
4. Interest income derived from a depository bank under the expanded foreign currency deposit system
(EFCDS)
a. Derived from FCDUs:
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i. The interest income must be derived by residents. If the interest income is derived
by a resident individual taxpayer, it shall be subject to a final tax of 15%
ii. Any income of non-residents, whether individuals or corporations, shall be tax
exempt
iii. Of the bank account is jointly in the name of a non-resident and a resident, 50%
shall be treated as exempt and the other 50% shall be subject to the final tax of
15%
b. Derived by FCDUs:
i. The interest income must be derived by residents. Interest income from foreign
currency loans granted by such depository banks under the EFCDS other than
OBUs shall be subject to final tax of 10%
ii. Any income of non-residents, whether individuals or corporations, shall be tax-
exempt
5. Interest income derived from offshore banking units of OBUs
a. Income derived by OBUs from foreign currency transactions with nonresidents, other OBUs,
and local commercial banks are tax-exempt
b. If the foreign currency transactions are with residents other than OBUs and local
commercial banks, the interest income shall be subject to 10%
6. Interest income derived all other instruments
Any other debt instrument not within the coverage of deposit substitutes shall be subjected to a creditable
withholding tax of 20%.
Bank of Bank of America is a foreign corporation licensed to There is nothing in Section 24 which indicates that
Americ engage in business in the Philippines through its the 15% tax is on the total amount of profit. Where
a v. CA Makati branch. the Bank paid 15% branch profit the law does not qualify that the tax is imposed and
(1994) remittance tax from its regular unit operations and collected at source, the qualification should not be
from its foreign currency deposit operations. The read into law.
tax was based on net profits after income tax
without deducting the amount corresponding to the The remittance tax was conceived in an attempt to
15% tax. It then filed a claim for refund for the equalize the income tax burden on foreign
portion that corresponds with the 15% branch profit corporations maintaining local branches vs.
remittance tax, claiming that the BIR should tax subsidiary domestic corporations (majority of the
them based on the profits actually remitted shares are owned by foreign corporations).
abroad, and not on the amount before the tax.
Prior to the amendment of the Revenue Code, local
WHETHER THE BPRT SHOULD BE ASSESSED branches were made to pay only the usual corporate
ON THE AMOUNT ACTUALLY REMITTED tax of 25-35% on net income. While Philippine
ABROAD – YES subsidiaries of foreign corporations were subject
to the same rate 25-35% on their net income,
however, dividend payments were additionally
subjected to a 15% withholding tax.
To equalize, a 15% profit remittance tax was imposed

on local branches on their remittances of profits
abroad.
Compa In both cases, Compania General filed a claim for The taxable base in computing the 15% branch profit
nia refund with CIR for the alleged overpaid Branch remittance tax is the amount actually applied for by
General Profit Remittance Tax. Compania General, in both the branch with the Central Bank as profit to be
de cases, alleged a) that the 15% branch profit remitted abroad and not the total amount of branch
Tabaco remittance tax should be based on the profits profits. The use of the word “remitted” may well be
s de actually paid abroad; and b) the profits remitted understood as referring to that part of the said total
Filipina abroad by a branch office to its mother company is branch profits which would be sent to the Head office
s v. CIR an income tax hence, passive income which are as distinguished from the total profits of the branch
(Aug already subjected to the final tax shall not be (not all of which need be sent or would be ordered
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and included for purposes of computing the branch remitted abroad)

Nov profits remittance tax. On the other hand, CIR
1993) contends that a) the 15% branch profit remittance “EFFECTIVELY CONNECTED”
tax is imposed and collected at source necessarily As worded in the previously mentioned provision, the
the tax base should be the amount actually applied rule is that interests and dividends received by foreign
for by the branch with Central Bank of the corporation during a taxable year from all sources
Philippines as profit to be remitted abroad pursuant within shall not be considered as branch profits
to Revenue Memorandum No. 8-12 (March 17, unless the same are effectively connected with the
1982). conduct of trade and business of the corporation. The
phrase “effectively connected” was interpreted to
WON THE BRANCH PROFITS TAX ARE mean income derived from the business activity in
COMPUTED BASED ON THE PROFITS which the corporation is engaged. In this case, the
ACTUALLY REMITTED ABROAD OR ON THE corporation is engaged in business of leaf tobacco
TOTAL BRANCH PROFITS OUT OF WHICH THE dealer. In its corporate quarterly income tax returns
REMITTANCE IS MADE submitted to respondent, Compania argues that the
interests it received from savings deposit of Philtrust,
Section 28(A)(5) or those from Land Bank bonds and cash dividends
(5) Tax on Branch Profits Remittances. - Any profit from received from PLDT and Tabacalera Industrial
remitted by a branch to its head office shall be Dev’t Corporation of the Philippines are not effectively
subject to a tax of fifteen (15%) which shall be connected with the business it is engaged in hence,
based on the total profits applied or earmarked for not subject to tax.
remittance without any deduction for the tax
component thereof (except those activities which Furthermore, pursuant to Section 24(c) and (d) of the
are registered with the Philippine Economic Zone NIRC, dividends and interest are subject to final tax.
Authority). The tax shall be collected and paid in the To include them again as subject to branch profit
same manner as provided in Sections 57 and 58 of remittance tax under the same Section 24 (b)(2)(ii)
this Code: provided, that interests, dividends, rents, would be contrary to law.
royalties, including remuneration for technical
services, salaries, wages premiums, annuities,
emoluments or other fixed or determinable annual,
periodic or casual gains, profits, income and capital
gains received by a foreign corporation during each
taxable year from all sources within the Philippines
shall not be treated as branch profits unless the
same are effectively connected with the conduct
of its trade or business in the Philippines.
ITAD Det Norske is a Norweigian corporation, licensed to The Philippines-Norway tax treaty recognizes the
BIR do business in the Philippines. For the years 1998 BPRT and gives way to its imposition as paragraph 7,
Ruling to 2004, its Philippine branch remitted branch Article 10 of the tax treaty provides that branch profits
018-09 profits to the head office in Norway, thus, the remitted by a branch office of a Norwegian
corresponding branch profits remittance taxes corporation in the Philippines to its head office in
(BPRT) were withheld. The country manager of Det Norway may be subject to an additional tax like the
Norske now claims that it should be exempt from BPRT at a rate not to exceed 15 percent.
the tax pursuant to Article 25 of the Philippines-
Norway tax treaty. The BIR rejected this view. It Paragraph 1, Article 25 of the Philippines-Norway tax
held that it is not exempt and should be subject to treaty does not provide a legal basis for the non-
the branch profit remittance (BPRT). The imposition of the BPRT. The principle of equal
Philippines-Norway tax treaty recognizes the BPRT treatment intended by this paragraph is limited to
and gives way to its imposition as paragraph 7, nationals of the Philippines and of Norway who are
Article 10 of the tax treaty provides that branch both residents of the Philippines. While Det Norske is
profits remitted by a branch office of a Norwegian a national of Norway, it is not, however, a resident of
corporation in the Philippines to its head office in the Philippines under paragraph 1, Article 4 of the tax
Norway may be subject to an additional tax like the treaty.
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BPRT at a rate not to exceed 15 percent. It is not Paragraph 2, Article 25 of the Philippines-Norway tax
discriminatory since Det Norske is not a resident treaty lays down a principle of equal treatment
corporation within the view of the treaty. between a permanent establishment of a Norwegian
enterprise in the Philippines and a domestic
W/NT THE BRANCH PROFIT REMIITED IS enterprise. Similar with the United States, the
TAXABLE – YES Philippines is of the view that as long as the
aggregate taxes imposed by the Philippines on a
permanent establishment are not greater than the
taxes imposed by the Philippines on a domestic
enterprise, it cannot be considered that the
permanent establishment is treated less favorably in
the Philippines than the domestic enterprise. In this
connection, while the BPRT is imposed only on
permanent establishments and not on domestic
enterprises, the burden of this tax upon a permanent
establishment is, however, mitigated by the current
tax regimes which greatly favor the permanent
establishment over the domestic enterprise.
Also, as long as the aggregate taxes imposed by the

PH on a permanent establishment of a foreign
corporation in the Philippines is not greater than that
imposed on any domestic corporation, it cannot be
said that the foreign permanent establishment is
treated less favorably in the PH than a domestic
corporation/enterprise.
RR 11- Filipinos employed by ROHQs or RHQs in a managerial or technical position shall have the option to be
2010 taxed at either 15% of their gross income or at the regular income tax rate on taxable compensation income.
All other employees are considered as regular employees who are subject to the regular income tax rate on
their taxable compensation income. The former shall meet the following requirements:
1. Position and function test – must occupy a managerial or technical position and must actually be
exercising functions pertaining to said position
2. Compensation threshold test – employee must have received, or is due to receive a gross taxable
compensation of at least PhP975,000
3. Exclusivity test – employee must be exclusively working for the RHQ or ROHQ as a regular
employee and not just a consultant or contractual personnel
Nonresident Foreign Corporations
CIR v. SC Johnsons and Sons, Inc. (SCJS) is a domestic Private respondent is claiming for a refund of the
SC corporation who entered into a license agreement alleged overpayment of tax on royalties; however
Johnso with SC Johnson and Sons USA (USA), a foreign there is nothing on record to support a claim that the
n (1999) corporation for right to use patent, trademark and tax on royalties under the RP-US Treaty is paid under
technology, with a right to manufacture, package similar circumstances as the tax on royalties under
and distribute as well as secure assistance with the RP-West Germany Tax Treaty.
USA. For their use of trademark, SCJS was
required to pay royalties to USA which payments The entitlement of the 10% rate by U.S. firms despite
were subject to 25% withholding tax on royalty the absence of a matching credit (20% for royalties)
payments SCJS filed with the international tax would derogate from the design behind the most
affairs division (ITAD) of BIR for refund due to the grant equality of international treatment since the tax
overpayment of taxes. It claims that since the burden laid upon the income of the investor is not the
license agreement was approved by Technology same in the two countries. The similarity in the
Transfer Board (TT), it should be subject to the 10% circumstances of payment of taxes is a condition
withholding tax only pursuant to the most favored for the enjoyment of most favored nation treatment
nation clause in the RP-US Tax treaty in relation to precisely to underscore the need for equality of
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the RP-West Germany Tax Treaty. treatment. Respondent cannot be deemed entitled to
the 10% rate granted under the RP-West Germany
WON THE 10% WITHHOLDING TAX SHOULD BE Tax Treaty for the reason that there is no payment of
APPLIED – NO taxes on royalties under similar circumstances in RP-
US treaty.
The purpose of a most favored nation clause is to
grant to the contracting party treatment not less
favorable than that which has been or may be Given the purpose underlying tax treaties and the
granted to the most favored among other countries. rationale for the most favored nation clause, the
It is intended to establish the principle of equality of concessional tax rate of 10% provided for in the RP-
international treatment by providing that the citizens Germany Tax Treaty should apply only if the taxes
or subjects of the contracting nations may enjoy the imposed upon royalties in the RP-US Tax Treaty and
privileges accorded by either party to those of the in the RP-Germany Tax Treaty are paid under similar
most favored nation. The essence of the principle is circumstances. (meaning that private respondent
to allow the taxpayer in one state to avail of more must prove that the RP-US Tax Treaty grants similar
liberal provisions granted in another tax treaty to tax reliefs to residents of the United States in respect
which the country of residence of such taxpayer is of the taxes imposable upon royalties earned from
also a party provided that the subject matter of sources within the Philippines as those allowed to
taxation, in this case royalty income, is the same as their German counterparts under the RP-Germany
that in the tax treaty under which the taxpayer is Tax Treaty.)
liable.
The RP-US and the RP-West Germany Tax Treaties
do not contain similar provisions on tax crediting. The
RP-Germany Tax Treaty, expressly allows crediting
against German income and corporation tax of 20%
of the gross amount of royalties paid under Philippine
law. On the other hand, the RP-US Tax Treaty,
which is the counterpart provision with respect to
relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid.
Marube Marubeni Corporation is a foreign corporation duly The alleged overpaid taxes were incurred for the
ni v. organized and existing under the laws of Japan and remittance of dividend income to the head office in
CIR duly licensed to engage in business under Japan which is a separate and distinct income
(1889) Philippine laws. It has equity investments in AG&P taxpayer from the branch in the Philippines. This is
of Manila. AG&P declared and paid cash dividends inferred from the fact that the investment was made
to Marubeni and withheld 10% final dividend tax for purposes peculiarly germane to the conduct of the
thereon. AG&P again declared and paid cash corporate affairs of Marubeni, Japan, but not of the
dividends to Marubeni and withheld 10% final branch in the Philippines. Marubeni, having made this
dividend tax thereon. AG&P directly remitted the independent investment attributable only to the head
cash dividends to Marubeni’s head office in Tokyo, office, cannot now claim the increments as ordinary
Japan, net not only of the 10% final dividend tax but consequences of its trade or business in the
also of the withheld 15% profit remittance tax based Philippines and avail itself of the lower tax rate of
on the remittable amount after deducting the final 10%. Marubeni Japan, being a non-resident foreign
withholding tax of 10%. Marubeni sought a ruling corporation, as a general rule, is taxed 35% of its
from the BIR on whether the dividends received gross income from all sources within the Philippines.
from AG&P are effectively connected with its However, a discounted rate of 15% is given to
conduct or business in the Philippines as to be Marubeni on dividends received from a domestic
considered branch profits subject to the 15% profit corporation (AG&P) on the condition that its domicile
remittance tax imposed under Section 24 (b) (2) of state (Japan) extends in favor of Marubeni, a tax
the National Internal Revenue Code as amended by credit of not less than 20% of the dividends received.
Presidential Decrees Nos. 1705 and 1773.
Additionally, It is the argument of petitioner

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corporation that following the principal-agent

relationship theory, Marubeni Japan is likewise a
resident foreign corporation subject only to the 10
% intercorporate final tax on dividends received
from a domestic corporation in accordance with
Section 24(c) (1) of the Tax Code of 1977. Under
the Tax Code, a resident foreign corporation is one
that is "engaged in trade or business" within the
Philippines. Petitioner contends that precisely
because it is engaged in business in the Philippines
through its Philippine branch that it must be
considered as a resident foreign corporation.
WON THE CASH DIVIDENDS ARE SUBJECT TO

PROFIT REMITTANCE TAX - NO because the
same were not income earned by a Philippine
Branch of Marubeni Corporation of Japan
WON MARUBENI (JAPAN) IS RESIDENT

FOREIGN CORPORATION – NO
Reederi MV Amstelmeer and MV Amstelkroon vessels of N.V. Reederij "AMSTERDAM" is a foreign corporation
j N.B. Reederij "AMSTERDAM," called on Philippine not authorized or licensed to do business in the
Amster ports to load cargoes for foreign destination. The Philippines.It does not have a branch office in the
dam freight fees were paid abroad. Royal Interocean Philippines and it made only two calls in Philippine
and Lines acted as husbanding agent for a fee or ports.
Royal commission on said vessels. CIR filed the ITR for
Interoc and in behalf of .V. Reederij "AMSTERDAM" under In order that a foreign corporation may be considered
ean Sec. 15 of the NIRC. CIR assessed Royal for engaged in trade or business, its business
Lines v deficiency income tax as a non-resident foreign transactions must be continuous. A casual business
CIR corporation not engaged in trade or business in the activity in the Philippines by a foreign corporation, as
(1988) Philippines under Section 24 (b) (1) of the Tax in the present case, does not amount to engaging in
Code. Royal filed ITR for the subject vessels on the trade or business in the Philippines for income tax
assumption that NV Reederij is a foreign purposes.
corporation engaged in trade or business in the
Philippines. Royal as the husbanding agent filed a Foreign corporations not doing business in the
written protest against the assessment made by the Philippines are taxable on income 'from all sources
CIR within the Philippines, as interest, dividends, rents,
salaries, wages, premiums, annuities,
WON NV REEDERIJ AMSTERDAM, NOT HAVING compensations, remunerations, emoluments, or other
ANY OFFICE OR PLACE OF BUSINESS IN THE fixed or determinable annual or periodical or casual
PH, WHOSE VESSELS CALLED ON THE PH gains, profits and income and capital gains.' The tax
PORTS FOR THE PURPOSE OF LOADING is 30% (now 35%) of such gross income. (Sec. 24 (b)
CARGOES ONLY TWICE, SHOULD BE TAXED (1), Tax Code.)
AS A FOREIGN CORPORATION ENGAGED IN
TRADE OR BUSINESS IN THE PH – NO
CIR v. PMC-PH is a domestic corporation which is wholly- SEC 24(b)(1) provides that the tax sparing provision
Proctor owned subsidiary of PMC-USA, a non-resident will be applied if:
& foreign corporation. PMC-USA then, as the sole 1. The country of domicile of the foreign
Gamble shareholder of PMC-PH, is entitled to receive corporation shall allow such foreign
Philippi income from the latter in the form of dividends. For corporation a tax credit for taxes deemed paid
nes the following years, PMC-PH declared cash in the Phil. (Note that this tax credit is
(1991) dividends. PMC-PH invoked the tax sparing applicable as against the said country of
provision in Section 24(B)(1) of the Tax Code as domicile of the foreign corporation; and that
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the withholding agent of the gov’t with respect to the the PH does not require that the US tax law
dividends paid to PMC-USA, claiming a refund of deem the parent corporation to have paid the
the 20% point portion of the 35% point whole tax 20% points of dividend tax waived by the PH-
paid. The CIR opposed, claiming that PMC-USA, enough that the US “shall allow.”)
the taxpayer, and not PMC-PH, the remittor or 2. It reaches a minimum amount equivalent to
payor, should be legally entitled to receive the 20% points which is the difference between
refund, if any. the regular dividend tax of 35% and the
preferential tax rate of 15%.
WON PMC-PH IS ENTITLED TO THE 15%
PREFERENTIAL TAX RATE ON DIVIDENDS Such requirements were met in the case at bar. As to
DECLARED AND REMITTED TO ITS PARENT first requirement, US tax law treats the PH
CORPORATION – YES. corporate income tax as if it came out of the pocket,
as it were, of PMC-PH as a part of the economic cost
What is a tax-sparing provision? of carrying on business operations in the PH through
As explained in the case of CIR V. PROCTER & the medium of PMC-PH, and here earning profits.
GAMBLE PHILIPPINES [DECEMBER 2, 1999]: A What is, under US law, deemed, paid by PMC-US are
more general way of mitigating the impact of double not “phantom taxes” but instead PH corporate income
taxation is to recognize the foreign tax as a tax taxes actually paid here by PMC-PH.
credit. However, the principal defect of the tax credit
system is when low tax rates or special tax As for the second requirement, for every 55.25 of
concessions are granted in a country for the dividends actually remitted (after withholding at the
obvious reason of encouraging foreign investments. rate of 15%) by PMC-PH to its parent, a tax credit of
For instance, if the usual tax rate is 35 percent but a 29.75 is allowed by the US Tax Code for PH
concession rate accrues to the country of the corporate income tax “deemed paid” by the parent but
investor rather than to the investor himself.80 To actually paid by the wholly- owned subsidiary. Since
obviate this, a tax sparing provision may be 29.75 is much higher than the 13 amount of dividend
stipulated. With tax sparing, taxes exempted or tax waived by the PH govt, the US Tax Code
reduced are considered as having been fully paid. specifically and clearly complies with the requirement
of SEC 24(b)(1) of the NIRC.
BIR Cash dividends declared by SM Investments, a PH A dividend paid to a non-resident foreign corporation
Ruling domestic corporation whose shares are traded and is subject to the withholding tax of 35% as a general
DA-145- listed with the PSE to Asia Opportunities, a foreign rule, but if the country where the NRFC is
07 corporation organized under the British virgin Island domiciled allows a credit against the tax due from
(BVI). the NRFC taxes deemed to have been paid in the
PH in an amount equivalent to 20% of such
SM is asking whether it is subject to the 15% dividend, or does not subject such dividend to
preferential withholding tax rate pursuant to taxation, then dividend paid to such NRFC are taxed
Section 28(B)(5)(b) of the Tax Code as amended by only at 15%.
RA 9337.
The International Business Companies Ordinance of
Relevant provision: British Virgin Islands does not impose any tax on
(b) Intercorporate Dividends. — A final withholding dividend received from foreign sources, including
tax at the rate of fifteen percent (15%) is hereby those received from PH corporations by foreign
imposed on the amount of cash and/or property corporations domiciled therein, the cash dividend is
dividends received from a domestic corporation, subject to the preferential withholding tax rate of 15%.
which shall be collected and paid as provided in
Section 57(A) of this Code, subject to the condition
that the country in which the nonresident foreign
corporation is domiciled, shall allow a credit against
the tax due from the nonresident foreign corporation
taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%), which
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represents the difference between the regular

