TaxLawRev1 Updated

Tax Law Review Atty.
Salvador
PART 1 A. INTRODUCTION 1. GENERAL PRINCIPLES SOURCES OF TAX LAWS Sec. 21 Sources of Revenue the following taxes, fees and charges are deemed to be national internal revenue taxes: 1. Income tax; 2. Estate and Donors taxes; 3. Value-added tax; 4. Other percentage taxes; 5. Excise taxes; 6. Documentary stamp taxes; and 7. Such other Taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue Other Sources in general: 1. Constitution 2. NIRC 3. Other Tax Statutes 4. Revenue Regulations implementing NIRC 2. CONSTITUTIONAL LIMITATIONS SISON V. COMMISSIONER BP 135 was enacted amending sec 21 of the NIRC1. Petitioner Sison assails the amendment claiming it would unduly discriminate against him by the imposition of higher tax rates upon his income from the exercise of his profession vis--vis against those earning a fixed
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income. He claims that the measure is arbitrary and violative of both the equal protection and due process clauses of the constitution.
Held: The power to tax is inherent in sovereignty. However, it is not limitless. The constitution sets forth its limitations. Adversely affecting as it does property rights, both the due process and the equal protection clauses may properly be invoked to invalidate a revenue measure. However, there has to be sufficient basis to support such a claim. The due process clause may be invoked if the measure is so arbitrary that it finds no support in the Constitution, as when it amounts to a confiscation of property or where it beyond the authority of the taxing authority, or is not for a public purpose. As for equal protection, it is sufficient if the law operates equally and uniformly on all persons under the same circumstances or that all persons must be treated in the same manner, the conditions not being different, both in privileges conferred and liabilities imposed. In the case of BP 135, there is ample distinction to adopt a gross system of income taxation to compensation income. In such law, the basis for classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all tax payers whithin the class and fixing a set of reduced tax rates to be applied to all of them.
3. HISTORY INCOME TAXATIONDEFINITIONS/
OF
DISTINCTIONS
Case did not state what the law says or how it amends the NIRC
Income Tax Systems: Global Tax System- all items of income are reported in the return, regardless of the classification as compensation, business, professional, or passive income or capital gains. Schedular Tax System- different kinds of income are subjected to different rates (graduated or flat) Semi-schedular or semi-global tax system- gross income includes compensation income, business or professional income, and passive income not subject to final tax. The
BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
(UPDATED BY: NAVARRA, ELLIE, 4B 2012)
Tax Law Review Atty. Salvador

taxable income is computed after deducting the allowable deductions from the taxable income and it is subject to graduated tax or corporate income tax. The Philippines follow a semi-schedular or semi-global tax system. 4. CLASSIFICATION OF INCOME TAXPAYERS - Individual - Corporations or others with separate personality D. TAX ON INDIVIDUALS 1. KINDS OF INDIVIDUAL TAXPAYERS i) Individual Citizens- Taxable on all sources of income, whether within or without the Philippines ii) Non-resident Citizen- Taxable only on income from within the Philippines iii) Individual Resident Aliens- Taxable only on income from within the Philippines iv) Non- Resident Aliens-taxable only on income from within the Philippines SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. (1) An income tax is hereby imposed: (a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein;
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(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and (c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. The tax shall be computed in accordance with and at the rates established in the following schedule: Not over P10,000....5% Over P10,000 but not over P30,000P500+10% of the excess over P10,000 Over P30,000 but not over P70,000P2,500+15% of the excess over P30,000 Over P70,000 but not over P140,000..P8,500+20% of the excess over P70,000 Over P140,000 but not over P250,000P22,500+25% of the excess over P140,000 Over P250,000 but not over P500,000P50,000+30% of the excess over P250,000 Over P500,000 ... P125,000+34% of the
juridical

excess over P500,000 in 1998.
Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%).
For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. (B) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the longterm deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years - 5%; Three (3) years to less than (4) years - 12%; and Less than three (3) years - 20% (2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer: Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; and Ten percent (10% beginning January 1, 2000.
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Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic

corporation, except shares sold, or disposed of through the stock exchange. Not over P100,000........ 5% On any amount in excess of P100,000 10% (D) Capital Gains from Sale of Real Property. (1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer. (2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains
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tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon. SEC. 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in trade or Business Within the Philippines. (1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding. (2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarters of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under

Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years - 5%; Three (3) years to less than four (4) years - 12%; and Less than three (3) years - 20%. (3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24. (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such
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income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24. (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. (D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. (E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor

engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code. 2. DEFINITION OF EACH KIND OF TAXPAYER: a. Resident Citizens and Resident Aliens Sec. 5-6, RR-2 An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and tenure of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. b. Non-Resident Citizens i. Sec 22 (NIRC): the term non resident citizen means
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(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as a nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purposes of this section. ii. Sec. 2 - RR 1-79 Who are considered as nonresident citizens the term non-resident citizen means one who establishes to the satisfaction of the Commission of Internal Revenue 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:

(1) Immigrant one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa as such has been secured (2) Permanent employee one who leaves the Philippines to reside abroad for employment on a more or less permanent basis (3) Contract worker one who leaves the Philippines on account of a contract of employment which is renewed from time to time within or during the taxable year under such circumstances as to require him to be physically present abroad most of the time during the taxable year. To be considered physically present abroad most of the time during the taxable year, a contract worker must have been outside the Philippines for not less than 183 days during the taxable year. c. Non-Resident Aliens Engaged in business in the Phil. i. Sec. 25 (NIRC) - A nonresident alien individual who may either be: (1) Engaged in trade or business (the term denotes habituality or sustained activity) and he is deemed so engaged if the aggregate stay in the Philippines exceeds 180 days for each calendar year; or (2) Not engaged in trade or business ii. Sec. 5, RR 2 A nonresident alien individual means an individual (1) Whose residence is not within the Philippines; and (2) Who is not a citizen of the Philippines
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Sec. 25 - Tax on Nonresident Aliens A nonresident alien engaged in trade or business in the Philippines shall be taxed in the same manner as an individual citizen and a resident alien individual on taxable income derived from sources within the Philippines. A NONRESIDENT ALIEN is one who shall come to the Philippines and stay herein for an aggregate period of more than 180 days during a calendar year. Tax on their passive income is likewise the same. The rate of tax on income from all sources within the Philippines of a non resident alien NOT engaged in business here shall be 25%, except for gains from sale of real property and sale or exchange of stocks not thru the stock market. An alien individual employed by the regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies shall be taxed 15% on his gross income PROVIDED the same tax treatment is given to Filipinos employed in the same position by the same multinational companies. Those aliens employed by off shore banking units2 established in the Philippines shall be taxed 15% on their gross income PROVIDED the same tax treatment is given to Filipinos employed and occupying the same positions as aliens employed by these off shore banking units. Aliens who are permanent residents of a foreign country but are employed and assigned in the Phil by a foreign service contractor or subcontractor engaged in petroleum operations in the Philippines shall be taxed 15% on their gross income PROVIDED that the same tax treatment is given to Filipinos occupying the same position as aliens by the petroleum contractor or subcontractor.
a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Bangko Sentral Ng Pilipinas to transact offshore banking business in the Philippines in accordance with PD 1034 (RR 10-98)

3. KIND OF INCOME AND INCOME TAX OF INDIVIDUALS a. TAX FORMULA b. FINAL INCOME TAX Sec. 24 - Rates of Income Tax A uniform tax rate schedule is used to determine tax liability of resident citizens, of non-resident citizens, and of resident aliens, subject however to the rule set under no.1 above. Not over P10,000.5% Over P10,000 but not over P30,000.P500 plus 10% of the excess over P10,000 Over P30,000 but not over P70.000.P2,500 plus 15% on the excess Over P70,000 but not over P140,000...P8,500 plus 20% on excess Over P140,000 but not over P250,000.P22,500plus 25% on excess Over P250,000 but not over P500,000.P50,000plus 30% on excess Over 500,000P125,000plus 32% of excess For married individuals, both shall compute their individual income tax based on their own taxable income, provided however that if they do not derive income purely from compensation, they shall file a return for the taxable year to include the income of both spouses. If is impractical to file just one return, each spouse may file a separate return but such will be consolidated by the Bureau.3 The taxable income subject to the rates above do not include the income derived from passive income, capital gains from sales of
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shares of stock not traded in the stock exchange and capital gains from sale of real property, the tax rates of which are as follows: Passive income Interest of Bank deposits, deposit substitutes, from trust funds Interest received by a resident under the expanded foreign Currency deposit system4 Interest from a long-term deposit or investment Interest from a pre-terminated long term deposit or investment With a remaining maturity of 4 to less than 5 yrs 3 to less than 4yrs less than 3 yrs Royalties except from books, etc Royalties from books, literary works and musical compositions Prizes up to P10,000 Prizes exceeding P10,000 Winnings other than from sweepstakes or lotto Sweepstakes and lotto winnings Cash or property dividends, actually or constructively received from a domestic corp., joint stock co., insurance or mutual fund corp. and regional operating head-quarters of multinationals or on the share in the distributable net income after tax of a partnership of which he is a partner, or of an association, a joint account or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer 20% 7.5% tax exempt 5%
12% 20% 20% 10% taxable income 20% 20% Exempt 10% as
SEC. 51(D) of the NIRC
Foreign currency deposit system- the conduct of banking transactions whereby any person whether natural or juridical may deposit foreign currencies forming part of the Philippine international reserves , in accordance with RA 6462 ( RR 10-98)

RESIDENT CITIZENS AND RESIDENT ALIENS Capital Gains from shares Gains from shares of stocks sold, bartered or exchanged outside the Stock market if not more than P100,000..5% If over P100,000..10% Capital Gains from the sale of Real Property Tax rate is now 6% based on the gross selling price or current fair market value, whichever is higher. However, if the sale is made to the government or any of its subdivisions or to any GOCC, it may be taxed as part of the taxpayers income ( as set forth in the fist paragraph of this part), at the option of the taxpayer. (RR 8-98)
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The following personal exemptions are allowed for the purpose of determining the tax to be imposed upon resident citizens and resident aliens:5 For single individual or married individual judicially decreed as legally separated with no qualified dependentsP 50,000.00 For head of familyP 50,000.00 For each married individual *P 50,000.00 * In case of married individuals where only one of the spouses is deriving gross income, only such spouse will be allowed to claim the personal exemption.
Additional Exemptions:
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EXCEPTION: If the sale is of the taxpayers principal residence of a natural person and the proceeds are used to purchase a new home, it shall be exempt provided: a return is filed with the Bureau within 30 days from the sale stating the intention to avail of the exemption Proceeds are used within 18 months from sale to purchase a new residence The historical costs of the residence sold is carried over to the new home Exemption can only be availed of once every 10 years If proceeds are not fully utilized, portion of the gain is taxable using this formula: Taxable gain= gsp or fmv (whichever is higher) x unutilized portion/gsp
4. PERSONAL, ADDITIONAL, AND SPECIAL EXEMPTIONS; AMOUNTS
Amended by RA 9504. Implemented by RR 10-2008: For CY 2008, the applicable personal and additional exemptions shall be prorated, as follows: January 1 to July 6 to Personal exemption Total July 5 December 31 Single Head of family Married P10,000 12,500 16,000 P 25,000 25,000 25,000 P35,000 37,500 41,000
Additional exemption for 4,000 12,500 16,500 every QDC For the period July 06 to December 31, 2008, a transitory withholding tax table shall be applied using the pro-rated personal and additional exemption allowances covering the period July 06 to December 31, 2008. Employers are required to undertake final year adjustments consolidating their employees compensation for 2008 taking into consideration the transitory exemption allowances.

For each qualified dependent, an P25,000 additional exemption can be claimed but only up to 4 qualified dependents
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additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. NON-RESIDENT CITIZEN RR 1-79 Non-resident citizens are allowed the following exemptions:
The additional exemption can be claimed by the following: The husband who is deemed the head of the family unless he explicitly waives his right in favor of his wife The spouse who has custody of the child or children in case of legally separated spouses. Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed by the Tax Code. The individuals considered as Head of the Family supporting a qualified dependent Personal Exemptions and Optional Standard Deduction A) Individual 1) Kinds of individual and Amount of personal exemption: Each married individual P50,000 In case of married individuals where only one of the spouses is deriving gross income, ONLY such spouse shall be allowed the personal exemption Head of the family P50,000 a) Single; or b) Married individual judicially declared as legally separated with no qualified dependents 2) Dependents Each dependent not exceeding 4 P25,000 The additional exemption for dependents shall be claimed by ONLY one spouse in case of married individuals In case of legally separated spouses, additional exemptions may be claimed ONLY by the spouse who has custody of the child or children; PROVIDED that the total amount of
Personal exemptions: Single or married but legally separated$2,000 Married or head of the family...$4,000
Also, the total amount of the national income tax actually paid to the national government of the foreign country of his residence shall be deducted from his taxable income.
RR No. 9-99 prescribes non-resident citizens, overseas contract workers and seamen to file information returns (BIR Form 1701C or the new computerized Form 1703). Said form, together with other relevant supporting papers, shall be filed to the Foreign Post or the Revenue District Office which has jurisdiction over the place of residence of the taxpayer not later than April 15 following the taxable year. The 1998 returns filed after April 15 but not later than July 15, 1999 will not be subject to penalty charges. NON-RESIDENT ALIENS ENGAGED IN BUSINESS IN THE PHILIPPINES OR IN
THE EXERCISE OF A PROFESSION
These persons are entitled to personal exemptions in the amount equal to the exemptions allowed in the income tax law of the country of which he is a citizen, to citizens of the Philippines not residing in that country. Such amount shall not exceed the amount fixed in Sec 36 of the NIRC. However, such nonresident alien shall file a true and accurate return of the total income received by him from all sources within the Philippines.