income tax of thirty-five percent (35%) and the
fifteen percent (15%) tax on dividends as provided
in this subparagraph: Provided, That effective
January 1, 2009, the credit against the tax due shall
be equivalent to fifteen percent (15%), which
represents the difference between the regular
income tax of thirty percent (30%) and the fifteen
percent (15%) tax on dividends;
Mirant Mirant Corp is a domestic corporation situated at PERMANENT ESTABLISHMENT IS NOT ALWAYS
Operati Quezon province. It is primarily engaged in the RFC
ons managing of gas turbine and other power Although VHL and WES World-wide Education
Corp v. generating plants and related facilities for the Service Ltd. do not have a fixed place of business,
CIR conversion into electricity of coal and other fuel. nonetheless, they would still be considered as having
(2008) Mirant filed its monthly remittance return of income established a "permanent establishment" if they have
taxes withheld for 1999-2000 as final taxes withheld "furnished services through their employees or other
from VHL Enterprises and WES Worldwide personnel for a period or periods the aggregate of
Education Service. Both are non-resident foreign which is more than 183 days in a 12-month period."
corporations. VHL’s head office is at Alabama, USA The treaty provision says that the business profits of
while WES Worldwide’s is at England, UK. Mirant an enterprise shall be taxable only if there is a
availed of the 5% expanded/creditable withholding permanent establishment. The key is, before any
taxes and availed of the BIR’s Voluntary profit could be taxed, first, you have to ask this
Assessment Program as it believed that it had question: Will this enterprise make a profit, a
erroneously withheld and remitted the final business profit that is defined in the treaty? If so,
withholding taxes from VHL and WES. Mirant does he have a permanent establishment in the
argued that under the RP-US and RP-UK Tax Philippines? If the answer to both questions is yes,
Treaties, VHL and WES have established their then the Philippine government can tax. If the answer
permanent establishments in the Philippines for to the second question is negative, there is no
having furnished services through their employees permanent establishment, then you cannot tax a
or other personnel for more than 183 days. Hence, profit.
they should be legally considered as resident
foreign corporations for income tax purposes and In this case, VHL and WES are both non-resident
the income payments to said corporations are foreign corporations with no fixed place of business in
subject only to the 5% creditable withholding tax. the Philippines; but these corporations render hands-
CIR argued that absent a showing that VHL and on training, instructional and/or consultancy services
WES are resident foreign corp, they are subject to to the employees of petitioner, respectively for a
final withholding tax as provided under Sec. 28(b) of period of more than 183 days within a 12-month
the Tax Code (32%) as it had not been shown that period. Thus, they have established permanent
the corporations are doing business in the PH. establishments in the PH.
WHETHER THE TRANSACTIONS BETWEEN However, it must be remembered that a foreign

MIRANT AND THE FOREIGN CORPORATIONS corporation wishing to avail of the benefits of the tax
HAVE CREATED PERMANENT treaty should invoke the provisions of the tax treaty
ESTABLISHMENTS – YES, THEY ARE NOT TAX and prove that indeed the provisions of the tax treaty
EXEMPT applies to it, before the benefits may be extended to
such corporation. Nowhere in the records of the case
was it shown that petitioner indeed took the liberty of
properly observing the provisions of the said order.
The finding that they have effectively created

permanent- establishments makes them liable to pay
taxes to the Philippine government for taxable
transactions within the Philippines but it does not
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automatically convert their status into "resident

foreign corporations" in the Philippines.
Deutsc The bank remitted to the BIR an amount The constitution provides for the adherence to the
he representing 15% of the branch profit remittance tax general principles of international law as part of the
Bank v. on its regular banking unit net income remitted to law of the land. Every treaty is binding upon the
CIR the Deutsche Bank of Germany for 2002 and prior parties and obligations must be performed. There is
(2013) taxable years. Believing that they made an nothing in RMO 1- 2000 indicating a deprivation of
overpayment, it filed a claim for refund or a tax entitlement to a tax treaty for failure to comply with
credit certificate. It also requested from the the 15-day period. The denial of availment of tax relief
International Tax Affairs Division for a confirmation for the failure to apply within the prescribed period
of its entitlement to a preferential tax rate of 10% would impair the value of the tax treaty. The
under the RP-Germany Tax Treaty. obligation to comply with the tax treaty must take
precedence over the objective of RMO 1-2000
The claim was denied on the ground that because the non-compliance with tax treaties would
application for tax treaty relief was not filed with have negative implications on international affairs and
ITAD prior to the payment of BPRT, violating the would discourage foreign investments.
fifteen-day period mandated under Section III, Par.
2, of RMO 1-2000.
W/N THE FAILURE TO STRICTLY COMPLY

WITH THE PROVISIONS OF RMO 1-2000 WILL
DEPRIVE PERSONS OR CORPORATIONS THE
BENEFIT OF A TAX TREATY - NO
RMO Guidelines on Tax Treaty Relief Application

072-10
ITAD is the sole office charged with the receiving of tax treaty relief applications (TTRA). All tax treaty relief
applications relative to the implementation and interpretation of the provisions of Philippine tax treaties shall
only be submitted to and received by the International Tax Affairs Division (ITAD). All rulings relative to the
application, implementation and interpretation of the provisions of Philippine tax treaties shall emanate from
ITAD.
ITAD Energizer, a domestic corporation, entered into a The tax imposed on royalties derived by a resident of
Ruling Renewal Agreement with Everyday, a US the United States from sources within the Philippines
102- 02 corporation, for the right to use its trademarks and shall be the lowest rate of Philippine tax that may be
patents, technical information, business information, imposed an royalties of the same kind paid under
data, and know-how. The agreement was similar circumstances to a resident of a third State.
registered with the Technology Transfer Registry. This is the "most-favored nation"` clause found in
Article 13(2)(b)(iii) of the RP-US tax treaty. In this
As consideration, Energizer is to pay Everyday 3% connection, it must be noted that the royalties arising
royalties. Everyday is not licensed to do business from the Philippines and paid to a resident of the
in the PH, and neither it is registered herein. Netherlands may also be taxed in the Philippines but
the tax so charged shall not exceed 15 percent of the
gross amount of royalties in cases other than
WON ENERGIZER IS ENTITLED TO THE MOST royalties paid by in enterprise registered in preferred
FAVOURABLE NATION CLAUSE IN THE RP-US areas of activities in the Philippines.
TAX TREATY IN RELATION TO THE RP-
NETHERLANDS TAX TREATY, THUS MAKING IT ROYALTIES, defined
SUBJECT TO THE LOWER TAX RATE OF 15%. The term "royalties" as used in this Article means any
— YES. payment of any kind received as a consideration for
the use of, or right to use, any patent, trademark,
design or model, secret formula or process, or for the
use of, or the right to use of, industrial, commercial or
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scientific equipment, or for information concerning

industrial, commercial or scientific experience.
MOST-FAVORED-NATION CLAUSE
The SC has interpreted the "most-favored-nation"
clause, particularly the phrase "paid under similar
circumstances," as referring to the manner of
payment or taxes and not to the subject matter of
the tax which is royalties.
Hence, the "most-favored-nation" clause of the RP-

US tax treaty must be interpreted not only in relation
to Article 12 of the RP-Netherlands tax treaty but also
in connection with the provisions on the elimination of
double taxation of both.
A perusal of the RP-US and the RP-Netherlands tax

treaties, particularly their provisions on the avoidance
of double taxation, shows a similarity on the manner
of payment of taxes, that is, the allowable foreign tax
credit on both treaties is the amount actually paid in
the Philippines.
Such being the case, and since Energizer is not

registered and engaged in preferred areas of
activities in the Philippines, this Office is of the
opinion and so holds that the royalty payments by
Energizer to Eveready are subject to the preferential
tax rate of 15% of the gross amount of royalties
pursuant to the "most-favored-nation" provision of the
RP-US tax treaty in relation to the RP-Netherlands
tax treaty.
ITAD Avon Comestics (domestic corp.) submitted a Tax Under paragraph 2 (b) (iii) of the Philippine-US tax
Ruling Treaty Relief Application (TTRA) on June 23, 2011 Treaty, royalties arising in the Philippines and paid to
024- 13 requesting confirmation that royalties to be paid to a resident of the United States may be taxed in the
Avon Products (foreign corp.) are subject to Philippines at the lowest rate of income tax that may
Philippine Income tax at the reduced rate of 10% be imposed on royalties of the same kind paid under
pursuant to the PH-US tax treaty, in relation to the similar circumstances to a resident of a third State
PH-Czech tax Treaty. (also known as the "most-favored-nation treatment”).
Both PH-US tax treaty and PH-CZECH Tax treaty
WON ROYALTY PAYMENTS OF AVON satisfy the conditions as said in S.C. Johnson case in
COSMETICS TO AVON PRODUCTS ARE order to apply the reduced rate of 10%.
SUBJECT TO PHILIPPINE INCOME TAX AT THE
REDUCED RATE OF 10 PERCENT? YES, but "S.C. Johnson case" requires two conditions for a
DENIES relief on all royalties under the Agreement most-favored-nation treatment on royalties to apply:
paid before June 24, 2011 in violation of the 1. Royalties arising in the Philippines and paid
requirement that filing of the TTRA should be made to a resident of the other State, in this case,
BEFORE the transaction under RMO 72-2010. the United States, must be of the same kind
as those arising in the Philippines and paid to
a resident of a third State (Czech in this case)
to which the latter's tax treaty with the
Philippines subjects the latter royalties to a
most-favored-nation treatment.
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2. The method of elimination of double taxation

applied by the other State, in this case, the
United States, on royalties paid to a resident
thereof must be the same as that applied.
9. Withholding Tax
CIR v. Smart entered into 3 agreements with Prism (non- WITHHOLDING AGENT MAY CLAIM A TAX
Smart resident Malaysian corporation) under which Prism REFUND
Commu would provide programming and consultancy The person entitled to claim a tax refund is the
nication services for the installation of the Service Download taxpayer. However, in case the taxpayer does not
, Inc. Manager Agreement and the Channel Manager file a claim for refund, the withholding agent may
(2010) Agreement, and for the installation and file the claim. What is clear in the prior decision of
implementation of Smart Money and Mobile CIR v. Procter & Gamble is that a withholding agent
FWT at Banking Service. For the payment, Smart thought has a legal right to file a claim for refund for two
source that the amount to be paid constituted royalties so reasons:
Smart withheld from its payments $136K (25%
royalty tax under the RP-Malaysia Tax Treaty). First, he is considered a “taxpayer” under the NIRC
Smart filed an administrative claim with the BIR as he is personally liable for the withholding tax as
claiming that its payments to Prism were not well as for deficiency assessments, surcharges and
royalties but “business profits” which were not penalties, should the amount of the tax withheld be
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taxable because Prism did not have a permanent finally found to be less than the amount that should
establishment in the Philippines. CIR countered that have been withheld under the law.
Smart as the withholding agent was not a party-in-
interest to claim the refund. Second, as an agent of the taxpayer, his authority to
file the necessary income tax return and to remit the
WON SMART CAN CLAIM THE REFUND  YES tax withheld to the government impliedly includes the
authority to file a claim for refund and to bring an
action for recovery of such claim. As an agent of the
TP, it is the duty of the withholding agent to return to
the principal TP what he has recovered. Otherwise,
he would be unjustly enriching himself at the expense
of the principal TP from whom the taxes were
withheld and from whom he derives his legal right to
file a claim for refund.
Filipina Petitioner Filipinas Synthetic questions the CIR’s There was a definite liability, a clear and imminent
s deficiency withholding tax at source assessments certainty that at the maturity of the loan contracts, the
Synthet for the (a) the fourth quarter of 1974 to the fourth foreign corporation was going to earn income in an
ic Fiber quarter of 1975, and (b) the fourth quarter of 1975 ascertained amount, so much so that petitioner
Corp. v. to the fourth quarter of 1976. The bulk of the already deducted as business expense the said
CA deficiency assessments consisted of interest and amount as interests due to the foreign corporation.
(1999) compromise penalties for alleged late payment of This is allowed under the law, petitioner having
withholding taxes due on interest loans, royalties, adopted the ‘accrual method’ of accounting in
CWT and guarantee fees Filipinas Synthetic paid to non- reporting its incomes.
resident corporations. Although Filipinas Synthetic
uses the accrual method of accounting, it still Petitioner cannot now claim that there is no duty to
contends that its liability to withhold tax at source withhold and remit income taxes as yet because the
arises when the said amounts have become due loan contract was not yet due and demandable.
and demandable under their respective contracts, Having “written-off” the amounts as business expense
and not upon their “setting-up” or accrual. in its books, it had taken advantage of the benefit
provided in the law allowing for deductions from gross
WON THE LIABILITY TO WITHHOLD TAX AT income. Moreover, it had represented to the BIR that
SOURCE ON INCOME PAYMENTS TO NON- the amounts so deducted were incurred as a
RESIDENT FOREIGN CORPORATIONS ARISES business expense in the form of interest and royalties
UPON REMITTANCE OF THE AMOUNTS DUE paid to the foreign corporations. It is estopped from
TO THE FOREIGN CREDITORS OR UPON claiming otherwise now
ACCRUAL THEREOF  UPON ACCRUAL
Tax Code is silent as to when the duty to withhold
taxes arises. In this case, to determine when the duty
to withhold the taxes arose, the Court inquired into
the nature of accrual method of accounting, the
procedure used by the taxpayer, and to the modus
vivendi of withholding tax at source come. It noted
that under the accrual basis method of accounting,
income is reportable when all the events have
occurred that fix the taxpayer’s right to receive the
income and the amount can be determined with
reasonable accuracy. Such method is allowed by law
in reporting incomes.
PNB v. Gotesco, a corporation engaged in real estate, PNB was able to establish, through evidence
CIR entered in 1995 into a syndicated loan agreement presented, that it did not in fact use the claimed
(2015) with PNB and 3 other banks. To secure the loan, creditable withholding taxes to settle its tax liabilities,
Gotesco mortgaged a 6-hectare expanse known as such as: (1) 2003 Audited FS, which still included the
CWT the Ever Ortigas Commercial Complex, under a mortgaged property in the asset account, providing
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mortgage trust indenture agreement in favor of the it did not recognize the foreclosure sale and
PNB, through its Trust Banking Group, as trustee. therefore, the payment by PNB of the creditable
Gotesco subsequently defaulted on its loan withholding taxes corresponding to the same; (2) the
obligations. Thus, PNB foreclosed the mortgaged ITRs, which the CTA required to show that the excess
property. Gotesco then filed a civil case against creditable withholding tax was not used by Gotesco;
PNB for the annulment of the foreclosure (3) testimony of Gotesco’s former accountant; and (4)
proceedings. As its prepared for the consolidation Withholding Tax Remittance Returns providing that
of its ownership over the foreclosed property, PNB the amount was withheld and paid by PNB in 2003.
paid the BIR DST and also withheld and remitted to
withholding taxes equivalent to 6% of the bid price. Thus, evidence on record sufficiently proves that the
PNB then filed for refund on the basis that it claimed creditable withholding tax was withheld and
inadvertently applied the 6% creditable remitted to the BIR, that such withholding and
withholding tax rate on the sale of real property remittance was erroneous, and that the claimed
classified as ordinary asset, when it should creditable withholding tax was not used by Gotesco to
have applied the 5% rate on the sale of ordinary settle its tax liabilities.
asset, as provided in SEC. 2.47.2(J)(B) of RR 2-98,
as amended by RR 6-01, considering that Gotesco
is primarily engaged in the real estate business.
WON GOTESCO IS ENTITLED TO THE TAX

REFUND  YES
RR 12- Amends Section 2.57.2 of Revenue Regulations No. 2-98 relative to the collection of the creditable
98 withholding tax on income payments from medical practitioners. It will be the duty and responsibility of
the hospital or clinic to collect from any patient admitted by such hospital or clinic the professional
fee of the attending medical practitioner and to withhold the tax prescribed in the Regulations. The
withholding tax prescribed in the regulations will not apply whenever there is proof that no professional fee
has in fact been charged by the medical practitioner and paid by his patient, provided, however, that this fact
is shown in a sworn declaration jointly executed by the medical practitioner, the patient or his duly
authorized representative and the administrator of the hospital or clinic.
RR 1- SUBJECT: Amendments to Sections 2.78.1(B), Section 2.79(A) and (F), 2.83.4(C) and 2.83.5 of Revenue
2006 Regulations No. 2-98, as Amended
Pursuant to Section 244, in relation to Section 79 (A) Internal Revenue Code of 1997, as amended, these
Regulations are hereby promulgated to amend Sections 2.78.1(B), Section 2.79(A) and (F), 2.83.4(C) and
2.83.5 of Revenue Regulations No. 2-98 , as amended, with respect to the withholding of income tax on
compensation income received by minimum wage earners
SECTION 1. Section 2.78.1(B) of Revenue Regulations No. 2-98, as amended, is hereby amended to read
as follows:
"SECTION 2.78.1. Withholding of Income Tax on Compensation Income.
xxx xxx xxx
"(B) Exemptions from withholding tax on compensation. — The following income payments are
exempted from the requirement of withholding tax on compensation:
xxx xxx xxx
"(13) COMPENSATION INCOME OF INDIVIDUALS THAT DO NOT EXCEED THE ST A

TUTORY MINIMUM W AGE OR FIVE THOUSAND PESOS (PHP5,000.00) PER MONTH (SIXTY
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THOUSAND PESOS [PHP60,000.00] A YEAR), WHICHEVER IS HIGHER."
"(14) COMPENSATION INCOME OF EMPLOYEES OF THE GOVERNMENT OF THE

PHILIPPINES, OR ANY OF ITS POLITICAL SUBDIVISIONS, AGENCIES OR
INSTRUMENTALITIES, WITH SALARY GRADES 1 TO 3."
SECTION 2. Section 2.79(A) and (F) of Revenue Regulations No. 2-98, as amended, is hereby amended to
read as follows:
“SEC. 2.79. Income Tax Collected at Source on Compensation Income.
"(A) Requirement of Withholding. — Every employer must withhold from compensations paid, an
amount computed in accordance with these regulations. PROVIDED, THAT COMPENSATION
INCOME OF (1) INDIVIDUALS THAT DO NOT EXCEED THE STATUTORY MINIMUM WAGE
OR FIVE THOUSAND PESOS (PHP5,000.00) PER MONTH (SIXTY THOUSAND PESOS
[PHP60,000.00] A YEAR), WHICHEVER IS HIGHER, AND (2) EMPLOYEES OF THE
GOVERNMENT OF THE PHILIPPINES, OR ANY OF ITS POLITICAL SUBDIVISIONS,
AGENCIES OR INSTRUMENTALITIES, WITH SALARY GRADES 1 TO 3, SHALL NOT BE
SUBJECT TO WITHHOLDING TAX.
"THE AFOREMENTIONED INDIVIDUALS WHOSE COMPENSATION INCOME IS NOT

SUBJECT TO WITHHOLDING TAX SHALL REMAIN LIABLE FOR INCOME TAXES AND SHALL
CONTINUE TO FILE THEIR ANNUAL INCOME TAX RETURNS AND PAY THE INCOME
TAXES DUE THEREON, IF ANY, NOT LATER THAN APRIL 15 OF THE YEAR IMMEDIATELY
FOLLOWING THE TAXABLE YEAR.
xxx xxx xxx
"(F) Requirement for Deductibility. — The provisions of Sec. 2.58.5 of these Regulations shall
apply. PROVIDED, THAT COMPENSATION INCOME WHERE NO INCOME TAXES WERE
WITHHELD PURSUANT TO SECTION 2.79(A) OF THESE REGULATIONS, SHALL BE
ALLOWED AS A DEDUCTION FROM AN EMPLOYER'S GROSS INCOME WHEN THE
REQUIRED EMPLOYEES WITHHOLDING STATEMENT (BIR FORM NO. 2316) HAVE BEEN
ISSUED TO SUBJECT EMPLOYEES IN ACCORDANCE WITH SECTION 2.83.1 OF RR 2-98.
PROVIDED, FURTHER, THAT THE ALPHABETICAL LIST OF THE SUBJECT EMPLOYEES
SHALL BE SUBMITTED UNDER SCHEDULE 7.2 OF BIR FORM NO. 1604-CF IN
ACCORDANCE WITH SECTION 2.83.2 OF RR 2-98."
SECTION 3. Section 2.83.4(C) of Revenue Regulations No. 2-98, as amended, is hereby amended to read
as follows:
"SEC. 2.83.4. Substituted Filing of Income Tax Returns by Employees Receiving Purely
Compensation Income. — . . . .
xxx xxx xxx
The following individuals, however, are not qualified for substituted filing and therefore, still
required to file BIR Form No. 1700 in accordance with existing regulations:
xxx xxx xxx
"(C) EMPLOYEES WHOSE GROSS COMPENSATION INCOME DO NOT EXCEED THE

STATUTORY MINIMUM WAGE OR FIVE THOUSAND PESOS (PHP5,000.00) PER MONTH
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(SIXTY THOUSAND PESOS [PHP60,000.00] A YEAR), WHICHEVER IS HIGHER, INCLUDING

EMPLOYEES OF THE GOVERNMENT OF THE PHILIPPINES, OR ANY OF ITS POLITICAL
SUBDIVISIONS, AGENCIES OR INSTRUMENTALITIES, WITH SALARY GRADES 1 TO 3."
xxx xxx xxx"
SECTION 4. Section 2.83.5 of Revenue Regulations No. 2-98, as amended, is hereby amended to read as
follows:
"SEC. 2.83.5. Registration as Withholding Agent. — Every person who makes payment or
expects to make payment of compensation in AN AMOUNT EXCEEDING THE STATUTORY
MINIMUM WAGE OR SIXTY THOUSAND PESOS (P60,000.00) A YEAR (FIVE THOUSAND
PESOS [PHP5,000.00] MONTHLY), WHICHEVER IS HIGHER, to any single employee shall
register by filing in duplicate, with the Revenue District Office (RDO) of the City or Municipality
where his legal residence or place of business is located, an Application for Registration as a
withholding agent using the form prescribed by the Bureau not later than ten (10) days after
becoming an employer."
RMC SUBJECT: Withholding of Income Tax on Backwages, Allowances, and Benefits Received by Employees
39-2012 through Garnishments of Debts or Credits Pursuant to a Labor Dispute Award
TO: All Internal Revenue Officials, Employees and Others Concerned
This Circular is issued to require the withholding of taxes on backwages, allowances and benefits received
by virtue of a labor dispute award through garnishments of debts due to the employers and other credits to
which the employer is entitled including bank deposits, financial interests, royalties, or commissions.
It should be noted that backwages, allowances and benefits awarded in a labor dispute constitute
remunerations for services that would have been performed by the employee in the year when actually
received, or during the period of his dismissal from the service which was subsequently ruled to be illegal.
The employee should report as income and pay the corresponding income taxes by allocating or spreading
his backwages, allowances and benefits through the years from his separation up to the final decision of the
court awarding the backwages. The said back wages, allowances and benefits are subject to withholding tax
on wages.
However, when the judgment awarded in a labor dispute is enforced through garnishment of debts due to
the employer or other credits to which the employer is entitled, the person owing such debts or having in
possession or control of such credits (e.g., banks or other financial institutions) would normally release and
pay the entire garnished amount to the employee. As a result, employers who are mandated to withhold
taxes on wages pursuant to Section 79 of the Tax Code of 1997, as amended, as implemented by Revenue
Regulations No. 2-98, as amended, cannot withhold the appropriate tax due thereon.
In this regard, the provisions of Section 78 (D) (1) of the Tax Code of 1997, as amended, and Section 2.78.4
(A) of Revenue Regulations No. 2-98 , as amended, provide, thus:
"SEC. 78. Definitions. — As used in this Chapter: "SECTION 2.78.4. Employer. — . . .
xxx xxx xxx
(D) Employer — The term 'employer' means the person for whom an individual performs or
performed any service, of whatever nature, as the employee of such person, except that:
(1) If the person for whom the individual performs or performed any service does not have
control of the payment of the wages for such services, the term 'employer' (except for the
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purpose of Subsection A) means the person having control of the payment of such
wages." (Emphasis and underscoring supplied)
(A) Person for whom the services are or were performed does not have control. — The term
"employer" also refers to the person having control of the payment of the compensation in
cases where the services are or were performed for a person who does not exercise such
control. For example, where compensation, such as certain types of pensions or retirement pay,
are paid by a trust and the person for whom the services were performed has no control over the
payment of such compensation, the trust is deemed to be the "employer". (Emphasis and
underscoring supplied)
Based on the foregoing provisions, persons having control of the payment of wages or salaries are
authorized to deduct and withhold upon such wages or salaries the withholding tax due thereon. In this
case, the garnishees are the persons owning debts due to the employer or in possession or control of
credits to which the employer are entitled. Accordingly, they are in control of the payment of backwages,
allowances and benefits and they are authorized to deduct and withhold the income tax due from the
backwages, allowances and benefits to be paid to employees, and are respectively liable for such
deductions.
In order to ensure the collection of the appropriate withholding taxes on wages, garnishees of a judgment
award in a labor dispute are constituted as withholding agents with the duty of deducting the corresponding
withholding tax on wages due thereon in an amount equivalent to five percent (5%) of the portion of the
judgment award representing the taxable backwages, allowances and benefits.
All internal revenue officers and others concerned are hereby enjoined to give this Circular as wide a
publicity as possible.
Section Withholding Tax by Government Agencies
2.57.2(N Income payments, except any single purchase which is P10,000 and below, which are made by a
), RR 2- government office, national or local, including GOCCs83,111 on their purchases of goods from local
98 suppliers shall be subject to a withholding tax of 1%.
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10. Special Rules

Minimum Corporate Income Tax
CREBA CREBA assails the imposition of the minimum MCIT does not tax capital but only taxes income as
v. Exec. corporate income tax as being violative of the due shown by the fact that the MCIT is arrived at by
Secreta process clause as it levies income tax even if there deducting the capital spent by a corporation in the
ry is no realized gain. They also question the sale of its goods, i.e., the cost of goods and other
(2010) creditable withholding tax on sales of real properties direct expenses from gross sales.
classified as ordinary assets stating that: (1) they
ignore the different treatment of ordinary assets and Besides, there are sufficient safeguards that exist for
capital assets; (2) the use of gross selling price or the MCIT: (1) it is only imposed on the 4th year of
fair market value as basis for the CWT and the operations; (2) the law allows the carry forward of any
collection of tax on a per transaction basis (and not excess MCIT paid over the normal income tax; and
on the net income at the end of the year) are (3) the Secretary of Finance can suspend the
inconsistent with the tax on ordinary real properties; imposition of MCIT in justifiable instances.
(3) the government collects income tax even when
the net income has not yet been determined; and The regulations on CWT did not shift the tax base of
(4) the CWT is being levied upon real estate a real estate business’ income tax from net income to
enterprises but not on other enterprises, more GSP or FMV of the property sold since the taxes
particularly those in the manufacturing sector. withheld are in the nature of advance tax payments
and they are thus just installments on the annual tax
WON THE IMPOSITION OF MCIT ON DOMESTIC which may be due at the end of the taxable year. As
CORPORATIONS IS UNCONSTITUTIONAL FOR such the tax base for the sale of real property
VIOLATING DUE PROCESS  NO classified as ordinary assets remains to be the net
taxable income and the use of the GSP or FMV is
because these are the only factors reasonably known
to the buyer in connection with the performance of the
duties as a withholding agent.
CIR v. For its fiscal year ending March 2001 (FY 2000- First, Section 13 (a) of Presidential Decree No. 1590
PAL 2001), PAL allegedly incurred zero taxable income, refers to “basic corporate income tax.” In
(2009) which left it with unapplied creditable withholding Commissioner of Internal Revenue v. Philippine
tax in the amount of P2,334,377.95. PAL did not Airlines, Inc., the Court already settled that the “basic
pay any MCIT for the period. PAL requested for the corporate income tax,” under Section 13 (a) of
refund of its unapplied creditable withholding tax for Presidential Decree No. 1590, relates to the general
FY 2000-2001. The Large Taxpayers Audit and rate of 35% (reduced to 32% by the year 2000) as
Investigation Division 1 (LTAID 1) of the BIR Large stipulated in Section 27 (A) of the NIRC of 1997.
Taxpayers Service (LTS), issued a Tax Verification
Notice authorizing verification of the supporting Second, Section 13 (a) of Presidential Decree No.
documents and pertinent records. During an 1590 further provides that the basic corporate income
informal conference, BIR relayed to PAL that it was tax of PAL shall be based on its annual net taxable
instead being assessed for deficiency MCIT. PAL income. This is consistent with Section 27 (A) of the
argued that it was not liable for MCIT under its NIRC of 1997, which provides that the rate of basic
franchise. The CIR argued that Section 13 (a) of PD corporate income tax, which is 32% beginning 1
No. 1590 provides that the corporate income tax of January 2000, shall be imposed on the taxable
PAL shall be computed in accordance with the income of the domestic corporation.
NIRC. And, since the NIRC of 1997 imposes MCIT,
and PAL has not applied for relief from the said tax, Third, even if the basic corporate income tax and the
then PAL is subject to the same. MCIT are both income taxes under Section 27 of the
NIRC of 1997, and one is paid in place of the other,
WON PAL is liable for deficiency MCIT for FY the two are distinct and separate taxes.
2000-2001  NO
Fourth, the evident intent of Section 13 of Presidential
Lifted from PM Reyes: Decree No. 1520 is to extend to PAL tax concessions
In COMMISSIONER VS. PAL [JULY 7, 2009], PAL not ordinarily available to other domestic
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under PD 1590 (its franchise) was liable only for corporations. Section 13 of Presidential Decree No.
basic corporate income tax or franchise tax, 1520 permits PAL to pay whichever is lower of the
whichever is lower and this is in lieu of all other basic corporate income tax or the franchise tax; and
taxes, except real property. The CIR contends that the tax so paid shall be in lieu of all other taxes,
PAL is subject to MCIT while it was the contention except only real property tax. Hence, under its
of PAL that the MCIT was included in the “in lieu of franchise, PAL is to pay the least amount of tax
all other taxes” provision. The Supreme Court noted possible.
there is a distinction between taxable income, which
is the basis for basic corporate income tax; and Fifth, the CIR posits that PAL may not invoke in the
gross income, which is the basis for the MCIT under instant case the “in lieu of all other taxes” clause in
Section 27(E). The two terms have their respective Section 13 of Presidential Decree No. 1520, if it did
technical meanings, and cannot be used not pay anything at all as basic corporate income tax
interchangeably. Hence, the basic corporate or franchise tax. As a result, PAL should be made
income tax cannot cover MCIT since the basis for liable for “other taxes” such as MCIT. This line of
the first is the annual net taxable income; while the reasoning has been dubbed as the Substitution
basis for the second is gross. Thus, MCIT is Theory, and this is not the first time the CIR raised
included in “all other taxes” from which PAL is the same.
exempted.
And sixth, Presidential Decree No. 1590 explicitly
allows PAL, in computing its basic corporate income
tax, to carry over as deduction any net loss incurred
in any year, up to five years following the year of such
loss. Therefore, Presidential Decree No. 1590 does
not only consider the possibility that, at the end of a
taxable period, PAL shall end up with zero annual net
taxable income (when its deductions exactly equal its
gross income), as what happened in the case at bar,
but also the likelihood that PAL shall incur net loss
(when its deductions exceed its gross income). If PAL
is subjected to MCIT, the provision in Presidential
Decree No. 1590 on net loss carry-over will be
rendered nugatory. Net loss carry-over is material
only in computing the annual net taxable income to
be used as basis for the basic corporate income tax
of PAL; but PAL will never be able to avail itself of the
basic corporate income tax option when it is in a net
loss position, because it will always then be
compelled to pay the necessarily higher MCIT.
RR 9-98 RR 9-98 prescribes the regulations to implement RA No. 8424 relative to the imposition of the Minimum
except Corporate Income Tax (MCIT) on domestic corporations and resident foreign corporations.
Sec.
2.28 (E)  An MCIT of 2% of the gross income as of the end of the taxable year is imposed upon any domestic
(7) corporation beginning the 4th taxable year immediately following the taxable year in which such
corporation commenced its business operations.
 The MCIT will be imposed whenever such operation has zero or negative taxable income or
whenever the amount of MCIT is greater than the normal income tax due from such operation.
 In the case of a domestic corporation whose operations or activities are partly covered by the
regular income tax system and partly covered under a special income tax system, the MCIT will
apply on operations covered by the regular income tax system.
 Any excess of the minimum corporate income tax (MCIT) over the normal income tax as computed
under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against the
normal income tax for the three (3) immediately succeeding taxable years.
o The taxpayer shall pay the MCIT whenever it is greater than the regular or normal corporate
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income tax, which is imposed under Sec. 27(A) and Sec. 28(A)(1) of the Code.
o The excess MCIT is creditable against the normal income tax within the next three (3) years
from payment thereof.
o The excess MCIT cannot be claimed as a credit against the MCIT itself or against any other
losses.
 For purposes of the MCIT, the taxable year in which business operations commenced shall be the
year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR).
o Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT
beginning January 1, 1998.
o Firms which were registered with BIR in any month in 1998 shall be covered by the MCIT
three calendar years thereafter (i.e. after the lapse of three calendar years from 1998). For
example, a firm which was registered in May 1998 shall be covered by the MCIT in 2002.
o The reckoning point for firms using the fiscal year shall also be 1998. For example, a firm
which registered with the BIR on July 1, 1998 shall be subject to an MCIT on his gross
income earned for the entire fiscal year ending in the year 2002.
o Transitory Rule for determining the MCIT for 1998 on firms which are taxable on a fiscal year
basis. For firms using the fiscal year basis and whose first taxable period under the minimum
corporate income tax covers month/months in 1997 (i.e. prior to the imposition of MCIT under
RA 8424), the MCIT which is due for 1998 shall be computed using an apportionment
formula. The ratio to be applied is the number of months in 1998 to twelve (12) months (i.e.
the total number of months in a fiscal year).
 The minimum corporate income tax (MCIT) shall apply only to domestic corporations subject to the
normal corporate income tax prescribed under these Regulations. Accordingly, the minimum
corporate income tax shall not be imposed upon any of the following:
 Domestic corporations operating as proprietary educational institutions subject to tax at ten
percent (10%) on their taxable income; or
 Domestic corporations engaged in hospital operations which are nonprofit subject to tax at
ten percent (10%) on their taxable income; and
 Domestic corporations engaged in business as depository banks under the expanded foreign
currency deposit system, otherwise known as Foreign Currency Deposit Units (FCDUs), on
their income from foreign currency transactions with local commercial banks, including
branches of foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system units and other depository banks under the
foreign currency deposit system, including their interest income from foreign currency loans
granted to residents of the Philippines under the expanded foreign currency deposit system,
subject to final income tax at ten percent (10%) of such income.
 Firms that are taxed under a special income tax regime such as those in accordance with RA
7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively).
 A MCIT of (2%) of the gross income from sources within the Philippines is imposed upon any
resident foreign corporation, beginning on the fourth (4th) taxable year (whether calendar or fiscal
year, depending on the accounting period employed) immediately following the taxable year in
which the corporation commenced its business operations, whenever the amount of the minimum
corporate income tax is greater than the normal income tax due for such year.
 The minimum corporate income tax shall only apply to resident foreign corporations, which are
subject to normal income tax. Accordingly, the minimum corporate income tax shall not apply to the
following resident foreign corporations:
o Resident foreign corporations engaged in business as "international carrier" subject to tax at
two and one-half percent (2 1⁄2%) of their "Gross Philippine Billings";
o Resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on
their income from foreign currency transactions with local commercial banks, including
branches of foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with Offshore Banking Units (OBUs), including interest income from foreign
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currency loans granted to residents of the Philippines, subject to a final income tax at ten
percent (10%) of such income; and
o Resident foreign corporations engaged in business as regional operating headquarters
subject to tax at ten percent (10%) of their taxable income.
o Firms that are taxed under a special income tax regime such as those in accordance with RA
7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively).
The Regulations will apply to domestic and resident foreign corporations on their aforementioned taxable
income derived beginning January 1, 1998 pursuant to the pertinent provisions of RA 8424, provided,
however, that corporations using the fiscal year accounting period and which are subject to MCIT on income
derived pertaining to any month or months of the year 1998 will not be imposed with penalties for late
payment of the tax.
Improperly Accumulated Earnings Tax
The Manila Wine Merchants Inc. is a domestic Using the Immediacy Doctrine, CTA is correct in
Manila corporation engaged in the importation and sale of finding that the investment made by petitioner in the
Wine whiskey, wines, liquors and distilled spirits. CIR USA Treasury shares in 1951 was an accumulation of
Mercha examined its books of account and found it had profits in excess of the reasonable needs of
nts, Inc. unreasonably accumulated surplus amount in petitioner’s business. The finding of the Court of Tax
v. CIR excess of the reasonable needs of the business Appeals that the purchase of the USA Treasury
(1984) subject to the 25% surtax imposed by Sec. 25 of bonds (for future expansion, acquisition of lots, land
the NIRC. CIR found that the accumulated surplus and buildings) were in no way related to petitioner’s
in question were invested to ‘unrelated business’ business of importing and selling wines whisky,
which were not considered in the ‘immediate needs’ liquors and distilled spirits, and thus construed as an
but MWMI asserts that it was for the future investment beyond the reasonable needs of the
expansion of the company, and that the surplus business is binding. Assuming it was for expansion, it
profits allegedly accumulated in the form of USA was just a mere afterthought.
Treasury shares in 1951 should not be subject to
surtax of 25% in 1957 but should be based on In determining whether accumulations of earnings or
surplus accumulated in 1951. profits in a particular year are within the reasonable
needs of a corporation for the 25% surtax, it is
WON THE PURCHASE OF THE USA TREASURY necessary to take into account prior accumulations,
BONDS BY PETITIONER IN 1951 CAN BE since accumulations prior to the year involved may
CONSTRUED AS AN INVESTMENT TO AN have been sufficient to cover the business needs and
UNRELATED BUSINESS  YES additional accumulations during the year involved
would not reasonably be necessary.
WON THE PENALTY TAX OF 25% CAN BE
IMPOSED ON SUCH IMPROPER
ACCUMULATION IN 1957 DESPITE THE FACT
THAT THE ACCUMULATION OCCURRED IN
1951  NO
CIR v. Tuason was assessed 25% surtax on unreasonable The Court does not dispute that these investments
Tuason accumulation of surplus for the years 1975-1978. were actually made. However, it also points out that
(1989) Tuason protested the assessment on the ground the corporation did not use up its surplus profits. The
that the accumulation of surplus profits was solely enormous discrepancy between the alleged
for the purpose of expanding its business investment cost and the declared market value of
operations as an estate broker which included these pieces of real estate was not denied by
construction of an apartment building and the Tuason. Thus, since the company as of the time of
purchase of a condominium unit which was assessment had invested in its business operations
intended for resale or lease. only a portion of its accumulated surplus profits, its
remaining accumulated surplus profits are subject to
WON THE ASSESSMENT WAS PROPER  YES 25% surtax.
From Pm Reyes: The touchstone of liability is the purpose behind the