SENIOR CITIZEN LAW: the law grants a twenty percent discount to senior citizens for medical and dental services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of services in hotels and similar lodging establishments, restaurants and recreation centers; and purchases of medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that business establishments extending the twenty percent discount to senior citizens may claim the discount as a tax deduction. CARLOS SUPERDRUG V. DSWD 5. DEFINITION OF: Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly compensated for the discount.
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For purposes of reimbursement, the law states that the cost of the discount shall be deducted from gross income, the amount of income derived from all sources before deducting allowable expenses, which will result in net income. Here, petitioners tried to show a loss on a per transaction basis, which should not be the case. An income statement, showing an accounting of petitioners sales, expenses, and net profit (or loss) for a given period could have accurately reflected the effect of the discount on their income. Absent any financial statement, petitioners cannot substantiate their claim that they will be operating at a loss should they give the discount. In addition, the computation was erroneously based on the assumption that their customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.
Held: The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-building, and to grant benefits and privileges to them for their improvement and well-being as the State considers them an integral part of our society. Petitioners have not taken time to calculate correctly and come up with a financial report, so that they have not been able to show properly whether or not the tax deduction scheme really works greatly to their disadvantage. In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring to a DOF Opinion, for every P1.00 senior citizen discount that petitioners would give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government by way of a tax deduction.
a. HEAD OF FAMILY A head of the family is an unmarried or a legally separated man or woman with one or both parents, or with one or more brothers and sisters, or with one or more legitimate, recognized natural or legally adopted children living with and dependent upon him for their chief support (more than 1/2 of the requirements for support), where such brothers of sisters or children are not more than 21 years of age, unmarried and not gainfully employed or where such children, brother or sister, regardless of age are incapable of self-support because of mental or physical defect b. DEPENDENT Dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is not capable of self-support because of mental or physical defect 6. CHANGE OF STATUS AND PERSONAL EXEMPTIONS
If the taxpayer should change his or her status during the taxable year, he may claim the corresponding additional exemptions in full for such year. If the taxpayer dies during the taxable year, his estate may claim the personal and additional exemptions for himself and his dependents as if he died at the close of such year. If the spouse or any of his dependents dies or if any of such dependents marries, become 21 or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if no such change had occurred.
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Premium payments of such nature paid during the taxable year, not exceeding P2,400 per family OR P200 a month paid during the taxable year by the taxpayer for himself, including his family, shall be allowed as deductions from his gross provided that the gross income of the family does not exceed P250,000 for the taxable year. For married couples, only the spouse claiming deductions for the dependents may avail of such exemption. (Sec. 34 [m]). Deduction from gross income of an amount not to exceed a) P2,400 per family; or b) P200 a month Rules for application a) Such deduction should have been paid during the taxable year for health and/or hospitalization insurance b) Said family has a gross income of not more than P250,000 for the taxable year In case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to the deduction
CHANGE OF STATUS Change If the taxpayer should marry or should have additional dependents during the taxable year If the taxpayer should die during the taxable year If the spouse or any dependent a) should die b) should marry (refers to the dependent) c) become 21 years old during the year d) becomes gainfully employed
Effect He may claim the corresponding exemptions in full for such year
His estate may claim the personal exemptions as if he dies at the close of such year The taxpayer may claim the personal exemptions as if the spouse or dependent dies or as if such dependent married, became 21 years old or became gainfully employed that the close of such year
NOTE: For any other event that results in a change in the status of the taxpayer as it affects his personal exemptions, and for which there are no specific rules applicable from those abovementioned, the status of the taxpayer at the end of the year shall determine his personal exemptions for such year. 7. PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION
INSURANCE

PART 2 TAX ON CORPORATIONS 1. DEFINITION OF CORPORATIONS: Sec. 22 NIRC the term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contact with the Government. General professional partnerships are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. COMMISSIONER V. BATANGAS TAYABAS BUS CO. (102 P 822) Issue: W/n the 2 transportation companies are liable to payment of income tax as a corporation on the theory that the Joint Emergency Operation organized & operated by them is a corporation w/in the meaning of the Revised Internal Revenue Code.
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equally between them, wholly disregarding the expenses incurred in the maintenance & operation of each company & of the individual income of said companies. From the standpoint of income tax law, this procedure & practice of determining the net income of each company was arbitrary & unwarranted, disregarding as it did the real facts of the case. Considering that Batangas Transportation & the Laguna Bus operated different lines, under different franchises, w/ different equipment & personnel, it cannot possibly be true & correct to say that at the end of each year, the gross receipts & income & the gross expenses of the 2 companies are exactly the same for purposes of the payment of income tax. Therefore, the Joint Emergency Operation in this case is a corporation under the Internal Revenue Code & is liable to income tax as a corporation. ONA VS CIR (25 SCRA 74)
Held: Yes, liable as a corporation. In the present case, the 2 companies contributed money to a common fund to pay the sole gen. manager, the accounts & office personnel attached to the office of said manager, as well as for maintenance & operation of a common maintenance & repair shop. Said common fund was also used to buy spare parts, & equipment for both companies, including tires. Said common fund was also used to pay all the salaries of the personnel of both companies, & at the end of each year, the gross income receipts of both companies were merged, & after deducting there from the gross expenses of the 2 companies, also merged, the net income was determined & divided
Ruling: For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate & the incomes thereof, for each of them to manage & dispose of as exclusively his own w/o intervention of the heirs, & accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. For purposes of tax on corporations, the NIRC, includes partnerships-with the exception of only duly registered gen. copartnershipswithin the purview of the term corporation.

BIR Ruling No. 317-92 Ayala Land, Inc.(ALI) & Appleyard Properties, Inc(API) entered into a Memorandum of Agreement (MOA) for the construction of the 6750 Bldg.. Pursuant to the MOA, they will contribute equal amounts to the construction costs & ALI will own 60% of the building while API will own 40%, while there is separate ownership, they will share common area expenses, real estate taxes, etc in the same proportion. ALI & API now propose to enter into a another agreement, a Joint Venture Agreement(JVA). Under the JVA, both ALI & API will contribute money as additional working capital & ALI will be appointed as manager & will be responsible for leasing the floors. HELD: The MOA has not by itself created a taxable joint venture. However, the joint venture to be subsequently entered into by & between ALI & API will create a joint venture subject to tax. Obillos vs. Commissioner (139 SCRA 436) The Supreme Court, applying Art. 1769 of the Civil Code, said that the sharing of gross returns does not itself establish a joint partnership whether or the persons sharing them have a joint or common right or interest in the property from which the returns are derived. There must, instead, be an unmistakable intention to form that partnership or joint venture. A sale of a co-ownership property at a profit does not necessarily establish that intention. This is about the tax liability of 4 brothers & sisters who sold 2 parcels of land which they had acquired from their father. In 1973, Jose Obillos Sr bought 2 parcels of land from Ortigas & Co & transferred his rights to his 4 children to enable them to build their residences. In 1974, the 4 children resold the lots to Walled City Securities Corp & earned profit. CIR assessed the 4 children with corporate income tax.
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themselves. They are simply co-owners. They were not engaged in any joint venture by reason of the isolated transaction. The original purpose was to divide the lots for residential purposes. The division of the profit was merely incidental to the dissolution of the co-ownership. 2. CLASSIFICATION OF CORPORATION AND THE TAX RULES: (SEC. 27, NIRC) a. IN GENERAL i. DOMESTIC Sec. 27, (A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after the following conditions have been satisfied:
HELD: It is error to hold that petitioners (Obillos) have formed a taxable unregistered partnership simply because they contributed in buying the lots, resold the same & divided the profit among

(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP); (2) A ratio of forty percent (40%) of income tax collection to total tax revenues; (3) A VAT tax effort of four percent (4%) of GNP; and (4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP. The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%). The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme. For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, "cost of goods" sold shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit. For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances and discounts. ii. RESIDENT FOREIGN Sec. 28, (1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the
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Philippines, shall be subject to an income tax equivalent to thirtyfive percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirtyfour percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27 (A). (2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. (C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon

corporations or associations engaged in s similar business, industry, or activity. (D) Rates of Tax on Certain Passive Incomes. (1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000..... 5% Amount in excess of P100,000.. 10% (3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a
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final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. (4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax. (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings. (E) Minimum Corporate Income Tax on Domestic Corporations. (1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. (2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. (3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of

prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case. (4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, "cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. For a manufacturing concern, cost of "goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, "cost of services" shall include interest expense.
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. (c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000...... 5%
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On any amount in excess of P100,000. 10% (d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title. Applies to foreign corporation engaged in trade or business within the Philippines Table II Source of Income Tax (a) On sale of shares of stock of a domestic corporation not listed and traded thru a local stock exchange, held as capital assets: On the net capital gain Not over P100,000 Final tax of 5% On any amount in excess of P10,000 Final tax of 10% NOTE: sale of shares of stock of a domestic corporation thru a local stock agent or thru initial public offering pays the stock transaction tax of the Tax Code, and shall not be subject to income tax (b) From sources within the Philippines, on passive income of interest under the expanded foreign currency deposit system Final tax of 7 1/2% (c) From sources within the Philippines, in passive income of: i. Interest on any currency bank deposit, yield or other monetary benefits from deposit substitutes, trust funds and similar arrangement; ii. Royalties Final tax of 20% (d) Dividend received from a domestic corporation Exempt Take note of the "sources of income" of the corporation given in the problem if such falls under (a) - (e) above, take it out
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and tax it accordingly. The income remaining may now be subject to either the NORMAL TAX, or the MCIT: THE NORMAL TAX: Taxable income (net) from sources within the Philippines i. Beginning January 1, 1998 Final tax of 34% ii. Beginning January 1, 1999 Final tax of 33% iii. Beginning January 1, 2000 and Final tax of 32% thereafter The normal tax is taxed on taxable income, which means that after taking out the sources of income as enumerated in Table I (a) - (e) above, giving you the gross income, deduct the allowable deductions for expenses. THE MINIMUM CORPORATION INCOME TAX: The MCIT is 2% of the MCIT gross income Beginning with the 4th year from start of business operations, the company will be taxed depending on which is higher, the NORMAL TAX or the MCIT gross income from sources, within the Philippines. The MCIT is 2% The same Rules with regard to the MCIT of a domestic corporation apply here The Secretary of Finance may suspend the imposition of the MCIT on any corporation which suffers losses: a) due to prolonged labor dispute; or b) due to force majeure; or c) due to legitimate business reverses REMEMBER: The difference between Table I (domestic corporations) and Table II (resident foreign corporations) is that the latter is ONLY taxed on sources of income within the Philippines. THE GROSS CORPORATE TAX INCOME

Application: The President of the Philippines, upon the recommendation of the Secretary of Finance, may, effective 2000, allow domestic corporations the option to be taxed on gross income as follows: a) the tax is 15% b) available only to firms whose ration of cost of sales to gross sales or receipt from all sources does not exceed 55% c) shall be irrevocable for 3 consecutive years during which the corporation is qualified under the scheme To compute the gross income, consult the computation for gross income in the NORMAL TAX (Caveat: Sir says that the IRR gives a different way to compute the gross income for the GCIT. But the NIRC says they are all the same.) REMEMBER: After (a) - (d) in Table I, the remaining income will be taxed either by the NORMAL TAX, the MCIT or the GCIT. But take note of the applicability of each. Moreover, the computation for gross income was included in this reviewer because you have to take note that the NORMAL TAX is taxed on taxable income (Gross Income Expenses), while the MCIT and GCIT are taxed on gross income. iii. NON-RESIDENT (SEC. 28, NIRC)
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three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; (b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that the country in which the nonresident foreign 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%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirtythree percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph; (c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange:
(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs (C) and (d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-

Not over P100,000........5% On any amount in excess of P100,000 10% Applies to a foreign corporation NOT engaged in trade or business within the Philippines Table III Sources of Income Tax (a) On sale of shares of stock of a domestic corporation not listed and traded thru a local stock exchange, held as capital assets: On the net capital gain Not over P100,000 Final tax of 5% On any amount in excess of P10,000 Final tax of 10% NOTE: sale of shares of stock of a domestic corporation thru a local stock agent or thru initial public offering pays the stock transaction tax of the Tax Code, and shall not be subject to income tax (b) Interest on foreign loans Final tax of 20% (c) Dividend from domestic corporations, under certain conditions (that the country in which the nonresident foreign corporation is domiciled, shall credit against the tax due from such corporation taxes deemed to have been paid in the Philippines equivalent to Final tax of 15% 20%) (d) Gross income from sources within the Philippines i. Beginning January 1, 1998 Final tax of 34% ii. Beginning January 1, 1999 Final tax of 33% iii. Beginning January 1, 2000 and Final tax of 32% thereafter
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REMEMBER: Take note that unlike Table I and II, nonresident foreign corporations are taxed on gross income. Also, the MCIT and GCIT do not apply to them. iv. SPECIAL CORPORATIONS 1. PRIVATE EDUCATIONAL PROFIT HOSPITALS INSTITUTIONS
AND
NON-
Sec. 27, (B) Proprietary Educational Institutions and Hospitals. Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A "Proprietary educational institution" is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.
Proprietary Educational Institutions Taxable proprietary educational institutions shall pay a tax of 10% on their taxable income except those subject to final taxes, provided, however, that if the gross income from unrelated trade, business or other activity exceeds 50% (predominance test) of the total gross income derived by any educational institutions from all sources, the corporate tax rates mentioned above are imposed on the entire taxable income of the educational institution. For this purpose, the term unrelated trade,

business or other activity means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution of its educational purpose or function. A proprietary educational institution is any private school maintained and administered by private individuals or groups and issued a permit to operate by the DECS or the CHED or the TESDA, as the case may be. (Vitug, Acosta). Sec. 4(3) Art. XIV 1987 Constitution: All revenues and assets of nonstock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution and cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions fore reinvestment. Finance Department Order # 137-87 Taxpayer Propriety educational institution and nonprofit hospital Resident international carrier Non-resident owner or lessor of vessel Non-resident cinematographic film owner, lessor or distributor Non-resident lessor of aircraft, machinery Tax Base Taxable income from all sources Gross Philippine Billings Gross rentals, leases, and charter fees from the Philippines Gross income from the Philippines Rate 10%
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and other equipment Philippine sources Regional operating Philippines taxable 10% headquarters of income multinational company GOCCs (except: N/A The same as other GSIS, SSS, PHIC, corporations engaged PCSO and PAGCOR) in similar activities There is no minimum corporate income tax for special corporations All revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes If the gross income of a proprietary educational institution or hospital from unrelated trade, business or other activity exceeds 50% of the total gross income derived from all sources, such educational institution or hospital shall be taxed as an ordinary corporation Non-resident owners of vessels are treated as special corporations only from charters or leases of the vessels to Filipino citizens or corporations approved by the Maritime Industry Authority What are the income tax rules on regional headquarters of a multinational company? Regional headquarters of a multinational company A branch established in the Philippines by a multinational company and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for its affiliates, subsidiaries or branches in the AsiaRegional operating headquarters of a multinational company A branch established in the Philippines by a multinational company which is engaged in any of the following qualifying services: general administration and planning, business planning and coordination, sourcing/procurement of raw
2 1/2% 4 1/2%
25%
Gross rentals, charter and other fees from
7 1/2%

Pacific region and other foreign markets materials and components, corporate finance advisory, marketing control and sales promotion, training and personnel management, logistics services, R&D development services and project development, technical support and maintenance, data processing and communication, and business development Shall pay a tax of 10% of its net income
Shall not be subject to income tax
NON-PROFIT NON-STOCK EDUCATIONAL INSTITUTION Dept Order # 149-95 Non-stock, nonprofit educational institutions are exempt from taxes on all their revenues and assets used actually, directly, and exclusively for educational purposes. They 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 institution of its educational purpose or function. 2. NON-RESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR, OR DISTRIBUTOR Sec. 28, (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines. 3. INTERNATIONAL CARRIERS
Sec. 28, (3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its "Gross Philippine Billings" as defined hereunder: (a) International Air Carrier. - "Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. BOAC V. CIR BOAC maintained a general sales agent in the Phil. The general sales agent was engaged in selling & issuing tickets, breaking down the whole trip into series of trips, receiving fare from the whole trip & allocating to the various airline companies the services rendered. In fact, the regular sales of ticket, its main activity is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt that BOAC was engaged in business in the Phil thru a local agent. It is a resident foreign corporation subject to tax upon its total net income from all sources w/in the Phil. Source of income is the property, activity or service that produced the income. For the source of the income to be considered as coming from the Phil, it is sufficient that the income is derived from activity within the Phil. In BOACs case, the sale of tickets in the Phil is the
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activity that produces the income. The tickets exchanged hands here & payments for fares were also made here in Phil currency. The situs of the source of payment is the Phil. The absence of the flight operations to & from the Phil is not determinative of the source of income or the situs of income taxation. RR 15-2002 Continuous and Uninterrupted Flight shall refer to a flight in the carrier of the same airline company from the moment a passenger, excess baggage, cargo and/or mail is lifted from the Philippines up to the point of final destination of the passenger, excess baggage, cargo and/or mail. The flight is not considered continuous and uninterrupted if transshipment of passenger, excess baggage, cargo and / or mail takes place at any port outside the Philippines on another aircraft belonging to a different airline company. Tax on Foreign Airline Companies without flights starting from or passing through any point in the Philippines An off-line airline having a branch office or a sales agent in the Philippines which sells passage documents for compensation or commission to cover offline flights of its principal or head office, or for other airlines covering flights originating from Philippine ports or offline flights, is not considered engaged in business as an international air carrier NO TAX Imposed Tax on International Air Carrier with Flights originating from Philippine ports --- irrespective of the place where passage documents are sold or issued, 2 % unless subject to a different tax rate under the applicable tax treaty to which the Philippines is a signatory. 4. NON-RESIDENT OWNER OF VESSELS Sec. 28, (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross
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rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. 5. NON-RESIDENT LESSOR OR AIRCRAFT, MACHINERIES, AND OTHER EQUIPMENT Sec. 28, (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees. 6. FOREIGN CURRENCY DEPOSIT SYSTEM/OFFSHORE BANKING UNITS Sec. 28, (4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax. RR 10-76 SECTION 1.Scope. Pursuant to Section 338 of the National Internal Revenue Code,as amended, the following regulations are hereby promulgated to govern the manner of taxation of offshore banks and the expanded Foreign Currency Deposit Units of depository banks established under Presidential Decrees No. 1034 and 1035, respectively.These regulations shall be known as Revenue Regulations No. 10-76.

SECTION 2.Definition of Terms. a."Offshore Banking" shall refer to the conduct of banking transactions in foreigncurrencies involving the receipt of funds principally from external sources and theutilization of such funds as provided in Presidential Decree No. 1034. b."Offshore Banking Unit" hereinafter referred to as OBU, shall mean a branch,subsidiary or affiliate of a foreign banking corporation which is duly authorized by theCentral Bank of the Philippines, as a separate accounting unit, to transact offshore banking business in the Philippines in accordance with the provisions of P.D. 1034 asimplemented by Central Bank Circular No. 546. c."Deposits" shall mean funds in foreign currencies which are accepted and held byan off-shore banking unit in the regular course of business, with the obligation to returnan equivalent amount to the owner thereof, with or without interest. d."Resident" shall mean (1)an individual citizen of the Philippines residing therein; or (2)an individual who is not a citizen of the Philippines but is permanently residing therein; or (3)a corporation or other juridical person organized under the laws of the Philippines.(4)a branch, subsidiary, affiliate, extension office or any other unit of corporations or juridical persons organized under the laws of any foreign country operating in the Philippines. e."Non-resident" shall mean an individual, corporation or other juridical person not included in the above definition of "residents". f."Foreign Currency Deposit Unit" (FCDU) shall mean an accounting unit or department in a local bank or in an existing local branch of foreign banks, which is authorized by the Central Bank of the Philippines to operate under the expanded foreign currency deposit system, in accordance with the provisions of P.D. 1035, as
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implemented by Central Bank Circular No. 547. The FCDU authority shall be distinguished from the authority to accept foreign currency deposits under R.A. No. 6426, as implemented by Central Bank Circular No. 343.g."Gross offshore income" shall mean all income arising from transactions allowed by the Central Bank of the Philippines conducted by and between 1)in the case of an offshore banking unit with another offshore banking unit or with an expanded Foreign Currency Deposit unit or with a non-resident;2)in the case of an expanded Foreign Currency Deposit Unit with another expanded Foreign Currency Deposit Unit or with an Offshore Banking Unit or with a non-resident. h."Gross onshore income" shall mean gross interest income arising from foreign currency loans and advances to and/or investments with residents made by Offshore Banking Units or expanded Foreign Currency Deposit Units. Such gross interest income shall include all fees, commissions and other charges which are integral parts of the income from the above transactions. SECTION 3.Rates of income tax to be imposed. The rates or income tax to be imposed, which shall be in lieu of all other taxes such as, but not limited to privilege tax, gross receipts tax, documentary and science stamp tax and profit remittance tax, are as followers:(a)On offshore income, there shall be imposed an income tax of five percent (5%) based on net offshore income as computed in Section 4. Income realized by offshore banking units on transactions with local commercial banks including branches of foreign banks that may be authorized by the Central Bank of the Philippines to transact business with offshore banking units shall likewise be subject to the same tax, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board, to be subject to the usual income tax payable by banks.(b)In the case of gross onshore income as defined in Section 2(h) above, the tax shall be ten percent (10%) thereof and shall be a final tax.(c)Income not covered by paragraphs (a) and (b) above shall

be subject to the usual corporate taxes imposed by the National Internal Revenue Code, as amended. SECTION 4.Manner of computation of net income. (a)Net offshore income for purposes of Section 3, paragraph (a) above, shall be the amount remaining after deducting from the gross offshore income during the taxable year the following items:1)the proportion of total interest expenses for the same period based on the ratio of offshore interest income which bears to the total gross interest income;2)the proportion of general administrative expenses based on the ratio of net offshore income which bears to the total net income after deducting only interest expenses mentioned in sub-paragraph (1) above.3)Likewise, there shall be allowed a reasonable amount of head office expenses in accordance with the ratio specified in sub-paragraph (2) above.(b)In the case of onshore income, the gross interest income without the benefit of any deduction corresponding to the allocable onshore income, shall be the amount upon which the ten percent (10%) withholding income tax shall be computed. SECTION 5.Manner of filing returns and payment of taxes. Within sixty (60) days after the end of each of the first three quarters of the calendar or fiscal year.(a)for offshore income and other income mentioned In Section 3(c) a return of net taxable offshore income shall be filed with, and the tax due thereon paid, to the Commissioner of Internal Revenue, Revenue Regional Director, Revenue District Officer or the Collection Agent of the City or Municipality where the corporation's principal office is located and where its books of accounts and other data from which the return is prepared are kept, by every offshore banking units and expanded Foreign Currency Deposit Units, regardless of whether there is tax due or not. For these purposes, B.I.R. Form No. 17.02-Q shall be used and the appropriate rates, as enumerated in Section 3 above, shall be applied accordingly.(b)for onshore income in the case of onshore income realized by an offshore banking unit or by an expanded Foreign Currency Deposit Unit, the income need not be included in
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the quarterly income tax return to be filed as required above as the payor-borrower under Section 53, in relation to Section 54, of the National Internal Revenue Code, is constituted as the withholding agent charged with the obligation of deducting, withholding and remitting to the Commissioner of Internal Revenue the income tax due thereon within the period prescribed by law with the appropriate return in accordance with existing revenue and Central Bank regulations. A copy of the quarterly return filed, together with the copy of the official receipt denoting payments thereon, shall be furnished direct to the offshore banking unit or foreign currency deposit unit concerned, which shall in turn submit to the Bureau of Internal Revenue said documents accompanied by statement showing a list of all its domestic borrowers, amount borrowed and interest income thereon. The statement with its attachments, shall be filed together with the quarterly return required above. A final consolidated return or an adjustment return on B.I.R. Form 1702 covering the total taxable onshore and offshore income for the preceding calendar or fiscal year shall be filed on or before the 15th day of the fourth month following the close of the calendar or fiscal year. The return shall include all the items of gross income and deductions for the whole taxable year. The tax shown on the final or adjustment return, after deducting therefrom the quarterly income taxes paid and withheld during the preceding three quarters of the same taxable year, shall either be paid upon filing, or refunded as the case may be. SECTION 6.Statement to be attached to the return. There shall be attached to the final consolidated return or adjustment return of the taxpayer for such taxable year a sworn statement, a specimen form of which is hereto attached, by a responsible officer setting forth in summarized form the pertinent information required by these regulations with respect to the computation of the net offshore income, gross onshore income and taxes paid or withheld. SECTION 7.Records to be kept. Every offshore banking unit, as well as expanded Foreign Currency Deposit Unit, which is duly authorized by the Central Bank of the Philippines to transact offshore

banking business in the Philippines shall maintain books of account which shall be kept in the place of its principal place of business for inspection. In addition, all the supporting data which were used in compiling the summary statement required to be attached to the income tax returns to be filed as prescribed under Section 6hereof must likewise be made readily available at its principal place of business. SECTION 8.Income of non-resident. Any income of non-residents from transactions with either an offshore banking unit or with an expanded Foreign Currency Deposit Unit shall be exempt from any and all taxes. SECTION 9.Income of foreign personnel. There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units in the Philippines as salaries, wages, annuities, compensations, remunerations and emoluments from such offshore banking units a tax equal to fifteen (15%) percent of such gross income. The afore said tax shall be deducted and withheld at source in the same manner and condition as that provided under Supplement "A" Withholding on Wages of Commonwealth Act No. 466, as amended. SECTION 10.Privileges of the offshore banking units. The offshore banking units shall be exempt from all forms of local licenses, fees, dues, imposts or any other local taxes or burdens. The license fee paid by offshore banking units shall be allowed as a deduction in accordance with Section 4 of these regulations. SECTION 11.Registration. Offshore a Banking Units and expanded Foreign Currency Deposit Units shall, uponreceipt of advice from the Central Bank, register with the Bureau of Internal Revenue its business name for the purpose of a.registering its trade name; b.registering as an employer pursuant to
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the provision of R. A. 466;c.registering its name for the purpose of securing its taxpayer account number (TAN).SECTION 12.Repealing Clause. All regulations, rulings or orders or portion thereof, which are inconsistent with the provisions of these regulations are hereby revoked. SECTION 13.Effectivity. These regulations shall apply to income received beginning with taxable year starting after January 1, 1977. RR 14-77 Gross Onshore Income shall mean gross interest income arising from foreign currency loans and advances to and/or investments with residents made by offshore banking units or expanded foreign currency loan transactions. In the case of foreign currency loan transactions, such gross interest income shall refer only to the stipulated interest and shall not include all fees, commissions and other charges which are integral parts of the income from the above transactions. Tax on Gross Onshore Income shall be 10% thereof and shall be a final tax RR 10-98 Sec. 2.24. Income Tax Rate of Interest Income from Foreign Currency Deposit Individual Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System (1) Resident Citizen or Resident Alien 7.5% final withholding tax (2) Non-Resident Citizen Exempt If a bank account is jointly in the name of the non-resident citizen such as an overseas contract worker and his spouse who is a resident in the Philippines, 50% of the interest income from such bank deposit shall be exempt, while the other 50% subject to 7.5% final withholding tax.