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In CIR v. TUASON [MAY 15, 1989], the CIR accumulation of the income and not the consequence
assessed Tuason, Inc. for IAET. The CIR presumed of the accumulation. Thus, if the failure to pay
that when Tuason, Inc. accumulated profits, the dividends were for the purpose of using the
purpose was to avoid the income tax on its undistributed earnings and profits for the reasonable
shareholders on the finding that it was a mere needs of the business, that purpose would not fall
holding or investment company. Tuason contended within the interdiction of the statute cited in Manila
it was for the purpose of expanding their business Wine Merchants, Inc. vs. CIR.
as a real estate broker. The Supreme Court ruled
that Tuason was liable for IAET. Tuason was a
mere holding company as it was not involved
itself in the development of the subdivisions but
merely subdivided its own lots and sold them
for bigger profits. It derived its income from
interest, dividends, and rental from the sale of
realty. The touchstone of liability is the purpose
behind the accumulation of the income and not the
consequences of the accumulation. The company's
failure to distribute dividends to its stockholders was
clearly for reasons other than the reasonable needs
of the business.
Cyana Petitioner is a corporation organized under PH Section 25 of the NIRC of 1977 discouraged tax
mid laws, is a wholly owned subsidiary of American avoidance through corporate surplus accumulation.
Philippi Cyanamid Co., based in Maine, USA. CIR sent an When corporations do not declare dividends, income
nes, assessment letter to petitioner and demanded the taxes are not paid on the undeclared dividends
Inc. v. payment of deficiency income tax of 119K for 1981. received by the shareholders. The tax on improper
CA Petitioner contended that it availed of the tax accumulation is essentially a penalty tax designed to
(2000) amnesty under EO 41. It said that the surtax compel the corporations to distribute earnings so the
assessment were improper since the profits were same could be taxed.
retained to increase the working capital of the
company and would be used for reasonable As of 1981, the working capital of Cyanamid was
business needs of the company. CIR denied the more than 2x its current liabilities, there is therefore
request. So petitioner appealed to the CTA. During adequacy in the working capital. Available income
the pendency of the appeal in the CTA, the covered the expenses and indebtedness for that year,
assessment was reduced to 26K as a result of a and there is no reason to expect an impending
compromise settlement. But the surtax on working capital deficit. If the CIR determined that the
improperly accumulated profits remained unsolved. corporation is avoiding the tax by accumulating
earnings or profit, it is for the taxpayer to prove the
WON PETITIONER IS LIABLE FOR determination wrong . This applies even when the
ACCUMULATED EARNINGS TAX FOR 1981  corporation is not a mere holding or investment
YES company and does not have unreasonable
accumulation of earning or profits.
In order to determine whether the profits are

accumulated for the reasonable needs to avoid
surtax, it must be shown that the controlling
intention of the taxpayer is manifest at the time of
the accumulation, not intentions declared
subsequently which are mere afterthoughts. And
the profits must be used within a reasonable time
after the close of the taxable year. Petitioners failed
to do so.
RR 2-01 The IAET is being imposed in the nature of a penalty to the corporation for the improper accumulation of its
earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay
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dividends tax on the earnings distributed to them by the corporation.
As a general rule, the IAET shall apply to every corporation formed or availed for the purpose of avoiding the
income tax with respect to its shareholders or the shareholders of any other corporation, by permitting
earnings and profits accumulate instead of being divided or distributed.
As exceptions, the IAET shall not apply to:

1. Publicly-held corporations
2. Banks and other non-bank financial intermediaries; and
3. Insurance companies
4. GPPs
5. Non-taxable joint ventures
6. Enterprises registered under SEZs
RMC Clarification on the imposition of the 10% IAET to taxable income of closely-held domestic corporations,
35-2011 except publicly held corporations, banks, and other non-bank financial intermediaries, insurance companies
and those enumerated under Section 4 of the RR No. 2-2001
Section 29 of the Tax Code provides that a corporation that permits the accumulation of earnings and profits
beyond the reasonable needs of the business, instead of dividing or distributing said profits, is subject to
10% IAET on the improperly accumulated taxable income (IATI).
Corporations using the calendar year basis – accumulated earning under tax shall not apply on improperly
accumulated income as of December 31 1997.
Corporations adopting the fiscal year accounting period – the improperly accumulated income not subject to
this tax shall be reckoned as of the end of the month comprising the 12-month period of fiscal year 1997-
1998.
BIR Abbot Phils., as a wholly-owned subsidiary of Abbot Phils. is considered a publicly-held corporation
Ruling Abbot-US, will be considered as being owned exempt from the Improperly Accumulated Earnings
25-02 proportionately by Abbott-US shareholders. The Tax. This is based on the representation that as of
ownership of a domestic corporation, for purposes the year end 2000, Abbot-US had 101 to 272
of determining whether it is a closely-held shareholders holding a combined 1,545,937,133
corporation or a publicly-held corporation, is shares of common stock, and the twenty largest
ultimately traced to the individual shareholders of shareholders of Abbott-US as of September 30, 2001
the parent company. own an aggregate of 30.1% of Abbot-US issued as
outstanding shares.
WON ABBOT PHILS. IS A PUBLICLY-HELD
CORPORATION  YES Based on Section 4 of Revenue Regulations No. 2-
2001, closely-held corporations are those
corporations at least 50% in value if the outstanding
capital stock or at least 50% of the total combined
voting power of all classes of stock entitled to vote is
owned directly or indirectly by or for not more than 20
individuals. Abbot-Phils. does not fall under the
definition of a closely-held corporation.
Fringe Benefits Tax
Benagli Petitioner, Benaglia, is manager of the hotels of the The petitioner lived at the hotel solely because he
a v. CIR Hawaiian Hotels, Ltd., in Hawaii for which he could not otherwise perform the services required of
(1937) receives his salary as well as a free room and him. The occupation of the premises was imposed
compensated meals. The IRS Commissioner upon him for the benefit of the employer. This is not
included the room and board that he and his wife to say that anytime an employee is fed or lodged by
receive as part of his gross income. Petitioner the employer that it is not taxable income. The court
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argues he has to live in the hotel room as a also looked at the intent of the parties and decided
necessary part of his job as manager of the hotel, the employer never intended the room and board to
and that it should not be counted as constituting form part of his compensation.
part of his salary.
The Board held that a taxpayer employee may
WON THE PETITIONER’S RECEIPT OF FREE exclude the value of food and lodging received from
ROOM AND MEALS FROM HIS EMPLOYER his employer, if he receives it solely for the
SHOULD BE REPORTED AS PART OF HIS convenience of his employer and as a necessary
COMPENSATION AND THUS FORM PART OF incident of the proper performance of his duty. The
HIS GROSS INCOME  NO meals-and-lodging exclusion has been formalized as
§119 in the tax code.
Though this case established the important

doctrine of “convenience of the employer,”
§119(a) of the tax code now has two other
requirements that are needed in order to take
fringe benefit exclusions for meals and lodging.
First, it must be on the business premises.
Second, in the case of lodging, it must be a
condition of taking the job.
RR 3-98 Implements Section 33 of the National Internal Revenue Code (NIRC), as amended by RA No. 8424,
relative to the special treatment of fringe benefits granted or paid by the employer to employees, except rank
and file employees, beginning January 1, 1998. The definition of fringe benefits as well as the determination
of the amount subject to the fringe benefits tax are specified in the Regulations.
The grossed- up monetary value of the fringe benefit represents the whole amount of income received by
the employee which includes the net amount of money or net monetary value of property which has been
received plus the amount of the fringe benefit tax thereon otherwise due from the employee, but paid by the
employer for and in behalf of his employee.
RMC RMC clarifies the tax implications of income or gain derived by an employee from exercise of stock option
88-2012 plans.
Under BIR ruling No. 119-2012, it was ruled that any income or gain derived by the employees from their
exercise of stock options is considered as additional compensation subject to Income tax, and consequently,
withholding taxes on compensation.
Any income or gain derived from stock option plans granted to managerial and supervisory employees
which qualify as fringe benefit tax imposed under Sec. 33 of the NIRC as amended.
The additional compensation or the taxable fringe benefit, is the difference of the book value / fair market
value of the shares, whichever is higher, at the time of the exercise of the stock option and the price fixed on
the grant date. The option has value only if, at the time of the exercise, the stock is worth more than the
price fixed on the grant date. The additional compensation or taxable fringe benefit arises whether the
shares of stocks involved are that of a domestic or foreign corporation.
If the shares to be issued at the exercise of the stock options come from the unissued shares of stock of the
issuing corporation, the original issuance of said shares is subject to DST.
In the event that employees subsequently sell, barter, exchange or otherwise dispose of shares of stock
obtained from their exercise of the stock options, the tax treatment is as follows:
1. If the shares involved are shares in a domestic corp, not traded in the stock exchange, the gain if
any is subject to CGT. Further, the sale or transfer of said shares is subject to DST, upon execution
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of the deed or upon delivery, assignment or indorsement of such shares in favor of another.
2. If the shares involved are shares of stock listed and traded through the Local Stock Exchange, the
transaction is subject to stock transaction tax.
3. If the shares involved are shares of stock in a foreign corporation, the gain, if any is subject to
ordinary Income Tax.
RMC Clarifies the tax treatment of stock option plans and other option plans.
79-2014
Stock option are “shares of stocks” as defined by Section 22(L) of the National Internal Revenue Code
(NIRC) of 1997, as amended, and are taxable as such. In the event that the said option was granted due to
an employee-employer relationship, and where the grantor is the employer and the grantee is the employee,
and no payment was received for the grant of the said option, on the year an option was granted, the grantor
cannot claim deductions for the grant of the stock option.
However, if the option was granted for a price, the full price of the option shall be considered capital gains,
and shall be taxed as such.
Upon issuance of the Option, the same is subject to a Documentary Stamp Tax amounting to P 0.75 on
each P 200.00, or fractional part thereof, of the par value of the stock subject of the option, or in the case of
stock without par value the amount equivalent to 25% of the Documentary Stamp Tax paid upon the original
issue of the stock subject of the option, as provided for in the Section 175 of the NIRC of 1997, as amended.
Any grant of an option for consideration, or transfer of the option is subject to Capital Gains Tax.
If the option was granted without any consideration, the cost base of the option for purposes of computing
capital gains shall be zero.
If the option is transferred by the grantee/ subsequent owner without any consideration, the same shall be
treated as a donation of shares of stock subject to Donor’s Tax. The basis shall be the fair market value of
the option at the time of the donation.
In equity-settled options, the grantee/ subsequent owner pays the exercise price to the grantor and the latter
is obligated to deliver the stocks to the owner of the option.
In the event the option was granted by an employer involving the employer’s own shares of stock or shares
it owns, upon the exercise of the option by a rank-and-file employee, an additional compensation equivalent
to the difference of the book value/fair market value of the shares, whichever is higher, at the time of the
exercise of the stock option and the price fixed on the grant date, shall be recognized and subjected to
Income Tax and consequently to Withholding Tax on compensation. However, if the employee which
exercises the option occupies a supervisory or managerial position, the difference of the book value/fair
market value of the shares, whichever is higher, at the time of the exercise of the stock option and the price
fixed on the grant date, shall be treated as a fringe benefit subject to Fringe Benefit Tax.
In the event the option was granted to a supplier of goods or services, the difference between the book
value/fair market value of the shares, whichever is higher, at the time of the exercise of the stock option and
the price fixed on the grant date, shall be recognized as additional consideration for the services rendered or
goods supplied by the said supplier, and shall be subject to the relevant Withholding Tax at source and
other taxes applicable.
In the event the option was granted to a person, natural or juridical, who is not an employee, or a supplier of
goods or services to the grantor, the difference between the book value/fair market value of the shares,
whichever is higher, at the time of the exercise of the stock option and the price fixed on the grant date shall
be considered a donation, and shall be subject to Donor’s Tax, among others.
The above rules on equity-settlement option also applies in case of cash-settlement options. Cash-settled
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options do not require the actual delivery of stocks. Instead, the market value, at the exercise date, of the
stock is compared to the exercise price, and the difference (if in a favorable direction) is paid by the grantor
to the holder of the option.
The issuing corporation shall submit to the Revenue District Office where it is registered a statement under
oath within 30 days from the grant of the option indicating the following:
1. Terms and condition of the stock option
2. Names, TINs, positions of the grantees
3. Book value, fair market value, par value of the shares subject of the option at the grant date
4. Exercise price, exercise date and/or period
5. Taxes paid on the grant, if any
6. Amount paid for the grant, if any
During the exercise period, the issuing corporation shall file a report on or before the 10th day of the month
following the month of exercise stating therein the following:
1. Exercise date
2. Names, TINs, positions of those who exercised the option
3. Book value, fair market value, par value of the shares subject of the option at the exercise date/s
4. Mode of settlement (i.e. cash, equity)
5. Taxes withheld on the exercise, if any
6. Fringe Benefits Tax paid, if any
Transfer Pricing
CIR v. FDC entered into several transactions: The Court held that Section 43 (now Section 50)
Filinves 1. It extended advances to its affiliates for gives the BIR the power to distribute, apportion or
t operational purposes. allocate gross income or deductions between or
(2011) 2. It entered into a deed of exchange with FLI among such organization, trade or business. FDC
where he transferred a building in and its affiliates fall under the definition of “controlled”
exchange for shares of stock. and “controlled taxpayer.” Aside from owning
3. It entered into a shareholder’s agreement significant portions of the shares of stock of FLI, FAI,
with RHPL for a formation of a joint venture DSCC, and FCI, the fact that FDC extended
company. substantial sums of money as cash advances to its
It was assessed by the BIR for deficiency income said affiliates for the purpose of providing them
taxes for these transactions. With regard to the financial assistance for their operational and capital
advances, it is being assessed for “theoretical expenditures seemingly indicate that the situation
interests” and Documentary Stamp Taxes. There sought to be addressed by the subject provision
really was no interest stipulated between FDC and exists.
its affiliates but the BIR basically assumed that
there was and invoked Section 43 of the old NIRC CIR’s power to distribute, apportion, or allocate gross
which provides that: (i)n any case of two or more income or deductions between or among controlled
organizations, trades or businesses (whether or not taxpayers may likewise be exercised whether or not
incorporated and whether or not organized in the fraud inheres in the transaction/s under scrutiny. For
Philippines) owned or controlled directly or indirectly as long as the controlled taxpayer’s taxable income is
by the same interests, the Commissioner of Internal not reflective of that which it would have realized had
Revenue is authorized to distribute, apportion or it been dealing at arm’s length with an uncontrolled
allocate gross income or deductions between or taxpayer, the CIR can make the necessary
among such organization, trade or business, if he rectifications in order to prevent tax evasion.
determines that such distribution, apportionment or
allocation is necessary in order to prevent evasion Despite the broad parameters provided, however, we
of taxes or clearly to reflect the income of any such find that the CIR’s powers of distribution,
organization, trade or business. According to the apportionment or allocation of gross income and
CIR, since FDC resorted to interest-bearing fund deductions under Section 43 of the 1993 NIRC and
borrowings from commercial banks. Since Section 179 of Revenue Regulation No. 2 does not
considerable interest expenses were deducted by include the power to impute “theoretical interests” to
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FDC when said funds were borrowed, the CIR the controlled taxpayer’s transactions. There must
theorizes that interest income should likewise be be proof of the actual, or at the very least,
declared when the same funds were sourced for the probable receipt or realization by the controlled
advances FDC extended to its affiliates. taxpayer of the item of gross income sought to be
distributed, apportioned, or allocated by the CIR.
WON THE ADVANCES EXTENDED BY
RESPONDENT TO ITS AFFILIATES ARE Record yielded no evidence of actual or possible
SUBJECT TO INCOME TAX  NO showing that the advances of FDC resulted to the
interests subsequently assessed. FDC’s Fund
Management Department Manager testified that the
advances were sourced from the corporation’s rights
offering in 1995 as well as its sale of its investment in
Bonifacio Land in 1997. Thus, not from the bank
loans. But they are liable for documentary stamp
taxes for such transactions as they qualify as loan
agreements.
Her Glaxo Canada acted as a secondary manufacturer A proper application of the arm’s length principle
Majesty and marketer of patented drug products. Between requires that regard be had for the “economically
the 1990 and 1993, they purchased the pharmaceutical relevant characteristics” of the arm’s length and non-
Queen ingredient ranitidine for upwards of $1500 for the arm’s length circumstances to ensure they are
v. patented drug Zantac, pursuant to a Licensing “sufficiently comparable.” Where there are no related
GlaxoS Agreement with parent company Glaxo Holdings, transactions or where related transactions are not
mithKli while generics pharmas were purchasing the same relevant to the determination of the reasonableness
ne, Inc. ingredient for only $200-$300 for their generic of the price in issue, a transaction-by-transaction
(2012) drugs. They were reassessed for the taxation years approach may be appropriate. However,
in question and their income was raised by some “economically relevant characteristics of the
$51M on the basis that it had paid more than a situations being compares” may make it necessary to
reasonable amount for the purchases. The Tax consider other transactions that impact the transfer
Court affirmed the minister’s reassessment, price under consideration. In each case, it is
employing the Comparable Uncontrolled Price necessary to address this situation by considering the
method in directly comparing the purchase price of relevant circumstances and, if required, transactions
Glaxo with those of the generics companies in other than the purchasing transactions must be taken
finding the purchase price paid to be unreasonable. into account.
The Court of Appeals, however, found that the Tax
Court had erred in not considering the Licensing In this case, Glaxo Canada was paying for at least
Agreement in determining whether the amount paid some of the rights and benefits under the License
was reasonable. The Court of Appeals instead Agreements part of the purchase prices for rantidine
adopted the Reasonable Business Person Test, from Adechsa. As such, the License Agreement could
which required looking into the circumstances that not be ignored in determining the reasonable amount
an arm’s length purchaser would consider relevant paid to Adechsa, which applies not only to payment
when deciding what price to pay. for goods but also payment for services. Considering
the License and Supply Agreements together offers a
WON THE LICENSING AGREEMENT SHOULD realistic picture of the profits of Glaxo Canada. The
BE CONSIDERED IN DETERMINING THE prices paid by Glaxo Canada to Adechsa were
REASONABLENESS OF THE PURCHASE PRICE payment for a bundle of at least some rights and
PAID  YES benefits under the License Agreement and product
under the Supply Agreement. The generic
comparators used thus do not reflect the economic
and business reality of Glaxo Canada and, at least
without adjustment, do not indicate the price that
would be reasonable in the circumstances had Glaxo
Canada and Adchesa been dealing at arm’s length,
RR 2- Transfer pricing - pricing of cross-border, intrafirm transactions between related parties or associated
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2013 enterprises.
 Occurs between a taxpayer of a country with high income taxes and a related or associated
enterprise of a country with low income tax.
Arm’s length principle - internationally recognized standard for transfer pricing between associated
enterprises.
 Requires that transactions with a related party must be made under comparable conditions and
circumstances as a transaction with an independent party
3-steps
1. Conduct a comparability analysis
2. Identify the tested party and appropriate transfer pricing method
3. Determine the arm’s length results
RMO This RMO prescribes the policies and guidelines on the determination of taxable income on inter-company
63-99 loans or advances pursuant to Section 50 of the Tax Code, as amended. The arm’s length bargaining
standard will be used as the ultimate test for determining the correct gross income and deductions between
two or more enterprises under common control.
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11. Special Entities

Proprietary Educational Institutions and Hospitals
CIR v. St. Luke’s Medical Center is a hospital organized as The Court holds that Section 27(B) of the NIRC does
St. a non-stock and non-profit corporation. The BIR not remove the income tax exemption of proprietary
Luke’s assessed St. Luke's deficiency taxes for 1998, non-profit hospitals under Section 30(E) and (G).
Medical comprised of deficiency income tax, value-added Section 27(B) on one hand, and Section 30(E) and
Center, tax, withholding tax on compensation and expanded (G) on the other hand, can be construed together
Inc. withholding tax. St. Luke’s protested against the without the removal of such tax exemption. The last
(2012) assessment made but BIR failed to act on it. The paragraph of Section 30 provides that if a tax exempt
BIR argued before the CTA that Section 27(B) of charitable institution conducts “any” activity for profit,
the NIRC, which imposes a 10% preferential tax such activity is not tax exempt even as its not-for-
rate on the income of proprietary non-profit profit activities remain tax exempt. Thus, even if the
hospitals, should be applicable to St. Luke's. The charitable institution must be “organized and
BIR claimed that St. Luke's was actually operating operated exclusively” for charitable purposes, it
for profit in 1998 because only 13% of its revenues is nevertheless allowed to engage in “activities
came from charitable purposes. St. Luke’s conducted for profit” without losing its tax
countered that the BIR should not consider its total exempt status for its not-for-profit activities.
revenues, because its free services to patients was
65.20% of its 1998 operating income. It also The Court finds that St. Luke’s is a corporation that is
claimed that its income does not inure to the benefit not “operated exclusively” for charitable or social
of any individual. St. Luke's maintained that it is a welfare purposes insofar as its revenues from paying
non-stock and non-profit institution for charitable patients are concerned. This ruling is based not only
and social welfare purposes under Section 30(E) on a strict interpretation of a provision granting tax
and (G) of the NIRC. It argued that the making of exemption, but also on the clear and plain text of
profit per se does not destroy its income tax Section 30(E) and (G). Section 30(E) and (G) of the
exemption. NIRC requires that an institution be “operated
exclusively” for charitable or social welfare purposes
WON THE IMPOSITION OF 10% TAX UNDER to be completely exempt from income tax. An
SEC. 27(B) REMOVES THE TAX EXEMPTION institution under Section 30(E) or (G) does not
GRANTED UNDER SEC. 30(E) AND (G) OF THE lose its tax exemption if it earns income from its
TAX CODE  NO for-profit activities. Such income from for-profit
activities, under the last paragraph of Section 30, is
merely subject to income tax, previously at the
ordinary corporate rate but now at the preferential
10% rate pursuant to Section 27(B).
RMC This RMC circularizes the relevant portions of the Supreme Court decision in Commissioner of Internal
67-2012 Revenue v. St. Luke’s Medical Center Inc. Based on the said Supreme Court Decision, the following
provisions are specified in the Circular:
a. Private non-profit hospitals and educational institutions whose gross income from unrelated trade,
business or other activity does not exceed 50% of their total gross income derived from all sources
shall pay a tax of 10% on their taxable income except those covered by Section 27(D) of the
National Internal Revenue Code (NIRC). However, the following shall be subject to the tax
prescribed under Section 27(A) of the NIRC or the regular corporate tax rate on their taxable
income, except those covered by Section 27(D) of the NIRC:
i. Private non-profit hospitals and educational institutions whose gross income from unrelated
trade, business or other activity exceeds 50% of their total gross income derived from all
sources, or
ii. Hospitals and educational institutions claiming to be within the coverage of Section 27[B] of
the NIRC that fail to meet the above definition of “proprietary” and “non-profit”
In all cases, whether their Income Tax rates fall under Section 27[A] or 27[B] of the NIRC, the
aforesaid institutions are likewise subject to other applicable taxes, if warranted.
b. Non-stock, non-profit corporations or associations, which claim to be charitable institutions, yet, they
fail to meet the definition of “charitable” institutions, are not entitled to Income Tax-exemption under
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Section 30[E] of the NIRC, as amended, and their taxable income shall be subject to ordinary 30%
corporate rate under Section 27(A) of the NIRC. They are likewise subject to other applicable taxes,
if warranted.
c. Non-stock, non-profit corporations or associations, which claim to be charitable or social welfare but
are not organized and operated “exclusively” for charitable or social welfare purposes are not
entitled to the Income Tax- exemption under Sections 30[E] and [G] of the NIRC, as amended, and
their taxable income shall be subject to ordinary 30% corporate rate under Section 27(A) of the
NIRC, as amended. They are likewise subject to other applicable taxes, if warranted.
d. Activities for profit should not escape the reach of taxation. Being a non-stock and non-profit
corporation does not, by this reason alone, completely exempt an institution from tax. An institution
cannot use its corporate form to prevent its profitable activities from being taxed.
The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only
on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section
30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively” for
charitable or social welfare purposes to be completely exempt from Income Tax. An institution under Section
30(E) and (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income
from for-profit activities, under the last paragraph of Section 30, is merely subject to Income Tax, previously
at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).
St. Luke’s fails to meet the requirements under Section 30[E] and [G] of the NIRC to be completely tax
exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27[B] of the
NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested
pursuant to its corporate purposes. St. Luke’s, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit activities.
All concerned revenue officials and employees are directed to fully implement the decision of the Supreme
Court in G.R. Nos. 195909 and 195960 by ensuring that the proper taxes are collected from private non-
profit hospitals and educational institutions starting from January 1, 1998.
RMC This RMC clarifies the tax exemptions of non-stock, non-profit corporations and non-stock non-profit
76-2003 educational institutions.
Non-stock, non-profit organizations enumerated under Section 30 of the Tax Code of 1997 are exempt from
the payment of Income Tax on income received by them as such organization. However, they are subject to
the corresponding internal revenue taxes imposed under the Tax Code of 1997 on their income derived from
any of their properties, real or personal, or any activity conducted for profit regardless of the disposition
thereof (i.e. rental payment from their building/premises), which income should be returned for taxation.
In addition, their interest income from currency bank deposits and yield or any other monetary benefit from
deposit substitute instruments and from trust funds and similar arrangement, and royalties derived from
sources within the Philippines are subject to the 20% final withholding tax: provided, however, that interest
income derived by them from a depository bank under the expanded foreign currency deposit system shall
be subject to 7 1⁄2% final withholding tax.
The exemption of non-stock, non-profit educational institutions, on the other hand, refers to internal revenue
taxes imposed by the National Government on all revenues and assets used actually, directly and
exclusively for educational purposes.
Revenues derived from assets used in the operation of cafeterias/canteens and bookstores are exempt from
taxation provided they are owned and operated by the educational institution as ancillary activities and the
same are located within the school premises. Private educational institutions shall also be exempt from
Value-Added Tax, provided they are accredited as such either by the Department of Education, Culture and
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Sports or by the Commission on Higher Education. However, this exemption does not extend to their other
activities involving the sale of goods and services.
Said educational institutions shall, however, be subject to internal revenue taxes on income from trade,
business or other activity, the conduct of which is not related to the exercise or performance by such
educational institutions of their educational purposes or functions.
Unlike non-stock, non-profit corporations, interest income of such educational institutions from currency
bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in
pursuance of their purposes as an educational institution, are exempt from the 20% final tax and 71⁄2% tax
on interest income under the expanded foreign currency deposit system imposed under Section 27(D)(1) of
the Tax Code of 1997, subject to compliance with the conditions that as a tax- exempt educational
institution, they shall on an annual basis submit to the Revenue District Office concerned an annual
information return and duly audited financial statement, together with documents specified in the Circular.
Both non-stock, non-profit organizations and educational institutions are subject to the payment of the
annual registration fee of P500.00. They are also required to issue duly registered receipts or sales or
commercial invoices for each sale or transfer of merchandise or for services rendered which are not directly
related to the activities for which they are registered.
GOCCs
PAGCO In the 2011 case of PAGCOR v. BIR, the Court On gaming income:
R v. BIR ruled that PAGCOR is no longer exempt from
(2014) paying income tax since RA 9337 was passed, but There is no need for Congress to grant tax exemption
it is still exempt from paying 10% VAT. In 2013, to petitioner with respect to its income in gaming
PAGCOR filed a Motion for Clarification based on operations as the same is already exempted from all
the 2011 decision and a TRO against the taxes of any kind of whatever form under its Charter,
implementation of RMC 33-2013 on “Income Tax except the 5% franchise tax imposition. Basically,
and Franchise Due from PAGCOR, its Contractees income tax of gaming operations is exempted in the
and Licensee.” The RMC subjected PAGCOR’s first place under its Charter. To assume that its
income from operations and licensing of gambling, exemption under another law (which exemption would
casinos, gaming clubs and other similar recreation be subsequently withdrawn) would put it PAGCOR in
or amusement places, gaming pools and other an injurious position.
related operations to corporate income tax under
the NIRC. In this 2014 case, PAGCOR sought to On income from operation of related services:
declare Section 1 of RA 9337 insofar as it amends
the NIRC by excluding PAGCOR from the list of PAGCOR’s charter is not deemed amended by RA
GOCCs exempted from liability of corporate income 9337. With respect to PAGCOR’s income on
tax. PAGCOR claims that the RMC is an erroneous operations of related services, it is subject to income
interpretation and application of the 2011 decision tax only. The 5% franchise tax finds no application
(PAGCOR v. BIR). with respect to income from other related services in
view of the express provision of Section 14 (5) of PD
WON PAGCOR’S GAMING INCOME IS SUBJECT 1869. Hence, there is no basis for the imposition of
TO: franchise tax on income from operations from other
(A) 5% FRANCHISE TAX  YES related services.
(B) INCOME TAX  NO
WON PAGCOR’S INCOME FROM OPERATION