Sec. 2.27 and 2.28 Corporate Income Tax on Interest Income from a Depository Bank under the Foreign Currency Deposit System Taxation of Income of an FCDU or OBU from Foreign Currency Transactions In general, income derived by an FCDU or an OBU from foreign currency transactions with residents of the Philippines, including local commercial banks, local branches of foreign banks, and other depository banks under the foreign currency deposit system, shall be subject to final withholding tax of 10% based on gross income. RA 9294 Section 1. Section 27, paragraph (D) (3) of the National Internal Revenue Code, as amended, is hereby further amended to read as follows: "Sec. 27. Rates of Income Tax on Domestic Corporations. "(D) Rates of Tax on Certain Passive Incomes. "(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks: Provided, however, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%). "Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax."
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Section 2. Section 28, paragraph (A)(4) and (A)(7)(b) of the same Code are hereby amended to read as follows: "Sec. 28. Rates of Income Tax on Foreign Corporations. "(A) Tax on Resident Foreign Corporations. "(1) In General.-Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided. That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). "In the case of corporations adopting the fiscal-year accounting period the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. "The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. "Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27(A). "(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. "(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on this 'Gross Philippine Billings' as defined hereunder: "(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess

baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further,That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. "(b) International Shipping. - 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. "(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with nonresidents, other offshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units shall be exempt from all taxes except net income from such transactions as may be specified by the Secretary of Finance, upon recommendations of the Monetary Board which shall be subject to the regular income tax payable by banks: Provided, however, That any interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall be subject only to a final tax at the rate of ten percent (10%). "Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax.
"(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or carmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Section 57 and 58 of this Code: Provided, That interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. "(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. "(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. "(b) Regional operating headquarters as defined in Section 22 (EE) shall pay a tax of ten percent (10%) of their taxable income. "(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. "(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposits Substitutes, Trust Funds and Similar Arrangements and Royaties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however,That interest income derived by a resident foreign corporation from a depository bank under he expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (71/2%) of such interest income. "(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded
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foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular tax payable by banks: Provided, however. That interest income from foreign currency loans granted by such depositors banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%). "Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. "(c) Capital Gains from Sales of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000 Or any amount in excess of P100,000 5% 10%
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premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5 (c) and (d); Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). "(2) Nonresident Cinematographic Film Owner Lessor or Distributor. A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines. "(3) Nonresident Owner or Lessor of Vessels Charactered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (41/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. "(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charter and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (71/2%) of gross rentals or fees. "(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. "(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1996; "(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation which shall be collected and paid as provided in Section 57(A) Of this Code, subject to the condition that the country in which the nonresident foreign 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%) for 1997, nineteen percent (19%) for 1998, eighteen
"(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title. "(B) Tax on Nonresident Foreign Corporation. "(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries,

percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph; "(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed sold, or disposed of through the stock exchange; Not over P 100,000 On any amount in excess of P10,000 7. PETROLEUM SERVICE SUBCONTRACTOR 5% 10%" CONTRACTOR AND contractors or subcontractors engaged operations15%
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in petroleum
PD 87 Amended Act to Promote the Discovery and Production of Indigenous Petroleum and Appropriate Funds Privileges of Contractor: (1) Exempt from all taxes except income tax; (2) Exemption from payment of tariff duties and compensating tax on the importation of machinery and equipment, and spare parts and all materials required for petroleum operations subject to the condition that: a. Said machinery are not manufactured domestically b. Directly and actually needed and will be used exclusively by the contractor / subcontractor in its operations c. Prior approval of the Petroleum Board was obtained by the contractor before importation 8. ENTERPRISES
CONVERSION OF REGISTERED UNDER BASES & DEV. ACT OF 1992 AND PEZA ACT
PD 1354 Imposing final income tax on subcontractors and alien employees of service contractors and subcontractors engaged in petroleum operations in the Philippines 1. Every subcontractor, whether domestic or foreign, entering into contract with a service contractor engaged in petroleum operations in the Philippines derived from contract8% of gross income in lieu of any and all taxes 2. Provided: Income received from all other sources subject to regular income tax under NIRC a. For domestic corporations sources from within and without the Philippines b. For foreign corporations sources from within the Philippines 3. Aliens who are permanent residents of a foreign country but are employed and assigned in the Philippines by service
1995
RR 20-2002 Tax treatment Income derived by an enterprise registered with the Subic Bay Metropolitan Authority, Clark Development Authority, or the PEZA from its registered activities shall be subject to such tax treatment as may be specified in its terms of registration (i.e. the 5% preferential tax rate, the income tax holiday, or the regular income tax rate, as the case may be.) Nonetheless, whatever the tax treatment of said enterprise with respect to its registered activities, income realized by such registered enterprise that is not related to its registered activities shall be subject to the regular internal revenue taxes, such as the 20% final income tax on interest from Philippine Currency bank deposits and yield or any other monetary benefit from deposit

substitutes, and from trust funds and similar arrangements, the 7.5% tax on foreign currency deposits and 5% / 10% capital gains tax or % stock transaction tax, as the case may be, on the sale of shares of stock. Income payments made by a registered enterprise to an entity in the Customs Territory shall not be subject to the preferential tax rates or tax exemption enjoyed by the registered enterprise. Thus, dividends paid to the shareholders of a registered enterprise, interest payments to creditors of such registered enterprise (regardless of any tax provision for grossing up of taxes) , and other such payments shall be subject to the appropriate rate of tax imposable on the recipient of such income. JOHN HAY V. VICTOR LIM As gathered from Section 12 of R.A. No. 7227, the privileges given to Subic SEZ consist principally of exemption from tariff or customs duties, national and local taxes of business entities therein (paragraphs (b) and (c)), free market and trade of specified goods or properties (paragraph d), liberalized banking and finance (paragraph f), and relaxed immigration rules for foreign investors (paragraph g). Proclamation No. 420 also makes available to the John Hay SEZ benefits existing in other laws such as the privilege of export processing zone-based businesses of importing capital equipment and raw materials free from taxes, duties and other restrictions; tax and duty exemptions, tax holiday, tax credit, and other incentives under the Omnibus Investments Code of 1987; and the applicability to the subject zone of rules governing foreign investments in the Philippines. While the grant of economic incentives may be essential to the creation and success of SEZs, free trade zones and the like, the grant to the John Hay SEZ cannot be sustained. The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no support. Neither does the same grant of privileges to the John Hay SEZ find support in the other laws specified under Section 3 of Proclamation No. 420, which laws
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were already extant before the issuance of the proclamation or the enactment of R.A. No. 7227. The nature of most of the assailed privileges is one of tax exemption. It is the legislature, unless limited by a provision of the state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes. The challenged grant of tax exemption would circumvent the Constitutions imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress. In the same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon. If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227. COCONUT OIL REFINERS V TORRES Petitioners claim that the assailed issuances (Executive Order No. 97A; Section 5 of Executive Order No. 80; and Section 4 of BCDA Board Resolution No. 93-05-034) constitute executive legislation, in violation of the rule on separation of powers. Petitioners argue that the Executive Department, by allowing through the questioned issuances the setting up of tax and duty-free shops and the removal of consumer goods and items from the zones without payment of corresponding duties and taxes, arbitrarily provided additional exemptions to the limitations imposed by Republic Act No. 7227, which limitations petitioners identify as follows: (1) [Republic Act No. 7227] allowed only tax and duty-free importation of raw materials, capital and equipment.

(2) It provides that any exportation or removal of goods from the territory of the Subic Special Economic Zone to other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines. Anent the first alleged limitation, petitioners contend that the wording of Republic Act No. 7227 clearly limits the grant of tax incentives to the importation of raw materials, capital and equipment only. Hence, they claim that the assailed issuances constitute executive legislation for invalidly granting tax incentives in the importation of consumer goods such as those being sold in the duty-free shops, in violation of the letter and intent of Republic Act No. 7227. Held: While Section 12 of Republic Act No. 7227 expressly provides for the grant of incentives to the SSEZ, it fails to make any similar grant in favor of other economic zones, including the CSEZ. Tax and duty-free incentives being in the nature of tax exemptions, the basis thereof should be categorically and unmistakably expressed from the language of the statute. Consequently, in the absence of any express grant of tax and duty-free privileges to the CSEZ in Republic Act No. 7227, there would be no legal basis to uphold the questioned portions of two issuances: Section 5 of Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034, which both pertain to the CSEZ. RA 9400 "x x x." SECTION 1. Section 12 of Republic Act No. 7227, as amended, otherwise known as the Bases Conversion and Development Act of 1992, is hereby amended to read as follows: "SEC. 12. Subic Special Economic Zone. "(a) x x x xxx
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"(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and dutyfree importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Tariff and Customs Code of the Philippines, as amended, the National Internal Revenue Code of 1997, as amended, and other relevant tax laws of the Philippines; "(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no national and local taxes shall be imposed within the Subic Special Economic Zone. In lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all business enterprises within the Subic Special Economic Zone and shall be remitted as follows: three percent (3%) to the National Government, and two (2%) percent to the Subic Bay Metropolitan Authority (SBMA) for distribution to the local government units affected by the declaration of and contiguous to the zone, namely: the City of Olongapo and the municipalities of Subic, San Antonio, San Marcelino and Castillejos of the Province of Zambales; and the municipalities of Morong, Hermosa and Dinalupihan of the Province of Bataan, on the basis of population (50%), land area (25%), and equal sharing (25%).
SEC. 2. Section 15 of the Republic Act No. 7227, as amended, is hereby amended to read as follows: "SEC. 15. Clark Special Economic Zone (CSEZ) and Clark Freeport Zone (CFZ). Subject to the concurrence by resolution of the local government units directly affected, the President is hereby authorized to create by executive proclamation a Special Economic Zone covering the lands occupied by the Clark military reservations and its

contiguous extensions as embraced, covered and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended, located within the territorial jurisdiction of Angeles City, municipalities of Mabalacat and Porac, Province of Pampanga, and the municipalities of Capas and Bamban, Province of Tarlac, in accordance with the provision as herein provided insofar as applied to the Clark military reservations. The Clark Air Base proper with an area of not more than four thousand four hundred hectares (4,400 has.), with the exception of the twenty-twohectare commercial area situated near the main gate and the Bayanihan Park consisting of seven and a half hectares (7.5 has.) located outside the main gate of the Clark Special Economic Zone, is hereby declared a Freeport zone. "The CFZ shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital equipment within, into and exported out of the CFZ, as well as provide incentives such as tax and duty-free importation of raw materials and capital equipment. However, exportation or removal of goods from the territory of the CFZ to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Tariff and Customs Code of the Philippines, as amended, the National Internal Revenue Code of 1997, as amended, and other relevant tax laws of the Philippines. "The provisions of existing laws, rules and regulations to the contrary notwithstanding, no national and local taxes shall be imposed on registered business enterprises within the CFZ. In lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all registered business enterprises within the CFZ and shall be directly remitted as follows: three percent (3%) to the National Government, and two percent (2%) to the treasurer's office of the municipality or city where they are located.
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"The governing body of the Clark Special Economic Zone shall likewise be established by executive proclamation with such powers and functions exercised by the Export Processing Zone Authority pursuant to Presidential Decree No. 66, as amended: Provided, That it shall have no regulatory authority over public utilities, which authority pertains to the regulatory agencies created by law for the purpose, such as the Energy Regulatory Commission created under Republic Act No. 9136 and the National Telecommunications Commission created under Republic Act No. 7925. "x x x "Subject to the concurrence by resolution of the local government units directly affected and upon recommendation of the Philippine Economic Zone Authority (PEZA), the President is hereby authorized to create by executive proclamation Special Economic Zones covering the City of Balanga and the municipalities of Limay, Mariveles, Morong, Hermosa, and Dinalupihan, Province of Bataan. "Subject to the concurrence by resolution of the local government units directly affected and upon recommendation of the PEZA, the President is hereby authorized to create by executive proclamation Special Economic Zones covering the municipalities of Castillejos, San Marcelino, and San Antonio, Province of Zambales. "Duly registered business enterprises that will operate in the Special Economic Zones to be created shall be entitled to the same tax and duty incentives as provided for under Republic Act No. 7916, as amended: Provided, That for the purpose of administering these incentives, the PEZA shall register, regulate, and supervise all registered enterprises within the Special Economic Zones." SEC. 3. A new Section 15-A is hereby inserted, amending Republic Act No. 7227, as amended, to read as follows:

"SEC. 15-A. Poro Point Freeport Zone (PPFZ). The two hundred thirty-six and a half-hectare (236.5 has.) secured area in the Poro Point Special Economic and Freeport Zone created under Proclamation No. 216, series of 1993, shall be operated and managed as a freeport and separate customs territory ensuring free flow or movement of goods and capital equipment within, into and exported out of the PPFZ. The PPFZ shall also provide incentives such as tax and duty-free importation of raw materials and capital equipment. However, exportation or removal of goods from the territory of the PPFZ to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Tariff and Customs Code of the Philippines, as amended, the National Internal Revenue Code of 1997, as amended, and other relevant tax laws of the Philippines. "The provisions of existing laws, rules and regulations to the contrary notwithstanding, no national and local taxes shall be imposed on registered business enterprises within the PPFZ. In lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all registered business enterprises within the PPFZ and shall be directly remitted as follows: three percent (3%) to the National Government, and two percent (2%) to the treasurer's office of the municipality or city where they are located. "The governing body of the PPFZ shall have no regulatory authority over public utilities, which authority pertains to the regulatory agencies created by law for the purpose, such as the Energy Regulatory Commission created under Republic Act No. 9136 and the National Telecommunications Commission created under Republic Act No. 7925." SEC. 4. A new Section 15-B is hereby inserted, amending Republic Act No. 7227, as amended, to read as follows: "SEC. 15-B. Morong Special Economic Zone (MSEZ). Duly registered business enterprises operating within the MSEZ created under Proclamation No. 984, series of 1997, shall be entitled to tax and duty-
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free importation of raw materials and capital equipment. In lieu of all national and local taxes except real property tax on land, a five percent (5%) tax on gross income earned shall be paid by all registered business enterprises which shall be directly remitted as follows: three percent (3%) to the National Government, and two percent (2%) to the treasurer's office of the municipality or city where they are located." SEC. 5. A new Section 15-C is hereby inserted, amending Republic Act No. 7227, as amended, to read as follows: "Sec. 15-C. John Hay Special Economic Zone (JHSEZ). Registered business enterprises which will operate after the effectivity of this Act, within the JHSEZ created under Proclamation No. 420, series of 1994, shall be entitled to the same tax and duty incentives as provided for under Republic Act No. 7916, as amended: Provided, That for the purpose of administering these incentives, the PEZA shall register, regulate, and supervise all registered enterprises within the JHSEZ: Provided, further, That the Conversion Authority and the John Hay Management Corporation (JHMC) shall only engage in acquiring, owning, holding, administering or leasing real properties, and in other activities incidental thereto." RA 9399 SECTION 1. Grant of Tax Amnesty. - Registered business enterprises operating prior to the effectivity of this Act within the special economic zones and freeports created pursuant to Section 15 of Republic Act No. 7227, as amended, such as the Clark Special Economic Zone created under Proclamation No. 163. series of 1993; Poro Point Special Economic and Freeport Zone created under Proclamation No. 216, series of 1993; John Hay Special Economic Zone created under Proclamation No. 420, series of 1994; and Morong Special Economic Zone created under Proclamation No. 984, series of 1997, may avail themselves of the benefits of remedial tax amnesty herein granted on all applicable tax and duty liabilities, inclusive of

fines, penalties, interests and other additions thereto, incurred by them or that might have accrued to them due to the rulings of the Supreme Court in the cases of John Hay People's Coalition v. Lim, et al., G.R. No. 119775 dated 23 October 2003 and Coconut Oil Refiners Association, Inc. v. Torres, et al, G.R. No. 132527 dated 29 July 2005, by filing a notice and return in such form as shall be prescribed by the Commission of Internal Revenue and the Commissioner of Customs and thereafter, by paying an amnesty tax of Twenty-five thousand pesos (P25,000.00) within six months from the effectivity of this Act: Provided, That the applicable tax and duty liabilities to be covered by the tax amnesty shall refer only to the difference between: (i) all national and local impositions under relevant tax laws, rules and regulations; and (ii) the five percent (5%) tax on gross income earned by said registered business enterprises as determined under relevant revenue regulations of the Bureau of Internal Revenue and memorandum circulars of the Bureau of Customs during the period covered: Provided, however, That the coverage of the tax amnesty herein granted shall not include the applicable taxes and duties on articles, raw materials, capital goods, equipment and consumer items removed from the special economic zone and freeport and entered in the customs territory of the Philippines for local or domestic sale, which shall be subject to the usual taxes and duties prescribed in the National Internal Revenue Code (NIRC) of 1997,as amended, and the Tariff and Customs Code of the Philippines, as amended. 3. Kinds of Taxes: (Domestic, Resident, Non-Resident Corporations) a. Final income tax interest, royalties, capital gains on shares of stock dividends b. Income tax at the end of the year / quarterly income tax CIR V PROCTER & GAMBLE(INCLUDING MR) The ordinary 35% tax rate applicable to dividend remittances to nonresident corporate stockholders of a Philippine corporation, goes down
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to 15% if the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced 15% dividend tax rate is applicable if the USA shall allow to P&G-USA a tax credit for taxes deemed paid in the Philippines applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for taxes deemed paid in the Philippines must, as a minimum, reach an amount equivalent to 20% points which represents the difference between the regular 35% dividend tax rate and the preferred 15% dividend tax rate. It is important to note that Sec. 24(b)1 of the NIRC does not require that the US must give a deemed paid tax credit for the dividend tax (20% points) waived by the Philippines in making applicable the preferred dividend tax rate of 15%. In other words, our NIRC does not require that the US tax law deem the parentcorporation to have paid the 20% points of dividend tax waived by the Philippines. The NIRC only requires that the US shall allow P&G-USA a deemed paid tax credit in an amount equivalent to the 20% points waived by the Philippines. CIR V WANDER PHILS. (160 SCRA 573) Wander Phils. Inc is a domestic corporation, a wholly-owned subsidiary of Glaro S.A. Ltd. A Swiss corp not engaged in trade or business in the Phil. In 1975&1976, Wander remitted to Glaro dividends on which 35% was withheld & paid to the BIR. In 1977, Wander filed a claim for refund contending it is liable only to 15% withholding tax in accordance with sec 24(b)(1) of the Tax Code. Under the said provision, dividends received from a domestic corporation liable to tax shall be 15% of the dividends received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% w/c represents the

difference between the regular tax of 35% on corporations & the tax of 15% on dividends.
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Rev. Memo Circ. 55-80 Addition of 2 non-deductible taxes under Sec. 30 (c) of the NIRC: 1. Taxes paid on articles imported by the taxpayer where such importation is not connected with his trade or business 2. Excess electric energy consumption tax imposed by BP 36 BANK OF AMERICA VS. COMMISSIONER Facts: Bank of America is a foreign corporation duly licensed to engage in business in the Philippines. On July 20, 1982, it paid 15% branch profit remittance tax in the amount of P7,538,460,.72 on profit from its regular banking unit operations and P44,790.25 on profit from its foreign currency deposit unit operations or a total of P7,984,250.97. The tax base was based on net profits after income tax without deducting the amount corresponding to the 15% tax. Petitioner filed a claim with the BIR of that portion of the payment which corresponds to the 15% branch profit remittance tax, on the ground that the tax should have been computed on the basis of profits actually remitted, which is P45,244,088.85, and not on the amount before profit remittance tax, which is P53,228,339.82. Subsequently, without awaiting respondents decision, petitioner filed a petition for review with the CTA for recovery of the amount of P1,041,424.03. The court ruled in favor of the bank. Issue: Whether or not the branch profit remittance tax paid or withheld should be deducted from the tax base? Held: In the 15% remittance tax, the law specifies its own tax base to be on the profit remitted abroad. The tax is imposed on the amount sent abroad, and the law calls for nothing further. The taxpayer is a single entity and it should be understandable if it is the local branch of the corporation, using its own local funds, which remits the tax to the Philippine Government. The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one
HELD: In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. The fact that Switzerland did not impose any tax on the dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition. Wander liable only to withholding tax rate of 15% & is therefore entitled to refund. As to the contention of the Commissioner that Wander is but a withholding agent of the government & therefore can not claim reimbursement of the alleged overpaid taxes is UNTENABLE. Wander is a wholly owned subsidiary of Glaro. The fact that it became a withholding agent of the government, which was not by choice, cannot be considered as an abdication of its responsibility to its mother company. As the Philippine counterpart, Wander is the proper entity who should claim for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro.
4. BRANCH PROFIT REMITTANCE TAX Sec. 28, (5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.

hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a majority of all the latters shares of stock are owned by such foreign corporations. Prior to the amendatory provisions of the Revenue Code, local branches were made to pay only the usual corporate income tax of 25%-35% on net income applicable to resident foreign corporation. While Philippine subsidiaries of foreign corporations subject to the same rate of 25%-35% on their net income, dividend payments, however, were additionally subjected to a 15% withholding tax. In order to avert what would otherwise appear to be an unequal tax treatment on such subsidiaries vis--vis local branch offices, a 20%, later reduced to 15%, profit remittance tax was imposed on local branches on their remittances of profits abroad. But this is where the tax pari-passu ends between domestic branches and subsidiaries of foreign corporations. 5. Minimum Corporate Income Tax Sec. 27, (E) Minimum Corporate Income Tax on Domestic Corporations. (1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. (2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. (3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to
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suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case. (4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, "cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. For a manufacturing concern, cost of "goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used
and cost of supplies: Provided, however, That in the case of banks, "cost of services" shall include interest expense.
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income tax. Accordingly, the MCIT shall not apply to the following resident foreign corporations: 1. international carrier 2. offshore banking units 3. regional operating headquarters 4. firms that are taxed under special income tax regime (such as those enterprises registered with PEZA and enterprises registered pursuant to the Bases Conversion and Development Act 6. Improperly Accumulated Earnings Tax SEC. 29. Imposition of Improperly Accumulated Earnings Tax. (A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. (1) In General. - The improperly accumulated earnings tax imposed in the preceding Section 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 to accumulate instead of being divided or distributed. (2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporations; (b) Banks and other nonbank financial intermediaries; and (c) Insurance companies.
Sec. 28 [A][2] NIRC Foreign corps. (2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. RR 9-98 Imposition of the tax A minimum corporate income tax of 2% of the gross income as of the end of the taxable year is hereby imposed upon any domestic corporation beginning the 4th taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.
Carry forward of excess minimum corporate income tax Any excess of the minimum corporate income tax over the normal income tax as computed shall be carried against the normal income tax for the 3 immediately succeeding years. Relief from the MCIT The Secretary of Finance, upon recommendation of the Commissioner, may suspend imposition of the MCIT upon submission of proof by the applicant-corporation, duly verified by the Commissioners authorized representative, that the corporation sustained substantial losses on account of a prolonged labor dispute or because of force majeure or because of legitimate business reverses. The MCIT on Resident Foreign Corporations The MCIT shall only apply to resident foreign corporations which are subject to normal
(C) Evidence of Purpose to Avoid Income Tax. (1) Prima Facie Evidence. - the fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. (2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to the contrary. (D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly accumulated taxable income' means taxable income' adjusted by: (1) Income exempt from tax; (2) Income excluded from gross income; (3) Income subject to final tax; and (4) The amount of net operating loss carry-over deducted; And reduced by the sum of: (1) Dividends actually or constructively paid; and (2) Income tax paid for the taxable year. Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of 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 twelve (12)-month period of fiscal year 1997-1998. (E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the business' includes the reasonably anticipated needs of the business. RR 2-2001
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Sec. 2 There is imposed a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. The rationale is that if the earnings and profits were distributed, the shareholders would then be liable to income tax thereon, whereas if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. Thus, a tax 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 dividend tax on earnings distributed to them by the corporation. The touchstone of the liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would not generally make the accumulated or undistributed earnings subject to the tax. However, if there is a determination that a corporation has accumulated income beyond the reasonable needs of the business, the 10% improperly accumulated earnings tax shall be imposed. Sec. 4 Coverage The Improperly Accumulated Earnings Tax do not apply to the followings corporations: 1. Banks and other non-bank financial intermediaries; 2. Insurance companies; 3. Publicly-Held corporations; 4. Taxable partnerships; 5. General Professional Partnerships; 6. Non-Taxable joint ventures; and 7. Enterprises registered with PEZA and enterprises registered pursuant to the Bases Conversion and Development Act

CYANAMID PHIL. VS. CA Facts: Cyanamid Philippines is a wholly owned subsidiary of American Cyanamid Co., based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an importer / indentor. On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of deficiency income tax. Petitioner protested the assessments particularly the 25% Surtax Assessment. Petitioner claimed that the surtax for the undue accumulation of earnings was not proper because the said profits were retained to increase petitioners working capital and it would be used for reasonable business needs of the company. Petitioner contended that it availed of the tax amnesty under Executive Order no. 41, hence enjoyed amnesty from civil and criminal prosecution granted by law.
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the accumulated profits must be used within the reasonable time after the close of the taxable year. In the instant case, petitioner did not establish, by clear and convincing evidence that such accumulation of profit was for the immediate needs of the business. In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio between current assets to current liabilities. The working capital needs of a business depend upon the nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit to the business, and similar factors. Petitioner, by adhering to the Bardahl formula,6 failed to impress the tax court with the required definiteness envisioned by the statute. 7. Fringe Benefits Tax SEC. 33. Special Treatment of Fringe Benefit.(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the
6
Held: The provision imposing additional tax on corporation improperly accumulating profits or surplus (Sec. 25 NIRC) discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on the improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed. If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or profits to accumulate, and the taxpayer contested such a determination, the burden of proving the determination wrong, together with the corresponding burden of first going forward with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or investment company and does not have an unreasonable accumulation of earnings or profits. In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts. Furthermore,
The Bardahl formula was developed to measure corporate liquidity. The formula requires an examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw materials, raw materials into inventory, and inventory into sales, including the time it takes to collect payment for sales.

fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25. (B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for he employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section: (1) fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into account the peculiar nature and special need of the trade, business or profession of the employer. RR 3-98 Valuation of Fringe Benefits: 1. if the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount granted or paid for; 2. if the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property 3. if the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property. RR 8-2000
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Sec. 2 The following shall be considered as De Minimis benefits and is not subject to withholding tax on compensation income of both managerial and rank and file employees. 1. Monetized unused vacation leave credits not exceeding 10 days during the year; 2. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125.00 a month; 3. Rice subsidy of P1,000 or 1 sack of 50kg rice per month amounting to not more than P1,000; 4. Uniforms and clothing allowance not exceeding P3,000 per annum; 5. Actual yearly medical benefits not exceeding P10,000 per annum; 6. Laundry allowance not exceeding P300 per month; 7. Employees achievement awards which must be in the form of a 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; 8. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; 9. Flowers, fruits, books or similar items given to employees under special circumstances; and 10. Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage. RR 10-2000 The following shall be considered as de minimis benefits subject to Income Tax as well as withholding tax in compensation income of both managerial and rank and file employees: 1. Monetized unused vacation leave credits not exceeding 10 days during the year and the monetized value of leave credits paid to government officials and employees;
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2. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125.00 a month; 3. Rice subsidy of P1,000 or 1 sack of 50kg rice per month amounting to not more than P1,000; 4. Uniforms and clothing allowance not exceeding P3,000 per annum; 5. Actual yearly medical benefits not exceeding P10,000 per annum; 6. Laundry allowance not exceeding P300 per month; 7. Employees achievement awards which must be in the form of a 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; 8. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; 9. Flowers, fruits, books or similar items given to employees under special circumstances; and 10. Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage. 11. Fixed or variable transportation, representation and other allowances; The excess of advances made over actual expenses shall constitute taxable income if such amount is not returned to the employer Vacation and sick leave allowances constitute compensation unless considered as #1 12. De Minimis Benefits (Last amended by RR No. 5-2011) (a) Monetized unused vacation leave credits of private employees not exceeding 10 days during the year (b) Monetized value of vacation and sick leave credits paid to government officials and employees

(c) Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month (d) Rice subsidy of P1,500 or 1 sack of 50 kg rice amounting to not more than P1,500 (e) Uniform and clothing allowance not exceeding P4,000 per year (f) Actual yearly medical benefits not exceeding P10,000 (g) Laundry allowance of P300 per month (h) Employee achievement awards, for length of service or safety achievement 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 (i) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum (j) Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a per region basis Part 3 D. TAX ON CORPORATIONS
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SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. (1) In General. Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve. Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27(A). (2) Minimum Corporate Income Tax on Resident Foreign Corporations. A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection.