OF RELATED SERVICES IS SUBJECT TO:
(A) 5% FRANCHISE TAX  NO
(B) INCOME TAX  YES
Exempt Corporations
Dumag Petitioner Dumaguete Cathedral Credit Cooperative The Court finds merit in the petition. On November
uete (DCCCO) is a credit cooperative duly registered 16, 1988, the BIR declared in BIR Ruling No. 551-888
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Cathedr with and regulated by the Cooperative Development that cooperatives are not required to withhold taxes
al Authority (CDA). On April 24, 2003, petitioner on interest from savings and time deposits of their
Credit received from the BIR Regional Director, Sonia L. members. The Court holds that there is nothing in the
Cooper Flores, two Letters of Demand ordering petitioner to ruling to suggest that it applies only when deposits
ative v. pay the deficiency withholding taxes, inclusive of are maintained in a bank. Rather, the ruling clearly
CIR penalties, for the years 1999 and 2000 in the states, without any qualification, that since interest
(2010) amounts of P1,489,065.30 and P1,462,644.90, from any Philippine currency bank deposit and yield
respectively. On May 9, 2003, petitioner protested or any other monetary benefit from deposit
the Letters of Demand and Assessment Notices substitutes are paid by banks, cooperatives are not
with the CIR. The CTA First Division cancelled the required to withhold the corresponding tax on the
assessment for deficiency withholding taxes on the interest from savings and time deposits of their
honorarium and per diems of petitioners Board of members. This interpretation was reiterated in BIR
Directors, security and janitorial services, Ruling [DA-591-2006] dated October 5, 2006, upon
commissions and legal and professional fees, but the request of the cooperatives for a confirmatory
affirmed the assessments for deficiency withholding ruling on several issues, among which is the alleged
taxes on interests. Thereafter, the CTA En Banc exemption of interest income on members deposit
denied the MR. (over and above the share capital holdings) from the
20% final withholding tax.
WON PETITIONER IS LIABLE TO PAY THE
DEFICIENCY WITHHOLDING TAXES ON
INTEREST FROM SAVINGS AND TIME
DEPOSITS OF ITS MEMBERS  NO
CIR v. Vicente G. Sinco organized VG Sinco Educational It is too sweeping if not unfair to conclude that part of
G. Institution the income of the VGSEI as an institution inured to
Sinco (VGSEI) in order to establish and operate the benefit of one of its stockholders simply because
Educati Foundation College of Dumaguete. VGSEI is a non- part of the income was carried in its books as
onal stock corporation and was capitalized by Sinco and accumulated salaries of its president and teacher.
Corp. his family. The CIR assessed an aggregate sum of Much less can it be said that the payments made by
(1956) P5,364.77, which was paid by the college. 2 years the college to the Community Publishers, Inc.
later, VGSEI commenced an action in the CFI of redounded to the personal benefit of Sinco simply
Negros Oriental for the refund alleging that it is because he is one of its stockholders.
exempt from income tax under section 27 (e) of the
NIRC --- that it is exempt from the payment of the It has been established that the VGSEI is a non-
income tax because it is organized and maintained profit institution and since its organization it has
exclusively for the educational purposes and no never distributed any dividend or profit to its
part of its net income inures to the benefit of any stockholders. Of course, part of its income went to
private individual. However, the CIR maintained that the payment of its teachers or professors and to the
part of the net income accumulated by the VGSEI other expenses of the college incident to an
inured to the benefit of V. G. Sinco, president and educational institution but none of the income has
founder of the corporation (and also a teacher), and ever been channeled to the benefit of any individual
therefore the corporation is not entitled to the stockholder.
exemption prescribed by the law. CIR also showed
that the corporation had accounts payable to V. G.
Sinco and Community Publishers, Inc., to which
Sinco is the biggest stockholder.
WON VGSEI IS EXEMPT  YES

RR 13- Implementing Regulations of RA 9856 (REIT Law) “The Real Estate Investment Trust Act of 2009”
2011
REIT – Real Estate Investment Trust
 established in accordance with the Corporation Code of the Philippines
 rules and regulations promulgated by SEC
 Purpose: owning income-generating real estate assets
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 Except as otherwise provided, a corporation becomes a REIT and qualified to avail of the incentives
and privileges of the Act when:
 Its REIT plan is rendered effective by the SEC; and
 Its listing as a REIT is approved by the Exchange.
 Under RA 9856, REITs and their shareholders are entitled to various forms of tax incentives and
privileges. Below are some of the salient features of the implementing regulations:
Some Salient Features:

 For tax purposes: Real estate owned by REIT is considered ordinary assets.
 Minimum public ownership requirement. A REIT can avail of the tax incentives if it maintains the
minimum public ownership requirement of 40% for the first two years and 67% on or before the end
of the third year and thereafter.
 Income taxation of REIT
 A REIT shall be taxable on income derived from sources within and without the Philippines at
30% based on taxable net income.
 To arrive at net taxable income, REITs shall enjoy a deduction for dividends actually distributed
out of its distributable income.
 A REIT is not subject to minimum corporate income tax (MCIT) Summary of taxes: A REIT shall be
subject to the following taxes:
a. 20% final Income Tax on interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements and
royalties derived from sources within the Philippines
b. 7.5% final Income Tax on interest income derived from a depository bank under the expanded
foreign currency deposit system
c. Capital Gains Tax on sales or exchanges of shares of stock d. Corporate Income Tax and VAT
on real estate transactions
d. Documentary Stamp Tax on transactions not otherwise qualified for DST incentive (if qualified,
reduced by 50%)
e. All other taxes not otherwise expressly exempted by any law
 Establishment of escrow account. A REIT is required to create an escrow with an Authorized Agent
Bank (AAB) where the REIT shall place the income tax collectible if it will be disqualified from
deducting the dividends it has declared for the first and second year of its existence should it fail to
attain the minimum ownership of 67%. The escrowed amount covering the income tax waived shall
be released to the REIT only when it shows proof of compliance with the increase of minimum
ownership to 67% within three years from its listing; otherwise, it will be released in favor of the BIR.
 DST on transfer of real property. The transfer of real property to REITs, including the sale or transfer
of any and all security interest, shall be subject to a reduced rate at 50% of the applicable
documentary stamp tax (DST). The 50% DST granted as incentive on transfer of real property to
REITs shall be placed in an escrow to be created with an AAB. The amount held in escrow shall be
released to the REIT only upon submission of proof of listing within the two-year period; otherwise, it
shall be released in favor of the government.
 VAT on transfer of property for shares of stock. The transfer or exchange of real property for shares
of stock in a REIT pursuant to Section 40(c)(2) of the Tax Code shall be subject to value added tax
(VAT).
 Taxation of dividends of Overseas Filipino Workers (OFWs). The dividends received by an OFW
shall be exempt from the dividends tax for seven years from the effectivity of Revenue Regulations
No. (RR) 13- 2011.
 A REIT availing of tax incentives under the Act shall not be entitled to avail of incentives for the
same types of taxes that may be available under special laws.
RMC Section 26 (H) of the 1977 Tax Code, provided that clubs which are organized and operated exclusively for
35-2012 pleasure, recreation, and other non-profit purposes were exempt from income tax. This provision, however,
was deleted in the 1997 Tax Code, as amended. Hence, the income of recreational clubs from whatever
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source, including but not limited to membership fees, assessment dues, rental income, and service fees are
subject to income tax.
Also, Section 105 of the 1997 Tax Code provides that any person who engage in the regular conduct or
pursuit or commercial or an economic activity, regardless of whether or not the person engaged therein is a
nonstock, nonprofit private organization, or government entity is subject to VAT. Thus, from the said
provision, even a nonstock, non-profit organization is liable to pay VAT on the sale of goods or services
irrespective of the disposition of its net income.
RMC 9- Homeowners’ Association collection of membership fees:
2013 1. FORMS PART OF THEIR GROSS INCOME, HENCE, SUBJECT TO TAX.
 This is because a homeowners’ association furnishes its members with benefits, advantages
and privileges in return for such payments; and
2. SUBJECT TO VALUE-ADDED TAX (VAT)
3. BUT may be EXEMPT from Income Tax and VAT IF:
a. The homeowners’ association must be a duly constituted “Association” as defined under
Section 3(b) of RA No. 99045;
b. The local government unit having jurisdiction over the homeowners’ association must issue a
certification:
o identifying the basic services being rendered by the homeowners’ association
o stating its lack of resources to render such services
but such services must be “basic community services and facilities” referring to services and
facilities that redound to the benefit of all homeowners ex. security; street and vicinity lights;
maintenance, repairs and cleaning of streets; garbage collection and disposal; and other
similar services and facilities.; and
c. The homeowners’ association must present proof (i.e. financial statements) that the income
and dues were used for such basic services.
RMC Non-stock and/or non-profit corporations/associations/organizations are EXEMPT from INCOME TAX as
51-2014 long as its earnings or assets SHALL NOT INURE to the benefit of any of its trustees, organizers, members,
or any specific person.
NOT EXEMPT IF:

 They paid compensation, salaries, or honorarium to its trustees or organizers;
 They paid exorbitant or unreasonable compensation to its employees;
 They have provisions of welfare aid and financial assistance to its members.
 Donation to any person or entity (except donations made to other entities formed for the purpose/
purposes similar to its own);
 The purchase of goods or services for amounts over the fair market value from an entity in which
one or more of its trustees, officers or fiduciaries has an interest; and
 When upon dissolution and satisfaction of all liabilities, its remaining assets are distributed to its
trustees, organizers, officers or members. Its assets must be dedicated to its exempt purpose; NOT
to inure to the benefits of any of its members.
Special 1. Executive Order 226 (Article 39) or the Omnibus Investment Code
laws
grantin Registered Enterprises are granted an Income Tax Holiday as follows:
g a. For six (6) years from commercial operation for pioneer firms and four (4) years for
exempt non- pioneer firms, new registered firms shall be fully exempt from income taxes
status levied by the National Government. This tax exemption will be extended for another
to year in each of the following cases:
certain b. the project meets the prescribed ration of capital equipment to number of workers
types of set by the BOI
Corpor c. utilization of indigenous raw materials at rates set by the BOI
ations d. the net foreign exchange savings or earnings amount1
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e. For a period of three (3) years from commercial operation, registered expanding
firms shall be entitled to an exemption from income taxes levied by the National
Government.2
2. RA 7916 (Sections 23 to 25) or the Special Economic Zone Act

SEC. 23. Fiscal Incentives. – Business establishments operating within the ECOZONES shall be entitled to
the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export
Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known
as the Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as Inputs shall enjoy the same benefits provided
for in the Export Development Act of 1994.
SEC. 24. Exemption from National and Local Taxes.- Except for real property taxes on land owned by
developers, no taxes, local and national, shall be imposed on business establishments operating within the
ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within
the ECOZONE shall be paid and remitted as follows:
 3% to the National Government;
 2% which shall be directly remitted by the business establishments to the treasurer’s office of the
municipality or city where the enterprise is located.
SEC. 25. Applicable National and Local Taxes. – All persons and services establishments in the ECOZONE
shall be subject to national and local taxes under the National Internal Revenue Code and the Local
Government Code.
3. RA 9178 or the Barangay Micro Business Enterprises Act

All BMBEs shall be exempt from tax for income arising from the operations of the enterprise.
Section 3. Definition of Terms – As used in this Act, the following terms shall mean:
2. "Barangay Micro Business Enterprise," hereinafter referred to as BMBE, refers to any business
entity or enterprise engaged in the production, processing or manufacturing of products or
commodities, including agro-processing, trading and services, whose total assets including those
arising from loans but exclusive of the land on which the particular business entity's office, plant and
equipment are situated, shall not be more than Three Million Pesos (P3,000,000.00) The Above
definition shall be subjected to review and upward adjustment by the SMED Council, as mandated
under Republic Act No. 6977, as amended by Republic Act No. 8289.
For the purpose of this Act, "service" shall exclude those rendered by any one, who is duly licensed
government after having passed a government licensure examination, in connection with the
exercise of one's profession.
4. RA 9593 (Section 4 & 86, 88) or Tourism Act
1. New enterprises in Greenfield and Brownfield Tourism Zones 3shall, from the start of business
operations, be exempt from tax on income for a period of six (6) years. This income tax holiday may
be extended if the enterprise undertakes a substantial expansion or upgrade of its facilities prior to
1
No registered pioneer firm may avail of this incentive for a period exceeding eight (8) years.
2
During the period within which this incentive is availed of by the expanding firm it shall not be entitled to additional deduction for incremental labor
expense.
3
A “Greenfield Tourism Zone” refers to a new or pioneer development, as determined by the TIEZA (Tourism Infrastructure and Enterprise Zone
Authority) while a “Brownfield Tourism Zone” refers to an area with existing infrastructure or development as determined by the TIEZA.
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4
the expiration of the first six (6) years.
2. These enterprises shall likewise be allowed to carry over as deduction from the gross income for the
next six (6) consecutive years immediately following the year of the loss, their net operating losses
for any taxable year immediately preceding the current taxable year which had not been previously
offset as deduction from gross income.
3. An existing enterprise in a Brownfield Tourism Zone shall be entitled to avail of a non-extendible
income tax holiday if it undertakes an extensive expansion or upgrade of facilities.5
4. In lieu of all other national and local taxes, license fees, imposts and assessments, except real estate
taxes and such fees as may be imposed by the TIEZA, a new enterprise shall pay a tax of five
percent (5%) on its gross income earned, which shall be distributed as follows:
- 1/3 to be proportionally allocated among affected LGUs
- 1/3 to the National Government; and
- 1/3 to the TIEZA
5. RA 9856 or the Real Estate Investment Trust (REIT) Act
A REIT6 shall be subject to income tax on its taxable net income defined in the Act as the pertinent items of
gross income less all allowable deductions, less the dividends distributed by the REIT out of its
distributable income.7 In no case, shall the REIT be subject to MCIT.
Note, however, that if the REIT (1) fails to maintain its status as a public company as defined in the Act; (2)
fails to maintain the listed status of the investor securities on the Exchange; and (3) fails to distribute at least
90% of its distributable income, the income tax shall be imposed on taxable net income not as defined in the
Act but as defined in the Tax Code.
(see RR 13-2011 [JULY 25, 2011])
6. RA 10165 (Sections 3-5 & 22-24 only)
Section 3. Definition of Terms. – For purposes of this Act, the following terms are defined:
(a) Agency refers to any child-caring or child-placing institution licensed and accredited by the
Department of Social Welfare and Development (DSWD) to implement the foster care program.
Section 23. Incentives to Agencies. – Agencies shall be entitled to the following tax incentives:
(a) Exemption from Income Tax. – Agencies shall be exempt from income tax on the income derived
by it as such organization pursuant to Section 30 of the NIRC of 1997, as implemented by Revenue
Regulation (RR) No. 13-98; and
(b) Qualification as a Donee Institution. – Agencies can also apply for qualification as a donee
institution.
4
This extension shall consider the cost of such expansion or upgrade in relation to the original investment, but shall in no case exceed an additional six
(6) years.
5
Such an income tax holiday shall consider the cost of such expansion or upgrade in relation to the original investment, but shall in no case exceed six
(6) years to be counted from the time of completion of the expansion or upgrade.
6
A REIT is a stock corporation established principally for the purpose of owning income - generating real estate assets.
7
Dividends are allowed deductions.
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12. Capital Gains and Losses

Capital Assets/Income
Calasan Ursula Calasanz inherited a 1.6M sqm agricultural The spouses are real estate dealers under the Tax
z v. CIR land from her father which she subdivided and Code because of the business element of
(1986) introduced improvements unto so she could development, of the amount of contract receivables
liquidate the inheritance and sell them. The land which indicated the number, frequency and continuity
was converted into a residential subdivision called of sales and of the lots being advertised as part of the
Don Mariano Subdivision. Ursula and her husband residential subdivision.
paid capital gains tax on the profit they received
from sale of the lots but the CIR assessed them for As the spouses were deemed as real estate dealers,
deficient income tax claiming that the gains from the the properties are deemed to be property held by
sale should be taxed as ordinary income because the taxpayer primarily for sale to customers in the
the spouses engaged in business as real estate ordinary course of his trade or business, one of
dealers, as defined under the Tax Code. the exceptions in the definition of a capital asset. If for
the liquidation of a capital asset, the property owner
WON THE SPOUSES ARE REAL ESTATE enters the real estate business and carries on the
DEALERS  YES sale in the manner in which such a business is
ordinarily conduct, the liquidation constitutes a
WON THE GAINS FROM THE SALE OF THE business and a sale in the ordinary course of
LOTS WERE TO BE TAXED AS CAPITAL GAINS such a business and the preferred tax status is
OR ORDINARY INCOME  ORDINARY lost.
BIR A letter was sent by the Sentosa Park Property It is necessary to first determine the character of the
Ruling Development real property being sold.
27-02 Corporation requesting for a ruling on the tax 1. If the real property is a land or building
consequences on a sale of real estate property by a which is not actually used in the business
corporation (i.e. when both buyer and seller corp of the seller-corporation and is treated as a
are engaged in real estate business; when corp capital asset:
engaged in real estate sells to not engaged; when a. final tax: 6%
corp not engaged to real estate sells to engaged; b. NOTE: applies, whether or not the
and when corp engaged in real estate sells to seller-corporation is engaged in real
individual buyer). However, it did not specify in each estate business [Sec. 27(D)(5), Tax
of these instances, whether the property being sold Code]
is an ordinary asset or a capital asset in the hands 2. If the real property being sold is an
of the seller. ordinary asset, withholding tax rates under
Sec. 2.57.2 of RR No. 2-98 shall apply (see
HOW TO DETERMINE THE TAX comprehensive digest). The rate of withholding
CONSEQUENCES ON A SALE OF REAL tax will depend on whether:
ESTATE PROPERTY BY CORPORATION a. the seller is exempt or taxable;
[ENGAGED ON REAL ESTATE BUSINESS] b. whether the seller is habitually engaged
in real estate business or not; and
c. if the seller is habitually engaged in real
estate business, the gross selling price.
Also, registration with the HLURB or HUDCC shall be

sufficient for a seller/transferor to be considered as
habitually engaged in the real estate business. If the
seller/transferor is not registered with HLURB or
HUDCC, he/it may prove that he/it is engaged in the
real estate business by offering other satisfactory
evidence (for example, he/it consummated during the
preceding year at least six taxable real estate
transactions, regardless of amount).
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Ordinary Assets/Income
Tuason Petitioner inherited two contiguous parcels situated The record discloses that the petitioner owned other
v. on Pureza and Sta. Mesa streets in Manila. The real properties which he was putting out for rent, from
Lingad lands were subdivided into 29 lots. The 28 lots were which he periodically derived a substantial income,
(1974) used for rent while the 29th was not leased due to its and for which he had to pay the real estate dealer’s
low elevation. The 28 lots were eventually sold. The tax (which he used to deduct from his gross income).
29th lot, after doing the necessary filling of land, was Under the circumstances, the petitioner’s sales of the
sold on a 10-year installment basis. The petitioner several lots forming part of his rental business cannot
paid the taxes for his gains by treating the sale as be characterized as other than sales of non-capital
capital gains sales. During such times, the assets. The sales concluded on installment basis of
Commissioner attested to the correctness of his the subdivided lots comprising Lot 29 do not deserve
payment. However, in 1963, the Commissioner a different characterization for tax purposes. Thus it is
reversed itself and required him to pay deficiency also considered a sale on ordinary asset. However,
taxes because the income he received should be the court sees that there is no need to collect
computed as a sale on ordinary asset not capital surcharges as he relied in good faith to the opinions
asset. (See notes at the bottom on why it is of the Commissioner of BIR.
advantageous to be taxed at sale of capital assets
rather than ordinary asset). PM Reyes:
In this case, the activities of A are indistinguishable
WON THE PROPERTIES IN QUESTION WHICH from those invariably employed by one engaged in
THE PETITIONER HAD INHERITED AND the business of selling real estate. One strong factor
SUBSEQUENTLY SOLD IN SMALL LOTS TO is the business element of development which is very
OTHER PERSONS SHOULD BE REGARDED AS much in evidence. A did not sell the land in the
CAPITAL ASSETS  NO condition in which he acquired it. In the course of
selling the subdivided lots, A engaged in the real
estate business and accordingly, the gains from the
sale of the lots are ordinary income taxable in full.
Limitation on Capital Loss