(3) International Carrier. An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder: (a) International Air Carrier. 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. (b) International Shipping. 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. (4) Offshore Banking Units. The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.
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Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax. (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, That interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. (6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. (a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. (b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income. (7) Tax on Certain Incomes Received by a Resident Foreign Corporation. (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest:

Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and onehalf percent (7 1/2%) of such interest income. (b) Income Derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. (c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange: Not over P100,000 5% On any amount in excess of P100,000 10% (d) Intercorporate Dividends. Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title. (B) Tax on Nonresident Foreign Corporation. BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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(1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c) and (d): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines. (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees. (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;

(b) Intercorporate Dividends. A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to the condition that the country in which the nonresident foreign 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%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph; (c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange: Not over P100,000 5% On any amount in excess of P100,000 10% 1. THE TAXPAYER 2. EXEMPTION FROM THE TAX SEC. 30. Exemptions from Tax on Corporations. The following organizations shall not be taxed under this Title in respect to income received by them as such:
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(A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; (F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the

necessary selling expenses on the basis of the quantity of produce finished by them; Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. E. EXEMPT ENTITIES GENERAL PRINCIPLE EXEMPTION STRICTLY CONSTRUED 1. PARTNERSHIP (SEC. 26) SEC. 26. Tax Liability of Members of General Professional Partnerships. A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. Professional Partnership of Real Estate Brokers Exempt from Income Tax (Ruling No. 294-88, July 5, 1988) Ruling No. 294-88, July 5, 1988 A professional partnership of real estate brokers is exempt from income tax pursuant to Section 24(a) of the Tax Code, as amended. Accordingly, the commissions that will be paid to said partnership for professional services rendered are exempt from the withholding tax provisions of Revenue Regulations No. 6-85 otherwise known as the
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revised and Consolidated Expanded Withholding Tax Regulations implementing Section 50(b) of the Tax Code, as amended. 2. CO-OWNERSHIP OBILLOS v. COMMISSIONER, L-68118. October 29, 1985 This is about the tax liability of 4 brothers & sisters who sold 2 parcels of land which they had acquired from their father. In 1973, Jose Obillos Sr bought 2 parcels of land from Ortigas & Co & transferred his rights to his 4 children to enable them to build their residences. In 1974, the 4 children resold the lots to Walled City Securities Corp & earned profit. CIR assessed the 4 children with corporate income tax. HELD: It is error to hold that petitioners (Obillos) have formed a taxable unregistered partnership simply because they contributed in buying the lots, resold the same & divided the profit among themselves. They are simply co-owners. They were not engaged in any joint venture by reason of the isolated transaction. The original purpose was to divide the lots for residential purposes. The division of the profit was merely incidental to the dissolution of the co-ownership. 3. SEC. 30 CORPORATIONS Sec. 23-35, RR2 Sec. 23. Distributive Shares of partners- Under present laws and regulations the distributive shares of partners are subject to the final withholding tax of 15%. Sec. 24. Proof of exemption In order to establish its exemption, and thus will be relieved from the duty of filing returns of income and paying the tax, it is necessary that every organization claiming an exemption file an affidavit with the CIR, showing the character of the organization, the purpose for which it was organized, its actual activities, the sources of its income and disposition, whether or not any of its income is credited t surplus or inures or may incur to the

benefit of any private shareholder or individual, in general, all facts relating to its operations which affects its rights of exemption. TO such affidavit should be attached a copy of the charter or articles of incorporation, the by-laws of the organization, and the latest financial statement showing the assets, liabilities, receipts, and disbursements of the organization. Upon receipt of the affidavit and other papers by the CIR, the organization will be informed whether or not it is exempt. When an organization has established its right to exemption, it need not thereafter make and file a return of income as required under Section 46 of the Tax Code. However, the organization, should file on or before April 15 of each year, an annual information under oath, stating its gross income and expenses incurred during the preceding year, and a certificate showing that there has not been any substantial change in its By-laws, Articles of Incorporation, manner of operation, and activities as well as sources of disposition of income. Sec. 25. Agriculture and horticultural organizations. The organization contemplated by subsection (a) of Section 27 of the Code as entitled to exemption from income taxation are those which (1) have no net income inuring to the benefit of any member; (2) are education or instructive in character; and (3) have their objects the betterment of the conditions of those engaged in such pursuits, the improvement of the grade of their products, and the development of a higher degree of efficiency in their respective occupations. Organizations such as provincial fairs and like associations of a quasi-public character, which are designed to encourage the development of better agricultural and horticultural products through a system of awards, prizes, or premiums, and whose income derived from gate receipts, entry fees, donations, etc., is used exclusively to meet the necessary expenses of upkeep and operation, are thus exempt. On the other hand, associations which have for their purpose, for example, holding of periodical race meets, the profits from which may inure to the benefit of their shareholders, are not exempt. Similarly, corporations engaged in growing agricultural or horticultural products or raising livestock or
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similar products for profits are not exempt from tax under this paragraph. on issues voting shares, which entitle the holders upon the dissolution of the corporation to receive the proceeds of its property, including accumulated income, the right to exemption ceases to exist, even though the by-laws provide that the shareholders shall not receive any dividend or other return upon their shares. Section 31. Business leagues. -A business league is an association of persons having some common business interest, which limits its activities to work for such common interest and does not engage in a regular business of a kind ordinarily carried on for profit. Its work need not be similar to that of a chamber of commerce or board of trade. If it engages in a regular business of a kind ordinarily carried on for profit, the fact that the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not ground for exemption. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not exempt, since its members have no common business interest, even though all of its income is devoted to the purpose stated. A clearing house association, not organized for profit, no part of the net income for which inures to any private shareholder or individual, is exempt provided its activities are limited to the exchange of checks, and similar work for the common benefit of its members. An association of persons who are engaged in the transportation business, whether by land or water, which is designed to promote the legitimate objects of such business, and all of the income of which is derived from membership dues and is expended for office expenses is exempt from tax. Section 32. Civic leagues. Civic leagues entitled to exemption comprise those not organized for profit but operated exclusively for purposes beneficial to the community as a whole. In general, organizations engaged in promoting the welfare of mankind are exempt from tax.

Section 33. Social clubs. - The exemption applies to practically all social and recreation clubs which are supported by membership fees, dues, and assessments. If a club, by reason of the comprehensive powers granted in the charter, engages in business or in agriculture or horticulture, for profit, such club is not organized and operated exclusively for pleasure, recreation, or social purposes, and any profit realized from such activities is subject to tax. Section 34. Mutual insurance companies and like organizations. - It is necessary to exemption that the income of the company be derived solely from assessments, dues, and fees collected from members. If income is received from other sources, the corporation is not exempt. Income, however, from sources other than those specified does not prevent exemption where its receipt is a mere incident of the business of the company. Thus the receipt of interest upon a working bank balance, or of the proceeds of the sale of badges, office supplies, or equipment, will not defeat the exemption. The same is true of the receipt of interest upon Government bonds, where they were purchased and were afterwards sold. Where, however, such bonds are bought as a permanent investment, the receipt of the interest destroys the exemption. The receipt of what is, in substance, an entrance fee, charged by a mutual life insurance company as a condition of membership, does not render the company taxable, although this fee is called a premium. If an organization issues policies for stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance and maintains investments from which income is derived, it is not entitled to exemption. On the other hand, an organization may be entitled to exemption, although it makes advance assessment for the sole purpose of meeting future losses and expenses, provided that the balance of such assessments remaining on hand at the end of the year is retained to meet losses and expenses or is returned to members. An organization of a purely local character is one whose business activities are confined to a particular community, place, or district, irrespective, however, of political subdivisions.
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Section 35. Farmers' cooperative marketing and purchasing association - Cooperative associations, acting as sales agents for farmers or others, in order to come within the exemption must establish that for their own account they have no net income. Cooperative dairy companies, which are engaged in collecting milk and disposing of it or the products thereof and distributing the proceeds, less necessary operating expenses, among their members are exempt from the tax. If the proceeds of the business are distributed in any other way that on such a proportionate basis, the company will be subject to tax. A farmers association is not exempt from taxation where in accounting to farmers furnishing produce for the proceeds of sales it deducts more than the necessary selling expenses incurred. Cooperative associations acting as purchasing agents are not expressly exempt from tax, but rebates made to purchasers, whether or not members of the associations, in proportion to their purchase may be excluded from gross income in computing the net income subject to tax. Any profits made from non-members and distributed to members in the guise of rebates are, of course, subject to tax. Cooperative marketing associations duly incorporated under Act No. 3425, known as the Cooperative Marketing Law are exempt from income tax. SINCO V. CIR, 100 PHIL 127 Appellee is a non-profit institution and since its organization it has never distributed any dividend or profit to its stockholders. Only part of its income went to the payment of its teachers or professors and to the other expenses of the colleges incident to an educational institution but none of the income had never been channeled to the benefit of any individual stockholders.
Held: Whatever payment is made to those who work for a school or college as a remuneration for their services is not considered as distribution of profit as would make the school one conducted for profit.

The proof of exemption required by section 243, Regulation No. 2, Department of Finance is intended to relieve the tax-payer of the duty of filing returns and paying the tax. The failure to observe the requirement called for therein can not constitute a waiver of the right to enjoy the exemption. To hold otherwise would be tantamount to incorporating into the tax laws same legislative matter by administrative regulation. 4. RP- L I E R NCOME TAX TREATY ARTICLE 15 INDEPENDENT PERSONAL SERVICES (1) Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity may be taxed by that Contracting State. Except as provided in paragraph (2), such income shall be exempt from tax by the other Contracting State. (2) Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity in the other Contracting State may be taxed by that other Contracting State, if: (a) He has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; (b) He is present in that other Contracting State for a period or periods aggregating 90 days or more in the taxable year; or (c) The gross remuneration derived in the taxable year from residents of that other Contracting State for the performance of such services in the other Contracting State exceeds 10,000 United States dollars or its equivalent in Philippine pesos or such higher amount as may be specified and agreed in letters exchanged
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between the competent authorities of the Contracting States. (3) The term "income" as used in paragraph (2) means net income. ARTICLE 16 DEPENDENT PERSONAL SERVICES (1) Except as provided in Article 20 (Governmental Functions), wages, salaries, and similar remuneration derived by an individual who is a resident of one of the Contracting States from labor or personal services performed as an employee, including income from services performed by an officer of a corporation, may be taxed by that Contracting State. Except as provided by paragraph (2) and (3) and in Articles 20 (Governmental Functions), 21 (Teachers), and 22 (Students and Trainees), such remuneration derived from source within the other Contracting State may also be taxed by that other Contracting State. (2) Remuneration described in paragraph (1) derived by an individual who is a resident of one of the Contracting States shall be exempt from tax by the other Contracting State if (a) He is present in that other Contracting State for a period or periods aggregating less than 90 days in the taxable year; (b) He is an employee of a resident of, or of a permanent establishment maintained in, the first-mentioned Contracting State; and (c) The remuneration is not borne as such by a permanent establishment which the employer has in that other Contracting State. (3) Notwithstanding the preceding provisions of this Article, remuneration derived by an employee of a resident of one of the Contracting States for labor or personal services performed as a member of the regular complement of a ship or aircraft operated in international traffic by a resident of that Contracting State may be taxed only by that Contracting State.

ARTICLE 17 ARTISTES AND ATHLETES (1) Notwithstanding the provisions of Article XV (Independent Personal Services) and XVI (Dependent Personal Services), income derived by public entertainers such as theater, motion picture, radio or television artistes, and musicians, and by athletes, from their personal activities as such may be taxed in the Contracting State in which these activities are exercised provided that (a) Such income exceeds 100 United States dollars or its equivalent in the Philippine pesos per day, or (b) Such income exceeds in the aggregate 3,000 United States dollars or its equivalent in Philippine pesos during the taxable year. (2) Where income in respect of personal activities as such of a public entertainer or athlete accrues not to that entertainer or athlete himself but to another person, that income may, notwithstanding the provisions of Articles 8 (Business Profits), 15 (Independent Personal Services) and 16 (Dependent Personal Services), be taxed in the Contracting State in which the activities of the entertainer or athlete are exercised. (3) Notwithstanding the provisions of paragraph (1) and Articles 15 (Independent Personal Services) and 16 (Dependent Personal Services), income derived from activities performed in a Contracting State by public entertainers or athletes shall be exempt from tax in that Contracting State if the visit to that State is substantially supported or sponsored by the other Contracting State and the public entertainer or athlete is certified as qualified under this provision by the competent authority of the sending State. ARTICLE 18 PRIVATE PENSIONS AND ANNUITIES (1) Except as provided in Article 20 (Governmental Functions), pensions and other similar remuneration paid to an individual in consideration of past employment shall be taxable by the Contracting State where the service is rendered.
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(2) Annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that Contracting State. (3) Child support payments made by an individual who is resident of one of the Contracting States to an individual who is resident of the other Contracting State shall be exempt from tax in that other Contracting State. (4) The term "pensions and other similar remuneration", as used in this article, includes periodic payments other than social security payments covered in Article XIX (Social Security Payments) made (a) By reason of retirement or death and in consideration for services rendered or (b) By way of compensation for injuries or sickness received in connection with past employment. (4) The term "annuities", as used in this article, means a stated sum paid periodically at stated times during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). (5) The term "child support payments", as used in this article, means periodic payments for the support of a minor child made pursuant to a written separation agreement or a decree of divorce, separation maintenance, or compulsory support. ARTICLE 19 SOCIAL SECURITY PAYMENTS Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State (or in the case of such payments by the Philippines to an individual who is a citizen of the United States) shall be taxable only in the first-mentioned Contracting State. This article shall not apply to payments described in Article XX (Governmental Functions). ARTICLE 20 GOVERNMENTAL FUNCTIONS

Wages, salaries and similar remuneration, including pensions, annuities, or similar benefits, paid from public funds of one of the Contracting States; (a) To a citizen of that Contracting State, or (b) To a citizen of a State other than a Contracting State who comes to the other Contracting State expressly for the purpose of being employed by the first-mentioned Contracting State. for labor or personal services performed as an employee of the national Government of that Contracting State, or any agency thereof, in the discharge of functions of a governmental nature shall be exempt from tax by the Contracting State. ARTICLE 21 TEACHERS (1) Where a resident of one of the Contracting States is invited by the Government of the other Contracting State, a political subdivision or local authority thereof, or by a university or other recognized educational institution in that other Contracting State to come to that other Contracting State for a period not expected to exceed 2 years for the purpose of teaching or engaging in research, or both, at a university or other recognized educational institution and such resident comes to that other Contracting State primarily for such purpose, his income from personal services for teaching or research at such university or educational institution shall be exempt from tax by that other Contracting State for a period not exceeding 2 years from the date of his arrival in that other Contracting State. (2) This article shall not apply to income from research if such research is undertaken not in the general interest but primarily for the private benefit of a specific person or persons. ARTICLE 22 STUDENTS AND TRAINEES (1) (a) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the
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other Contracting State and who is temporarily present in that other Contracting State for the primary purpose of (ii) Studying at a university or other recognized educational institution in that other Contracting State, or (iii) Securing training required to qualify him to practice a profession or professional specialty, or (iv) Studying or doing research as a recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or educational organization, shall be exempt from tax by that other Contracting State with respect to amounts described in subparagraph (b) for a period not exceeding 5 taxable years from the date of his arrival in that other Contracting State. (b) The amounts referred to in paragraph (a) are (i) Gifts from abroad for the purpose of his maintenance, education, study, research, or training; (ii) The grant, allowance, or award; and (iii) Income from personal services performed in that other Contracting State in an amount not in excess of 3,000 United States dollars or its equivalent in Philippine pesos for any taxable year. (2) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State as an employee of, or under contract with, a resident of the first-mentioned Contracting State, for the primary purpose of (a) Acquiring technical, professional, or business experience from a person other than that resident of the first-mentioned Contracting State or other than a person related to such resident, or (b) Studying at a university or other recognized educational institution in that other Contracting State,

shall be exempt from tax by that Contracting State for a period not exceeding 12 consecutive months with respect to his income from personal services in an aggregate amount not in excess of 7,500 United States dollars or its equivalent in the Philippine pesos for any taxable year. (3) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State for a period not exceeding 1 year, as a participant in a program sponsored by the Government of that other Contracting State, for the primary purpose of training, research, or study, shall be exempt from tax by that other Contracting State with respect to his income from personal services in respect of such training, research, or study performed in that other Contracting State in an aggregate amount not in excess of 10,000 United States dollars or its equivalent in Philippine pesos in any taxable year. (4) The benefits provided under Article 21 (Teachers) and paragraph (1) of this Article shall, when taken together, extend only for such period of time, not to exceed 5 taxable years from the date of arrival of the individual claiming such benefits, as may reasonably or customarily be required to effectuate the purpose of the visit. The benefits provided under Article 21 (Teachers) shall not be available to an individual if, during the immediately preceding period, such individual enjoyed the benefits of paragraph (1) of this Article. 5. OMNIBUS INVESTMENT CODE DNCOME TAX HOLIDAY INCENTIVE, AS AMENDED BY EO 206 TITLE III - INCENTIVES TO REGISTERED ENTERPRISES Art. 39. Incentives to Registered Enterprises. - All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment; (a) Income Tax Holiday.
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(1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be prescribed by the Board, the income tax exemption will be extended for another year in each of the following cases: i. the project meets the prescribed ratio of capital equipment to number of workers set by the Board; ii. utilization of indigenous raw materials at rates set by the Board; iii. the net foreign exchange savings or earnings amount to at least US$500,000.00 annually during the first three (3) years of operation. The preceding paragraph notwithstanding, no registered pioneer firm may avail of this incentive for a period exceeding eight (8) years. (2) 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 proportionate to their expansion under such terms and conditions as the Board may determine; Provided, however, That 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) The provision of Article 7 (14) notwithstanding, registered firms shall not be entitled to any extension of this incentive. (b) Additional Deduction for Labor Expense. - For the first five (5) years from registration a registered enterprise shall be allowed an additional deduction from the taxable income of fifty percent (50%) of the wages corresponding to the increment in the number of direct labor for skilled and unskilled workers if the project meets the prescribed ratio of capital equipment to number of workers set by the Board: Provided, That this additional deduction shall be doubled if the activity is located in less developed areas as defined in Art. 40.

(c) Tax and Duty Exemption on Imported Capital Equipment. - Within five (5) years from the effectivity of this Code, importations of machinery and equipment and accompanying spare parts of new and expanding registered enterprise shall be exempt to the extent of one hundred percent (100%) of the customs duties and national internal revenue tax payable thereon: Provided, That the importation of machinery and equipment and accompanying spare parts shall comply with the following conditions: (1) They are not manufactured domestically in sufficient quantity, of comparable quality and at reasonable prices; (2) They are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its products, unless prior approval of the Board is secured for the part-time utilization of said equipment in a non-registered activity to maximize usage thereof or the proportionate taxes and duties are paid on the specific equipment and machinery being permanently used for non-registered activities; and (3) The approval of the Board was obtained by the registered enterprise for the importation of such machinery, equipment and spare parts. In granting the approval of the importations under this paragraph, the Board may require international canvassing but if the total cost of the capital equipment or industrial plant exceeds US$5,000,000, the Board shall apply or adopt the provisions of Presidential Decree Numbered 1764 on International Competitive Bidding. If the registered enterprise sells, transfers or disposes of these machinery, equipment and spare parts without prior approval of the Board within five (5) years from date of acquisition, the registered enterprise and the vendee, transferee, or assignee shall be solidarily liable to pay twice the amount of the tax exemption given it. The Board shall allow and approve the sale, transfer or disposition of the said items within the said period of five (5) years if made:
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(aa) to another registered enterprise or registered domestic producer enjoying similar incentives; (bb) for reasons of proven technical obsolescence; or (cc) for purposes of replacement to improve and/or expand the operations of the registered enterprise. Tax Credit on Domestic Capital Equipment. - A tax credit equivalent to one hundred percent (100%) of the value of the national internal revenue taxes and customs duties that would have been waived on the machinery, equipment and spare parts, had these items been imported shall be given to the new and expanding registered enterprise which purchases machinery, equipment and spare parts from a domestic manufacturer: Provided, That (1) That the said equipment, machinery and spare parts are reasonably needed and will be used exclusively by the registered enterprise in the manufacture of its products, unless prior approval of the Board is secured for the part-time utilization of said equipment in a non-registered activity to maximize usage thereof; (2) that the equipment would have qualified for tax and duty-free importation under paragraph (c) hereof; (3) that the approval of the Board was obtained by the registered enterprise; and (4) that the purchase is made within five (5) years from the date of effectivity of the Code. If the registered enterprise sells, transfers or disposes of these machinery, equipment and spare parts, the provisions in the preceding paragraph for such disposition shall apply. Exemption from Contractor's Tax. - The registered enterprise shall be exempt from the payment of contractor's tax, whether national or local. Simplification of Customs Procedure. - Customs procedures for the importation of equipment, spare parts, raw materials and supplies, and exports of processed products by registered enterprises shall be simplified by the Bureau of Customs. Unrestricted Use of Consigned Equipment. - Provisions of existing laws notwithstanding, machinery, equipment and spare part consigned to any registered enterprises shall not be subject to restrictions as to period of use of such machinery, equipment and
(d)
(e) (f)
(g)

spare parts Provided, that the appropriate re-export bond is posted unless the importation is otherwise covered under subsections (c) and (m) of this Article. Provided, further, that such consigned equipment shall be for the exclusive use of the registered enterprise. If such equipment is sold, transferred or otherwise disposed of by the registered enterprise the related provision of Article 39 (c) (3) shall apply. Outward remittance of foreign exchange covering the proceeds of such sale, transfer or disposition shall be allowed only upon prior Central Bank approval. (h) Employment of Foreign Nationals. - Subject to the provisions of Section 29 of Commonwealth Act Number 613, as amended, a registered enterprise may employ foreign nationals in supervisory, technical or advisory positions for a period not exceeding five (5) years from its registration, extendible for limited periods at the discretion of the Board: Provided, however, That when the majority of the capital stock of a registered enterprise is owned by foreign investors, the position of president, treasurer and general manager or their equivalents may be retained by foreign nationals beyond the period set forth herein. Foreign nationals under employment contract within the purview of this incentive, their spouses and unmarried children under twenty-one (21) years of age, who are not excluded by Section 29 of Commonwealth Act Numbered 613, as amended, shall be permitted to enter and reside in the Philippines during the period of employment of such foreign nationals. A registered enterprise shall train Filipinos as understudies of foreign nationals in administrative, supervisory and technical skills and shall submit annual reports on such training to the Board. (i) Exemption on Breeding Stocks and Genetic Materials. - The importation of breeding stocks and genetic materials within ten (10) years from the date of registration or commercial operation of the enterprise shall be exempt from all taxes and duties: Provided, That such breeding stocks and genetic materials are (1) not locally available and/or obtainable locally in comparable quality
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and at reasonable prices; (2) reasonably needed in the registered activity; and (3) approved by the Board. (j) Tax Credit on Domestic Breeding Stocks and Genetic Materials. - A tax credit equivalent to one hundred percent (100%) of the value of national internal revenue taxes and customs duties that would have been waived on the breeding stocks and genetic materials had these items been imported shall be given to the registered enterprise which purchases breeding stocks and generic materials from a domestic producer: Provided, 1) That said breeding stocks and generic materials would have qualified for tax and duty free importation under the preceding paragraph; 2) that the breeding stocks and genetic materials are reasonably needed in the registered activity; 3) that the approval of the board has been obtained by the registered enterprise; and 4) that the purchase is made within ten (10) years from date of registration or commercial operation of the registered enterprise. (k) Tax Credit for Taxes and Duties on Raw Materials. - Every registered enterprise shall enjoy a tax credit equivalent to the National Internal Revenue taxes and Customs duties paid on the supplies, raw materials and semi-manufactured products used in the manufacture, processing or production of its export products and forming part thereof, exported directly or indirectly by the registered enterprise: Provided, however, that the taxes on the supplies, raw materials and semi- manufactured products domestically purchased are indicated as a separate item in the sales invoice. Nothing herein shall be construed as to preclude the Board from setting a fixed percentage of export sales as the approximate tax credit for taxes and duties of raw materials based on an average or standard usage for such materials in the industry. (l) Access to Bonded Manufacturing/Trading Warehouse System. Registered export oriented enterprises shall have access to the utilization of the bonded warehousing system in all areas required by the project subject to such guidelines as may be issued by the Board upon prior consultation with the Bureau of Customs.

(m) Exemption from Taxes and Duties on Imported Spare Parts. Importation of required supplies and spare parts for consigned equipment or those imported tax and duty free by a registered enterprise with a bonded manufacturing warehouse shall be exempt from customs duties and national internal revenue taxes payable thereon, Provided, However, That at least seventy percent (70%) of production is exported; Provided, further, that such spare parts and supplies are not locally available at reasonable prices, sufficient quantity and comparable quality; Provided, finally, That all such spare parts and supplies shall be used only in the bonded manufacturing warehouse of the registered enterprise under such requirements as the Bureau of Customs may impose. (n) Exemption from Wharfage Dues and any Export Tax, Duty, Impost and Fee. - The provisions of law to the contrary notwithstanding, exports by a registered enterprise of its non- traditional export products shall be exempted of its non-traditional export products shall be exempted from any wharfage dues, and any export tax, duty, impost and fee. TITLE IV - INCENTIVES TO LESS-DEVELOPED-AREA REGISTERED ENTERPRISE Art. 40. A registered enterprise regardless of nationality located in a less-developed-area included in the list prepared by the Board of Investments after consultation with the National Economic & Development Authority and other appropriate government agencies, taking into consideration the following criteria: low per capita gross domestic product; low level of investments; high rate of unemployment and/or underemployment; and low level of infrastructure development including its accessibility to develop urban centers, shall be entitled to the following incentives in addition to those provided in the preceding article: (a) Pioneer incentives. - An enterprise in a less-developed-area registered with the Board under Book I of this Code, whether proposed, or an expansion of an existing venture, shall be entitled
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to the incentives provided for a pioneer registered enterprise under its law of registration. (b) Incentives for necessary and Major Infrastructure and Public Utilities. - Registered enterprise establishing their production, processing or manufacturing plants in an area that the Board designates as necessary for the proper dispersal of industry or in area which the Board finds deficient in infrastructure, public utilities, and other facilities, such as irrigation, drainage or other similar waterworks infrastructure may deduct from taxable income an amount equivalent to one hundred percent (100%) of necessary and major infrastructure works it may have undertaken with the prior approval of the Board in consultation with other government agencies concerned; Provided, That the title to all such infrastructure works shall upon completion, be transferred to the Philippine Government: Provided, further, That any amount not deducted for a particular year may be carried over for deduction for subsequent years not exceeding ten (10) years from commercial operation. 6. SPECIAL ECONOMIC ZONE ACT OF 1995 (RA 7916) Sec. 24. Exemption from Taxes Under the National Internal Revenue Code. - Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government. This five percent (5%) shall be shared and distributed as follows: (a) Three percent (3%) to the national government; (b) One percent (1%) to the local government units affected by the declaration of the ECOZONE in proportion to their population, land area, and equal sharing factors; and (c) One percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and

contiguous to each ECOZONE: Provided, however, That the respective share of the affected local government units shall be determined on the basis of the following formula: (1) Population - fifty percent (50%); (2) Land area - twenty-five percent (25%); and (3) Equal sharing - twenty-five percent (25%). 7. CIR V. CA, CTA & YMCA, GR. NO. 124043, OCT. 14, 1998 Whether the earnings of YMCA from leasing out a portion of its premises to small shop owners like restaurants and canteen operators and the parking fees collected from non-members are exempt from taxation based on Sec 27 of the NIRC.
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imitation pearls, precious and semi-precious stones and imitations thereof; all goods made of, or ornamented, mounted or fitted with precious metals or imitations thereof, as specifically mentioned in Section 150(a) of the National Internal Revenue Code of the Philippines, as amended; d) Additional deduction from taxable income of fifty percent (50%) of expenses incurred in training schemes approved by the appropriate agency and which shall be deductible during the financial year the expenses were incurred; RULE 3. IMPLEMENTATION OF THE EXCISE TAX EXEMPTION OF QUALIFIED JEWELRY ENTERPRISES PURSUANT TO SECTION 3(b) of RA 8502 SECTION 1. Exemption from Excise Tax. A Qualified Jewelry Enterprise shall be exempt from excise tax on its manufacture and removal of jewelry from its place of production or factory for sale, consumption or for any other disposition. It shall also be exempt from excise tax on its importation of raw materials and supplies, such as but not limited to gemstone and precious metals, or imitations thereof, for use in its manufacture or production of fine or imitation jewelry, or for disposition to another Qualified Jewelry Enterprise for the latter's use in the manufacture or production of fine or imitation jewelry, subject to the provisions of the joint Department of Finance-Bureau of Customs (DOF-BOC) Order implementing the provisions of R.A. No. 8502 on the importation made by such Qualified Jewelry Enterprise. In general, manufactured or produced jewelry, if shown to have been purchased from a Qualified Jewelry Enterprise, shall be presumed exempt from the excise tax, provided for under this Section, in the hands of the purchaser or the possessor thereof. Provided, however, that such Qualified Jewelry Enterprise shall be liable to the Value Added Tax and such other applicable internal revenue taxes on its sale, barter, exchange or other transactions, pursuant to the provisions of the National Internal Revenue Code of 1997. Provided, further, that the Qualified Jewelry Enterprise shall submit to the Bureau of Internal Revenue (BIR) a certified
Held: NO, The exemption claimed by YMCA is expressly disallowed by the very wordings of the last paragraph of then Sec 27 which mandates that the income of exempt organizations from any of their properties, whether real or personal, be subject to tax imposed by the same Code. Further, it is exempt from paying property tax and not income tax.
The bare allegations alone that it is a non-stock, non-profit educational institution is insufficient to justify its exemption from the payment of income tax. YMCA is not a school or educational institution. 8. JEWELRY INDUSTRY DEV. ACT OF 1998 (RA 8502, AS IMPLEMENTED BY RR 1-99, JAN. 6, 1999) SECTION 3. Development Incentives. The following incentives shall be available to qualified jewelry enterprises in the jewelry industry: a) Exemption from the imposition of excise tax on all goods commonly or commercially known as jewelry, whether real or