China Petitioner China Banking Corporation made a 53% Section 29(d)(4)(B) of the NIRC conveys that the loss
Bankin equity investment in the First CBC Capital Asia, sustained by the holder of the securities, which are
g Ltd. (a Hong Kong Subsidiary) in 1980. By 1986, capital assets (to him), is to be treated as a
Corpor First CBC Capital Asia has become insolvent. CAPITAL LOSS as if incurred from a sale or
ation v. Subsequently, with the approval of Bangko Sentral, exchange transaction.
CA petitioner CBC wrote off as being worthless its
(2000) investment in First CBC Capital (Asia), Ltd., in its Moreover, Section 33(c) of the NIRC provides that, “x
1987 Income Tax Return and treated it as a bad x x capital losses are allowed to be deducted only
debt or as an ordinary loss deductible from its to the extent of capital gains, i.e., gains derived
gross income. Respondent CIR disallowed the from the sale or exchange of capital assets, and
said deduction, and assessed petitioner for income not from any other income of the taxpayer.
tax deficiency. CIR had the following contentions:
(a) that although the Hong Kong Banking In sum, the Court denied the petition because:
Commissioner had revoked First CBC Capital’s 1. The equity investment in shares of stock held
license as a “deposit-taking” company, it was still by CBC of approximately 53% in its Hong
permitted to exercise its financing and investment Kong subsidiary (the First CBC Capital (Asia),
activities; (b) that the investment should not be Ltd.) is not an indebtedness, and it is a
classified as being “worthless;” and (c) that even capital, not an ordinary, asset;
assuming that they are worthless, they should be 2. Assuming that the equity investment of CBC
classified as “capital loss,” and not as bad debt has indeed become “worthless,” the loss
expense (there being no indebtedness to speak of sustained is a capital, not an ordinary, loss;
between petitioner and its subsidiary). Both the and
CTA and CA affirmed the CIR’s decision; hence, 3. The capital loss sustained by CBC can only
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this petition. be deducted from capital gains if any

derived by it during the same taxable year that
WON PETITIONER CBC WAS CORRECT IN the securities have become “worthless.”
CLAIMING THE SECURITIES AS A BAD DEBT
EXPENSE WHICH IT CAN DEDUCT FROM ITS
GROSS INCOME  NO
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13. Determination of Gain or Loss from Sale or Transfer of Property

Merger or Consolidation
CIR v. There are two corporations involved in this case, It is clear, in fact, that the purpose of the merger was
Rufino “old corporation” (term life 25 years) and the “new to continue the business of the Old Corporation,
(1987) corporation” (Term life 50 years). Rufino et al are whose corporate life was about to expire, through
both the majority stock holder of the old corporation the New Corporation to which all the assets and
and the new corporation. They are both engaged in obligations of the former had been transferred.
the same kind of business, (operating theaters What argues strongly, indeed, for the New
more particularly the Lyric Capitol Theaters in Corporation is that it was not dissolved after the
Manila. merger agreement in 1959. On the contrary, it
continued to operate the places of amusement
The President of the Old corporation and the originally owned by the Old Corporation and
General-Manager of New Corporation decided to transferred to the New Corporation, particularly the
merge. It was expressly declared that the merger of Capitol and Lyric Theaters, in accordance with the
the Old Corporation with the New Corporation was Deed of Assignment. The New Corporation, in fact,
necessary to continue the exhibition of moving continues to do so today after taking over the
pictures at the Lyric and Capitol Theaters even after business of the Old Corporation twenty-seven years
the expiration of the corporate existence of the ago.
former. Pursuant to resolution of the BOD of the old
corporation, the President of the old made Deed of The Court emphasized that the merger in
Assignment providing for the conveyance and question involved a pooling of resources aimed at
transfer of all the business, property, assets the continuation and expansion of business and
and goodwill of the Old Corporation to the New so came under the letter and intendment of the
Corporation in exchange for the latter’s shares National Internal Revenue Code, as amended by
of stock to be distributed among the shareholders the law, exempting from the capital gains tax
on the basis of one stock for each stock held in the exchanges of property effected under lawful
Old Corporation except that no new and corporate combinations.
unissued shares would be issued to the
shareholders of the Old Corporation. The reason for this conclusion is traceable to the
purpose of the legislature in adopting the provision of
As agreed, and in exchange for the properties, and law in question. The basic Idea was to correct the
other assets of the Old Corporation, the New Tax Code which, by imposing taxes on corporate
Corporation issued to the stockholders of the former combinations and expansions, discouraged the
stocks in the New Corporation equal to the stocks same to the detriment of economic progress,
each one held in the Old Corporation. The BIR particularly the promotion of local industry. Speaking
declaring that the merger of the aforesaid of this problem, HB No. 7233, which was
corporations was not undertaken for a bona fide subsequently enacted into R.A. No. 1921 embodying
business purpose but merely to avoid liability Section 35 as now worded, declared in the
for the capital gains tax on the exchange of the Explanatory Note:
old for the new shares of stock.
Accordingly, he imposed the private respondents RATIONALE: The exemption from the tax of the gain
are liable for deficiency income tax, surcharge derived from exchanges of stock solely for stock of
and interest. another corporation resulting from corporate mergers
or consolidations the provisions of the law, as
WON THE MERGER IS IN FURTHERANCE OF amended, was intended to encourage corporations in
BUSINESS  YES pooling, combining or expanding their resources
conducive to the economic development of the
WON THE NEW CORPORATION IS LIABLE FOR country.
CAPITAL GAINS AFTER THE MERGER  NO
Transfer of Property for Shares of Stocks
CIR v. Filinvest Development Corporation (FDC), a holding No. The Supreme Court stated that the requisites for
Filinves company, is the owner of 80% of the outstanding the non-recognition of gain or loss of a transfer of
t shares of respondent Filinvest Alabang Inc. (FAI) property for shares of stock are as follows:
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Develo and 67.42% of the outstanding shares of Filinvest a) the transferee is a corporation;
pment Land Inc. (FLI). FDC and FAI entered into a Deed b) the transferee exchanges its shares of stock
Corpor of Exchange with FLI. FDC and FAI both for property/ies of the transferor;
ation transferred in favor of FLI parcels of land. In c) the transfer is made by a person, acting
(2011) exchange for said parcels which were intended to alone or together with others, not exceeding
facilitate development of medium-rise residential four persons; and,
and commercial buildings, shares of stock of FLI d) as a result of the exchange the transferor,
were issued to FDC and FAI. FDC extended alone or together with others, not exceeding
advances in favor of its affiliates and entered into a four, gains control of the transferee.
Shareholders' Agreement with Reco Herrera PTE
Ltd. (RHPL) for the formation of a Singapore-based Rather than isolating FDC, the shares issued to FDC
joint venture company. FDC received from the BIR should be appreciated in combination with the new
a Formal Notice of Demand to pay deficiency shares issued to FAI. Together, FDC and FAI’s
income and documentary stamp taxes, plus shares add to 70.99% of FLI’s shares. Since the term
interests and compromise penalties. Deficiency "control" is clearly defined as "ownership of stocks in
taxes were assessed on the taxable gain a corporation possessing at least fifty-one percent of
supposedly realized by FDC from the Deed of the total voting power of classes of stocks entitled to
Exchange it executed with FAI and FLI, on the one vote, “ the exchange of property for stocks
dilution resulting from the Shareholders' Agreement between FDC-FAI and FLI clearly qualify as a tax-free
FDC executed with RHPL as well as the "arm's- transaction.
length" interest rate and documentary stamp taxes
imposable on the advances FDC extended to its Inasmuch as the combined ownership of FDC and
affiliates. FAI of FLI's outstanding capital stock adds up to
a total of 70.99%, it stands to reason that neither
WON THE EXCHANGE OF SHARES OF STOCK of said transferors can be held liable for
FOR PROPERTY AMONG FDC, FAI, AND FLI deficiency income taxes the CIR assessed on the
MET ALL THE REQUIREMENTS FOR THE NON- supposed gain which resulted from the subject
RECOGNITION OF TAXABLE GAIN UNDER transfer.
SECTION 34(C)(2) OF THE OLD NIRC (NOW SEC
40(C)(2)) - YES
BIR Maray Maray Farms, Inc. had six incorporators (de There was neither gain nor loss to the incorporators
Ruling Rivera, et. al.) who transferred and conveyed their but in order for their “gain” to not be recognized for
274-87 properties to the corporation in exchange of shares tax purposes, they must comply with the
of stock. After said transfer and conveyance, the requirements enumerated. They are, however, still
said incorporators (now transferors) gained control liable for documentary stamp tax because a stock is
of the corporation by owning more than 51% of the still considered as a valuable consideration in
total voting power of all classes of stocks entitled to exchange for property.
vote. In other words, the corporation exchanged
their shares of stock for the incorporators’ real
properties.
WHAT IS/ARE THE TAX IMPLICATION/S OF THE

EXCHANGE OF PROPERTY BY THE
INCORPORATORS AND SHARES OF STOCK BY
THE CORPORATION?
Administrative Requirements in Case of Tax-Free Exchanges
RR 18- See full text
01
RMR 1- REVENUE MEMORANDUM RULINGS NO. 1-2002 issued on May 9, 2002 consolidates, provides, clarifies
02 and harmonizes the existing guidelines on the tax consequences of a de facto merger pursuant to Section
40(C)(2) and (6)(b) of the National Internal Revenue Code of 1997.
A de facto merger involves the acquisition by one corporation of all or substantially all the properties of
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another corporation solely for stock. The phrase “substantially all the properties of another corporation”
mean “the acquisition by one corporation of at least 80% of the assets, including cash, of another
corporation,” which has the element of permanence and not merely momentary holding.
To constitute a de facto merger, the following elements must occur: 1) there must be a transfer of all or
substantially all of the properties of the transferor corporation solely for stock; and 2) it must be undertaken
for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation.
The provisions of the Ruling shall apply solely and exclusively to situations in which the facts are
substantially similar to the facts specified in the Ruling.
The Transferor (a domestic corporation) shall not recognize any gain or loss on the transfer of the property
to the Transferee. Consequently, the Transferor will not be subject to Capital Gains Tax, Income Tax, nor to
Creditable Withholding Tax on the transfer of such property to the Transferee. Neither may the Transferor
recognize a loss, if any, incurred on the transfer.
In addition, the assumption of liabilities or the transfer of property that is subject to a liability does not affect
the non-recognition of gain or loss under Section 40(C)(2) of the Tax Code of 1997, since in this case, the
total amount of such liabilities does not exceed the basis of the property transferred.
The Transferee is not subject to Income Tax on its receipt of the property as contribution to its capital, even
if the value of such property exceeds the par value or stated value of the shares issued to the Transferor.
The Transferor is not subject to Donor’s Tax, regardless of whether the value of the property transferred
exceeds the par/stated value of the Transferee shares issued to the Transferor, there having no intent to
donate on the part of the transferor.
The Transferor is not subject to Value-Added Tax (VAT) on the transfer of the property if it is not engaged in
a business that is subject to the VAT. Even if the Transferor is engaged in an activity that is subject to VAT,
it is nonetheless not subject to VAT on the transfer of the property to the Transferee.
The Documentary Stamp Tax consequences of the transfer, including the time of payment of the tax are
specified in the Ruling.
Business Purpose
Gregor Petitioner Gregory was the owner of all the stock of Reorganization was defined as the transfer by a
y v. United Mortgage Corporation (UMC) which had corporation of all or part of its assets to another
Helveri among its assets 1000 shares of Monitor Securities corporation, if immediately after the transfer the
ng Corporation. To be able to transfer the 1000 transferor or its stockholders or both are in control of
(1935) Monitor shares to herself, and eventually be able to the transferee corporation. In this situation, there
sell them at a profit, Gregory sought to bring about would be no considered “gain”, so taxes may be
a reorganization under the Revenue Act of 1928. avoided. The Court explained that the creation of
She caused the organization of Averill Corporation, Averill had no other purpose other than to
and 3 days later UMC transferred to Averill the transfer the shares to Gregory, and at the end
Monitor shares, which were then issued to Gregory. avoid taxes. Reorganization, to be valid must be
After 6 days from its organization, Averill was effected for a corporate purpose. Since no other
dissolved and liquidated by distributing its assets to purpose was present other than to transfer the
the petitioner. Gregory then immediately sold the said shares to Gregory, the reorganization must
shares at a profit, and it was not disputed that if no be disregarded.
“reorganization” was done, she would have been
liable for a much greater amount of tax.
WON THE REORGANIZATION THROUGH

AVERILL CORPORATION MAY BE
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DISREGARDED, AND THE PETITIONER

SHOULD BE TAXED AS IF UMC PAID HER
DIVIDENDS — YES
Rulings
RMC This RMC prescribes the period of prescription of rulings under Section 40(C)(2) of the NIRC, which deals
40-2012 with exchange of property. Numerous rulings have been issued by the BIR but are not immediately enforced
or executed.
The prescription period provided is ninety (90) days counted from date of receipt of the ruling by any of the
parties to the exchange transaction. Any violation will be subject to penalties provided in the tax code,
unless an extension has been given by the Commissioner for meritorious cases.
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14. Administrative Provisions

Accounting Periods and Methods
Consoli These are appeals from the amended decision of Consolidated was using the Accrual Method. The
dated the Court of Tax Appeals ordering the Consolidated language used by the parties in their contract show
Mines, Mines, Inc. (CMI) to pay the CIR deficiency income their intention to compute Benguet’s 50% share on
Inc. v. taxes for the years 1953, 1954 and 1956 or the total the excess of actual receipts over disbursements,
CA sum of P202,733.99, plus 5% surcharge and 1% without considering the “Accounts Receivable” and
(1974) monthly interest from the date of finality of the “Accounts Payable” as factors in the computation.
decision. The Company used the accrual method of Benguet then did not have a right to share in
accounting in computing its income. One of its “Accounts Receivable,” and, correspondingly, CMI did
expenses is the amount paid to Benguet as mine not have the liability to pay Benguet any part of that
operator, which amount is computed as 50% of “net item. And a deduction cannot be accrued until an
income.” The Company deducts as an expense actual liability is incurred, even if payment has not
50% of cash receipts minus disbursements, but been made. Since Benguet had no right to one-half of
does not deduct at the end of each calendar year the “Accounts Receivable,” CMI was correct in not
what the Commissioner alleges is “50% of the accruing said one-half as a deduction.
share of Benguet” in the “accounts receivable.”
However, it deducts Benguet’s 50% if and when the
“accounts receivable” are actually paid. It would
seem, therefore, that the Company has been
deducting a portion of this expense (Benguet’s
share as mine operator) on the “cash & carry”
basis.
WON CONSOLIDATED MINES USED A HYBRID

METHOD OF ACCOUNTING WHICH IS
PROHIBITED — NO
Bibiano This case involves petitioner Bibiano Bañas who As a general rule the whole profit accruing from a
v. sold a land to Ayala for P2,307,770. The Deed of sale of property is taxable as income in the year the
Banas, Sale provided that Ayala should pay P460,754. The sale was made. Although profit from an installment
Jr. v. balance would be paid in 4 equal consecutive basis is taxable between or among the years the
CA annual installments. However in his 1976 income installments are apportioned. Section 43 and Section
(2000) tax return, petitioner reported only the P461,754, 175 provide for entities who may use the installment
the initial payment, as income. After which, the method such as a seller of real property who
Revenue Director examined the books of petitioner disposes his property on installment, provided that
for 1976 and concluded that the sale of land should the initial payment does not exceed 25% of the selling
have been taxable wholly and not only the initial price.
payments. Petitioners insist that the sale made was
on installment basis and should be taxable as per Initial payment does not include amounts received by
installment, hence, this petition. the vendor in the year of sale from the disposition to a
3rd person of notes given by the vendee as part of the
WON RESPONDENT COURT ERRED IN FINDING purchase price which are due and payable in
THAT PETITIONER’S INCOME FROM THE SALE subsequent years. Where an installment obligation is
OF LAND IN 1976 SHOULD BE DECLARED AS A discounted at a bank or finance company, a taxable
CASH TRANSACTION (AND NOT ON disposition results, even if the seller guarantees its
INSTALLMENT) IN HIS TAX RETURN FOR THE payment, continues to collect on the installment
SAME YEAR — NO obligation, or handles repossession of merchandise in
case of default. Thus, by analogy, all the more would
a taxable disposition result when the discounting of
the promissory note was done by the seller himself.
In this case, although the proceeds of a discounted

promissory note are not considered part of the initial
133
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payment, it is still taxable income for the year it was

converted into cash. The income should be reported
at the time of the actual gain. Although the proceeds
of a discounted promissory note as not considered
initial payment, still it must be included as taxable
income on the year it was converted to cash. When
petitioner has the promissory notes covering the
succeeding installment payments of the land issued
by Ayala, discounted by Ayala itself he lost
entitlement to report the sale as sale on installment
since a taxable disposition resulted and petitioner
was required by law to report in his returns the gain.
What petitioner did is tantamount to an attempt to
circumvent the rue on payment of income taxes
gained from the sale of the land.
Returns and Payment of Taxes
RR 019- Subject: New Income Tax Forms
11 To: All Revenue Officials, Employees, and Other Concerned
Section 1. Objective.
These Revenue Regulations are issued to prescribe the new BIR Forms that will be used for Income Tax
filing covering and starting with Calendar Year 2011, and to modify Revenue Memorandum Circular No. 57-
2011.
Section 2. Scope.
Pursuant to Section 244 in relation to Sections 6(H), 51(A)(1), and 51(A)(2) of the National Internal Revenue
Code of 1997 (Tax Code), as amended, these Regulations are prescribed to revise BIR Form Nos. 1700,
1701, and 1702 to reflect the changes in information requested from said BIR Forms and to enable the said
forms to be read by an Optical Character Reader.
Section 3. Filing of New Income Tax Return Forms.

All taxpayers required to file their Income Tax returns under section 51(A)(1) of the Tax code, and those not
required to file under section 51(A)(2) but who nevertheless opt to do so, covering and staring with calendar
year 2011 – due for filing on or before April 15, 2012, should use the following revised forms:
1. BIR Form 1700 version November 2011 (Annual Income Tax Return for Individuals Earning Purely
Compensation Income);
2. BIR Form 1701 version November 2011 (Annual Income Tax Return for Self-Employed Individuals,
Estates and Trusts); and
3. BIR Form 1702 version November 2011 (Annual Income Tax Return for Corporation, Partnership
and Other Non-Individual Taxpayer).
All juridical entities following fiscal year of reporting are likewise required to use the new BIR Form 1702
starting with those covered under fiscal year ending January 31, 2012.
Systra This is a case where a second motion for It was in the year 2000 that petitioner derived excess
Philippi reconsideration was filed by petitioner. Systra tax credits and exercised the irrevocable option to
nes, likewise questioned the substantive aspect of CTA carry them over as tax credits for the next taxable
Inc. v. decisions. Petitioner had creditable taxes which year. The excess credits will only be applied “against
CIR they opted to carry over to the succeeding year income tax due for the taxable quarters of the
(2007) 2001. In 2001 ITR, it indicated that creditable succeeding taxable years.”
withholding taxes will also be carried over to next
year’s tax as credit. However, on August 9, 2001, Section 76 of the present tax code formulates an
petitioner instituted a claim for refund of its irrevocability rule which stresses and fortifies the
unutilized creditable withholding taxes. Due to BIR’s nature of the remedies or options as alternative, not
inaction, petitioner filed a petition for review. CTA cumulative. It also provides that the excess tax
134
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partially granted the petition but denied claim for credits may be carried over and credited against the
refund because petitioner was precluded from estimated quarterly income tax liabilities for the
claiming a refund. Once it was made for a particular taxable quarters of the succeeding taxable years until
taxable period, the option to carry over becomes fully utilized. Nevertheless, the amount will not be
irrevocable. forfeited in favor of the government but will remain in
the taxpayer’s account.
WON THE EXERCISE OF THE OPTION TO
CARRY-OVER EXCESS INCOME TAX CREDITS
UNDER SECTION 76 OF THE TAX CODE BARS
A TAXPAYER FROM CLAIMING THE EXCESS
TAX CREDITS FOR REFUND EVEN IF THE
AMOUNT REMAINS UNUTILIZED IN THE
SUCCEEDING TAXABLE YEAR — YES
Philam Petitioner, Philam Asset Management, Inc., acts as 1997 CWTs: It did not apply the excess creditable
Asset the investment manager of both Philippine Fund, taxes in any of its quarterly returns for 1998 did it
Manage Inc. (PFI) and Philam Bond Fund, Inc. (PBFI), which apply the excess creditable taxes. Thus, petitioner is
ment, are open-end investment companies. It also acts as entitled to a tax refund of its 1997 excess tax credits.
Inc. v. its principal distributor. To pay the petitioner for its
CIR services and facilities, a monthly management fee 1998 CWTs: Once the carry-over option has been
(2005) is imposed from which PFI and PBFI withheld the chosen, no application for a tax refund or issuance of
amount equivalent to a 5% creditable tax. a tax credit certificate shall then be allowed. The fact
that it filled out the portion “Prior Year’s Excess
In G.R. No. 156637, petitioner filed its annual Credits” in its 1999 FAR means that it categorically
corporate income tax return for the taxable year availed itself of the carry-over option.
1997 representing a net loss. Consequently, it
failed to utilize the creditable tax withheld; thus,
petitioner filed a claim for refund for the unutilized
tax credit. In G.R. No. 156637, petitioner filed its
annual corporate income tax return for the taxable
year 1998 representing a net loss. Likewise,
petitioner had an unapplied creditable
withholding tax. Petitioner declared in its 1999 tax
return the representation of its prior excess credit
for taxable year 1998. Petitioner claims for a
refund with respect to the unapplied creditable
withholding tax, stating that there is still an
unapplied amount.
WON THE PETITIONER IS ENTITLED TO A

REFUND OF ITS CREDITABLE TAXES
WITHHELD FOR TAXABLE YEAR 1997 — YES
WON THE PETITIONER IS ENTITLED TO A

REFUND OF ITS CREDITABLE TAXES
WITHHELD FOR TAXABLE YEAR 1998 — NO
CIR v. Far East Bank filed a claim for refund of overpaid 3 essential requirements for a claim for refund of this
Far creditable withholding taxes, which included CWT nature to prosper are:
East on rental income allegedly earned by the Bank as 1. filing the same within the 2-year period;
Bank & lessor. CTA found that respondent failed to prove 2. establishing the fact of withholding with
Trust that the income derived from rentals and sale of copies of the CWT certificates; and
Compa real property from which the taxes were withheld 3. showing that the income received was
ny were reflected in its 1994 Annual Income Tax declared as part of gross income.
(2010) Return. The CA found otherwise.
135
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Here the Petitioner failed to prove (2) as the return in

WON FAR EASTERN BANK CAN CLAIM FOR fact showed “Not Applicable” under the portion
REFUND NOTWITHSTANDING ITS FAILURE TO referring to Rental Income. In addition, some
SHOW IN THE RETURN THAT INCOME UPON certificates were likewise not submitted as evidence.
WHICH THE CREDITABLE TAXES WITHHELD
WERE BASED WAS IN FACT REPORTED — NO
Weinbr Petitioner filed its Annual Income Tax Return for CY In ruling for the petitioner, the Court held that to prove
enner & 2003. Two years after, it applied for the that no carry-over has been made does not
Inigo administrative tax credit/refund of its unutilized absolutely require the presentation of the quarterly
Insuran CWT for CY 2003. According to the CIR, its claim ITRs.
ce should not be granted because it was not able to
Brokers present the quarterly Income Tax Returns for CY What Section 76 requires, just like in all civil
, Inc. v. 2004 to prove no carry-over of the unutilized and cases, is to prove the prima facie entitlement to a
CIR excess CWT was made. The CIR cited Section 76 claim, including the fact of not having carried
(2015) of the NIRC: over the excess credits to the subsequent
SEC. 76. Final Adjustment Return. – Every quarters or taxable year. It does not say that to
corporation liable to tax under Section 27 prove such a fact, succeeding quarterly ITRs are
shall file an adjustment return covering the absolutely needed. Any document, other than
total taxable income for the preceding quarterly ITRs may be used to establish that indeed
calendar or fiscal year. If the sum of the the non-carry over clause has been complied with,
quarterly tax payments made during the said provided that such is competent, relevant and part of
taxable year is not equal to the total tax due the records.
on the entire taxable income of that year, the
corporation shall either: An annual ITR contains the total taxable income
a. Pay the balance of tax still due; or earned for the four (4) quarters of a taxable year, as
b. Carry-over the excess credits; or well as deductions and tax credits previously reported
c. Be credited or refunded with the or carried over in the quarterly income tax returns for
excess amount paid, as the case may the subject period. Thus, it can sufficiently reveal
be. whether carry over has been made in subsequent
quarters.
In case the corporation is entitled to a tax
credit or refund of the excess estimated It must be remembered that taxes computed in
quarterly income taxes paid, the excess the quarterly returns are mere estimates. It is the
amount shown on its final adjustment return annual ITR which shows the aggregate amounts
may be carried over and credited against the of income, deductions, and credits for all quarters
estimated quarterly income tax liabilities for of the taxable year. It is the final adjustment
the taxable quarters of the succeeding return which shows whether a corporation
taxable years. Once the option to carry-over incurred a loss or gained a profit during the
and apply the excess quarterly income tax taxable quarter.
against income tax due for the taxable
quarters of the succeeding taxable years The Court does not, and cannot, however, grant the
has been made, such option shall be entire claimed amount as it finds no error in the
considered irrevocable for that taxable original decision of the CTA Division granting refund
period and no application for cash refund or to the reduced amount of P2,737,903.34.
issuance of a tax credit certificate shall be
allowed therefor.
Petitioner argues that it was able to present its

Annual Income Tax Return for 2004 which shows
that it has not carried over the unutilized CWT. CTA
Division partially granted petitioner’s claim. CTA En
Banc reversed CTA Division and sided with the
CIR.
136
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WON PRESENTATION OF THE ITRS OF THE

SUCCEEDING QUARTERS OF A TAXABLE
YEAR IS INDISPENSABLE IN A CLAIM FOR
REFUND
— NO
BPI v. Prior to its merger with petitioner BPI on July 1, In case of the dissolution of a corporation, the period
CIR 1985, the Family Bank and Trust Co.(FBTC) earned of prescription should be reckoned from the date of
(2000) income from rentals from its leased properties and filing of the return required by Sec 78 (now 52) of the
interest from treasury notes and withheld the Tax Code. Petitioner’s contention that the prescriptive
appropriate taxes. Upon FBTC’s dissolution, it had period commenced only after it had filed FBTC’s Final
an excess tax credit of P2,146,072 from the year Adjustment Return is of no merit. This provision
prior and P174,065 for the current year (Total applies only to instances in which the corporation
refundable amount = P2,320,138.24). As FBTC’s remains subsisting but in instances where the
successor in interest, petitioner BPI claimed the corporation is contemplating dissolution, 78 (52)
amount as tax refund but respondent CIR refunded applies. When FBTC ceased operations, its taxable
only the amount of P2,146,072, leaving out the year was shortened to 6 months. Thus after FBTC
balance of P174,065. BPI then filed a petition for ceased operations on June 30, 1985 it became
review with the Court of Tax Appeals on December necessary for FBTC to file its income tax return within
29, 1987 but the same was dismissed on the 30 days after approval by the SEC of its plan of
ground that the claim had already prescribed. BPI dissolution. As the petition for review before the
contends that the 2-year prescriptive period should Tax Court was filed only on December 29, 1987—
only have been deemed commenced after it had more than 2 years from July 31, 1985 (the date the
filed FBTC’s Final Adjustment Return on April 15, tax return should have been filed)—the claim had
1986 pursuant to 46(a) of the 1977 NIRC (law prescribed.
applicable at the time of the transaction) but the
Court of Tax Appeals ruled that the prescriptive
period begins 30 days after the approval by the
SEC of the plan of dissolution, pursuant to Sec 78
(now Sec 52) of the same Code, so July 31, 1986.
WON PETITIONER’S CLAIM IS BARRED BY

PRESCRIPTION — YES
PDIC v. BIR, one of the creditors of RBTI, intervened in the The BIR ignores the New Central Bank Act and the
BIR liquidation proceedings of RBTI. BIR prayed that Civil Code. The Supreme Court does not agree.
(2013) the proceedings be suspended until PDIC has Section 52(C) of the Tax Code of 1997 is not
secured a tax clearance required under the Tax applicable to banks ordered placed under liquidation
Code of 1997, providing in Section 52(C) that the by the Monetary Board. A tax clearance is not a
dissolving or reorganizing corporation shall, prior to prerequisite to the approval of the project of
the issuance by the SEC of the Certificate of distribution of the assets of a bank under
Dissolution or Reorganization, as may be defined liquidation by the PDIC. Banks under liquidation by
by rules and regulations prescribed by the the PDIC as ordered by the Monetary Board
Secretary of Finance, upon recommendation of the constitute a special case governed by the special
Commissioner, secure a certificate of tax rules and procedures provided under Section 30 of
clearance from the Bureau of Internal Revenue the New Central Bank Act, which does not require
which certificate shall be submitted to the SEC. that a tax clearance be secured from the BIR. It is
unreasonable for the liquidation court to require that a
WON A BANK PLACED UNDER LIQUIDATION tax clearance be first secured as a condition for the
HAS TO SECURE A TAX CLEARANCE FROM approval of project of distribution of a bank under
THE BIR BEFORE THE PROJECT OF liquidation. It will be a chicken-and-egg dilemma. The
DISTRIBUTION OF THE ASSETS OF THE BANK BIR can only issue a certificate of tax clearance when
CAN BE APPROVED BY THE LIQUIDATION the taxpayer had completely paid off his tax liabilities.
COURT — NO Should the BIR find that RBBI still had outstanding
137
I`
tax liabilities, PDIC will not be able to pay the same

because the Project of Distribution of the assets of
RBBI remains unapproved by the RTC; and, if RBBI
still had outstanding tax liabilities, the BIR will not
issue a tax clearance; but, without the tax clearance,
the Project of Distribution of assets, which allocates
the payment for the tax liabilities, will not be approved
by the RTC.
United United Airlines filed with respondent a claim for tax In ruling for the CIR, the Court noted the erroneous
Airlines refund the amount of P5,028,813.23 allegedly deductions made by United Airlines. Petitioner’s
, Inc. v. representing income taxes paid in 1999 on return was found erroneous as it understated its
CIR passenger revenue from tickets sold in the gross cargo revenue for the same taxable year due to
(2010) Philippines, the uplifts of which did not originate in deductions of two (2) items consisting of commission
the Philippines. Petitioner argued that since it no and other incentives of its agent. The CTA therefore
longer operated passenger flights originating from correctly denied the claim for tax refund after
the Philippines beginning February 21, 1998, its determining the proper assessment and the tax due.
passenger revenue for 1999, 2000 and 2001 cannot The general rule of Section 72 of the NIRC provides
be considered as income from sources within the that fraudulent returns, or returns which contain any
Philippines, and hence should not be subject to understatement or undervaluation shall not be subject
Philippine income tax under Article 96 of the RP-US of any suit for recovery (tax refund). The CTA found
Tax Treaty. It agreed that petitioner cannot be taxed that petitioner had underpaid its GPB tax for 1999
on its 1999 passenger revenue from flights because petitioner had made deductions from its
originating outside the Philippines. However, in gross cargo revenues in the income tax return it filed
reporting a cargo revenue of P740.33 million in for the taxable year 1999, the amount of
1999, it was found that petitioner deducted two (2) underpayment even greater than the refund sought
items from its gross cargo revenue of P2.84 billion: for erroneously paid GPB tax on passenger revenues
P141.79 million as commission and P1.98 billion as for the same taxable period. Hence, the CTA ruled
other incentives of its agent. petitioner is not entitled to a tax refund.
WHETHER OR NOT THE PETITIONER IS

ENTITLED TO A REFUND OF THE AMOUNT OF
P5,028,813.23 IT PAID AS INCOME TAX ON ITS
PASSENGER REVENUES IN 1999 — NO
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Case Summary Doctrine

Case Summary Doctrine

o Real property used in the trade or business of TP

Sections 25 TAX ON NONRESIDENT ALIEN INDIVIDUALS

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YES virtue of the RP- US Military bases agreement.

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offices to work for JGC’s clients but will not lose

Sec 23(C) of NIRC – an individual citizen of the

In consideration of such protection, the flow of wealth

Since you will be a nonresident citizen, [after

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2.MCIT – only applies to one person corporation

5. Optional standard deduction threshold in OPC and sole proprietorship

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ceding companies and Munich, because without

Although there was clear evidence of co-ownership

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collect from since the partnership does not have any

Recall partnership law: Civil Code, Art. 1769(3) →

Instead of actually distributing the estate of the Scenario #2

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WON THERE WAS A CO-OWNERSHIP OR AN

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development services. 2. Local contractors are at a disadvantage in

With regard to Avida’s undertaking (as provided in

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To be taxable, the amount must be income first!

Requisites for taxability of income:

The wife of Vicente has an inchoate right in the

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property rights and in the ultimate ownership of

The stockholder who receives a stock dividend has

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to the corporation. There has been no separation of

A certificate of stock represented by the stock

WON LIMPAN IS JUSTIFIED IN NOT

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dollars. Petitioners are correct as to their claim that their

Revenue Memorandum Circular Nos. 7-71 10 and 41-

Petitioners argue that since there were no

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WON THE MONEY FOUND IS CONSIDERED Rent agreement

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- Security deposit – because there is no

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Citing Commissioner v. Banks, the court noted that

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ELEMENTS THAT DON’T MAKE THE CUT Calamansi tree

Need not arise from capital / investment

In Conwi v. Court of Tax Appeals,49 the Court

Case Summary Doctrine

interest or profit from investment. Unless

The membership fees, assessment dues, and other

There was no realized “gain.”

This stands in contrast to the fees received by

For as long as these membership fees,