true copy of its Certificate of Accreditation as a Qualified Jewelry Enterprise, issued by the Board of Investment (BOI), in order to avail of the exemption from excise tax herein provided. SECTION 2. Registration of the Factory or Place of Manufacture. Pursuant to Section 154 of the NIRC of 1997, the jewelry manufacturing plant of the Qualified Jewelry Enterprise shall, before commencing operations, be first registered with the Revenue District Office having jurisdiction over the area where such manufacturing plant is located. The Revenue District Officer concerned shall accordingly issue a Permit to Operate the Jewelry Manufacturing Plant. For Qualified Jewelry Enterprises that are already operational prior to their accreditation with BOI, submission of a copy of the Permit previously issued by the BIR would suffice. SECTION 3. Requirements and Procedures for Importations. 1. The importer must register with the Revenue District Office having jurisdiction over the importer's principal place of business in accordance with existing regulations. For every importation, he must file a written application for Permit to Import with the Revenue District Office where his principal place of business is registered, which shall be accompanied by the following documents: a. BIR Certificate of Exemption from Excise Tax; b. Name and Address of Supplier(s)/Consignors; c. List of Jewelries (with description) to be imported; and d. Pro-Forma Invoice. 2. Upon arrival of the goods in Custom's Custody, the importer shall apply for Authority to Release Imported Goods (ATRIG) with the Revenue District Office having jurisdiction over the port of entry which shall be accompanied by the following documents: a. Permit to Import;
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b. Commercial Invoice, Letter of Credit (LC), Bill of Lading, Packing List, and other importations documents, where applicable; and c. Import Entry and Internal Revenue Declarations. 3. Upon issuance of the ATRIG, the concerned RDO shall assign Revenue Officer(s) to supervise the release of imported goods from Custom's Custody and shall submit a report thereafter. 4. Permit to Import and Authority to Release Imported Goods (ATRIG) for raw materials and supplies which are exempt from excise tax pursuant to Section 1 of the Rule 3 hereof shall be stamped "EXCISE TAX EXEMPT". 5. Revenue District Officers charged with the processing of all applications for Permit to Import and/or ATRIG shall compile a list of approved application, which must tally with the withdrawal certificate/gate pass or other documents issued by the Bureau of Customs upon release of the imported goods. Any discrepancy noted must immediately be reconciled and an assessment of additional excise tax, if warranted, shall be issued immediately. SECTION 4. Manufacturer's or Producer's or Importer's Sworn Statement. The provisions of Section 130 (C) of the NIRC of 1997 to the contrary notwithstanding, every Qualified Jewelry Enterprises shall file with the Commissioner of Internal Revenue or his duly authorized representative every January 15th and July 15th of each year a sworn semestral report showing, among other information, the products manufactured, produced or imported during the period and their corresponding gross selling price or the market value thereof. The term "gross selling price" means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange made by such Enterprise, excluding the value added tax thereon. Provided, however, that for purposes of the value added tax, sales discount granted and indicated in the sales invoice at the time of sale and the grant of which does not depend upon the happening of a future event, may be excluded in computing for such gross selling price, pursuant to the provisions of Section 106 of the NIRC of 1997.

RULE 4. IMPLEMENTATION OF THE ADDITIONAL DEDUCTION OF FIFTY PERCENT FOR TRAINING EXPENSES INCURRED BY A QUALIFIED JEWELRY ENTERPRISE PURSUANT TO SEC. 3(d) OF RA 8502 SECTION 1. Additional Deduction For Training Expense. A Qualified Jewelry Enterprise providing training to its employees may avail of the additional deduction equivalent to fifty percent (50%) of the expenses incurred in training schemes for the purpose of computing the taxable income. The additional deduction of fifty percent (50%) shall be in addition to the allowable ordinary and necessary expenses on training which are fully deductible as a business expense in accordance with the provision of the NIRC of 1997. Provided, however, that the benefit arising from the said 50% additional deduction shall not be treated as a taxable income of the Enterprise in computing for its taxable income. SECTION 2. Conditions for Availment of the Tax Incentive. (a) A Qualified Jewelry Enterprise must submit a certified true copy of its Certificate of Accreditation issued by the BOI Managing Head or his duly authorized representative to the BIR. (b) The training scheme must be approved by the Technical Education and Skills Development Authority (TESDA). The TESDA must certify as to the description (objectives, type of training to be given, course syllabus, among others) and the cost of the training program. The TESDA must likewise certify that the training program was actually conducted and was instrumental to the acquisition of appropriate skills by recipient trainees employed in the accredited jewelry enterprise. A certification from the TESDA as to the accreditation of, and the actual conduct of, the training program must be secured and submitted to the BIR. In-house training conducted by the qualified jewelry enterprise should also be accredited and approved by the TESDA. A certification from the TESDA must likewise be submitted to the BIR in cases of inhouse training.
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SECTION 3. Period Considered for Tax Deduction. The additional deduction for training expenses shall be claimed in the taxable year in which the training expenses have been incurred. SECTION 4. Documentary Requirements. The tax deduction may be availed of by the Qualified Jewelry Enterprise upon filing of the quarterly/final income tax return accompanied with the following supporting documents to the BIR: (a) Certified true copy of BOI accreditation; (b) Certifications from TESDA as to registration of training program and actual conduct of training; and (c) Official Receipts of Training Expenses. RULE 5. REQUIREMENT TO KEEP BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS All Qualified Jewelry Enterprises availing of tax incentives under RA 8502 shall keep books of accounts and other pertinent records pursuant to the provisions of Title IX, Chapter 1, Section 235 of the National Internal Revenue Code of 1997. These records shall be subject to inspection and verification by any duly authorized revenue officer for the purpose of ascertaining compliance with the conditions under which they have been granted the tax incentives, and their tax liability, if any. 9. COOPERATIVE CODE OF THE PHILS. (RA 6983, AS IMPLEMENTED BY RR 20-2001) Art. 61. Tax Treatment of Cooperatives. - Duly registered cooperatives under this Code which do not transact any business with nonmembers or the general public shall not be subject to any government taxes or fees imposed under the internal revenue laws and other tax laws. Cooperatives not falling under this article shall be governed by the succeeding section.
Art. 62. Tax and Other Exemptions. - Cooperatives transacting business with both members and nonmembers shall not be subject to tax on their transactions to members. Notwithstanding the provisions of any or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions: (1) Cooperatives with accumulated reserves and undivided net savings of not more than Ten million pesos (P10,000,000.00) shall be exempt from all national, city, provincial, municipal or barangay taxes of whatever name and nature. Such cooperatives shall be exempt from customs duties, advance sales or compensating taxes on their importation of machineries, equipment and spare parts used by them and which are not available locally as certified by the Department of Trade and Industry. All tax-free importations shall not be transferred to any person until after five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the tax and/or duties thereon. (2) Cooperatives with accumulated reserves and undivided net savings of more than Ten million pesos (P10,000,000.00) shall pay the following taxes at the full rate: (a) Income Tax - On the amount allocated for interest on capitals: Provided, That the same tax is not consequently imposed on interest individually received by members: (b) Sales Tax - On sales to nonmembers: Provided, however, That all cooperatives, regardless of classification, are exempt from the payment of income and sale taxes for a period of ten (10) years. For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be reckoned from the effectivity date of said executive order. Cooperatives created after the approval of this Code shall be granted the same exemptions, the period of which shall be reckoned from the date of registration with the Authority: Provided, That at least twenty-five per centum (25%) of the net income of the cooperatives is returned to the members in the form of interest and/or patronage refunds:
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(c) All other taxes unless otherwise provided herein; and (d) Donations to charitable, research and educational institutions and reinvestment to socioeconomic projects within the area of operation of the cooperative may be tax deductible. All cooperatives, regardless of the amount of accumulated reserves and undivided net savings shall be exempt from payment of local taxes and taxes on transactions with banks and insurance companies: Provided, That all sales or services rendered for nonmembers shall be subject to the applicable percentage taxes except sales made by producers, marketing or service cooperatives: Provided, further, That nothing in this article shall preclude the examination of the books of accounts or other accounting records of the cooperative by duly authorized internal revenue officers for internal revenue tax purposes only, after previous authorization by the Authority. Any judge in his capacity as notary public, ex-officio, shall render service, free of charge, to any person or group of persons requiring either the administration of oath or the acknowledgment of articles of cooperation of a cooperative applicant for registration and instruments of loan from cooperative not exceeding Fifty thousand pesos (P50,000.00). Any register of deeds shall accept for registration, free of charge, any instrument relative to a loan made under this Code which does not exceed Fifty thousand pesos (P50,000.00) or the deeds of title of any property acquired by the cooperative or any paper or document drawn in connection with any action brought by the cooperative or with any court judgment rendered in its favor or any instrument relative to a bond of any accountable officer of a cooperative for the faithful performance of his duties and obligations. Cooperatives shall be exempt from the payment of all court sheriff's fees payable to the Philippine Government for and in connection with all actions brought under this Code, or where such action is brought by the Cooperative Development Authority before the court, to enforce the payment of obligations contracted in favor of the cooperative.
(3)
(4)
(5)
(6)

(7) All cooperatives shall be exempt from putting up a bond for bringing an appeal against the decision of an inferior court or for seeking to set aside any third party claim: Provided, That a certification of the Authority showing that the net assets of the cooperative are in excess of the amount of the bond required by the court in similar cases shall be accepted by the court as a sufficient bond. (8) Any security issued by cooperatives shall be exempt from the provisions of the Securities Act provided such security shall not be speculative. SECTION 3. Exemption From Taxes. 3.1 Duly registered cooperatives dealing/transacting business with members only shall be exempt from paying the following taxes for which they are directly liable, viz: a. Income Tax on income from operations; b. Value-Added Tax (VAT) under Section 109 pars. (r), (s), (t) and (u) of the Tax Code of 1997; c. 3% Percentage Tax under Section 116 of the Tax Code of 1997; d. Donor's tax on donations to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperatives; e. Excise tax under Title VI of the Tax Code of 1997; f. Documentary Stamp Tax imposed under Title VII of the Tax Code of 1997, provided, however, that the other party to the taxable document/transaction who is not exempt shall be the one directly liable for the tax; and g. Annual Registration Fee of P500.00 under Section 236(B) of the Tax Code of 1997. 3.2 Taxability/Exemption of duly registered cooperatives dealing/transacting business with both members and nonmembers: For cooperatives with accumulated reserves and undivided net savings of not more than Ten Million Pesos (P10,000,000.00)
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a. Exemption from all national internal revenue taxes for which they are directly liable, as enumerated under Sec. 3.1 of these Regulations. For cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (P10,000,000.00) a. Exemption from income tax for a period of ten (10) years from the date of registration with the CDA, provided, that at least twenty-five percent (25%) of the net income of the cooperative is returned to the members in the form of interest and/or patronage refund. For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be reckoned from March 10, 1987 (meaning, tax exemption is valid only until March 10, 1997). ASETHC After the lapse of the above ten-year period, they shall be subject to income tax at the full rate on the amount allocated for interests on capital, provided that the same is not consequently imposed on interest individually received by members; The tax base for all cooperatives liable to income tax shall be the net surplus arising from business transactions with non-members after deducting the amounts for the statutory reserve funds as provided for in the Cooperative Code and other laws. b. Exemption from VAT under Section 109 (r), (s), (t) and (u), 3% percentage tax under Section 116, and the P500.00 annual registration fee imposed under Section 236 (B), all of the Tax Code of 1997; c. Subject to all other internal revenue taxes unless otherwise provided by law; and d. Entitled to limited or full deductibility from the gross income of amount donated to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperative. Notwithstanding the foregoing, all income of the cooperative not related to its main/principal business/es shall be subject to all the

appropriate taxes under the Tax Code of 1997. This is applicable to all types of cooperatives, whether dealing purely with members or both members and non-members. In any event, all types of cooperatives are required to register with the Bureau of Internal Revenue. SECTION 4. Taxability Of Cooperatives To Other Internal Revenue Taxes. All Cooperatives, regardless of classification shall be subject to: 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 real property classified as capital assets or shares of stock; d) Documentary Stamp Taxes on transactions of cooperatives dealing with non-members when the accumulated reserves and undivided net savings of such cooperatives exceed Ten Million Pesos (P10,000,000.00); e) VAT billed on purchases of goods and services, except the VAT on the importation by agricultural cooperatives of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce, and importation by electric cooperatives of machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of electricity, pursuant to Section 109 (r) and (s) of the Tax Code of 1997 but which are not available locally as certified by the Department of Trade and Industry. All tax-free importations shall not be transferred to any person until five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the tax and/or the duties thereon; f)
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All other taxes for which the cooperatives are not otherwise expressly exempted by any law. Moreover, all cooperatives, regardless of classification, are considered as withholding agents and are required to file withholding tax returns and remit withholding taxes on all income payments that are subject to withholding. SECTION 5. Taxability Of Members/Stockholders Of Cooperatives. The exemption of the cooperatives does not extend to their individual members. Thus, members of cooperatives are liable to pay all the necessary internal revenue taxes under the National Internal Revenue Code, including the tax on earnings derived from their capital contribution. Provided, however, that interests received by members of a cooperative with accumulated reserves and undivided net savings greater than Ten Million Pesos (P10,000,000.00), after the lapse of the ten-year exemption under Sec. 3.2 (II) above, shall no longer be taxable in the hands of such members. SECTION 6. Documents To Be Attached To The Letter-Application For The Issuance Of Tax Exemption Certificate. A Letter-Application signed by the President/General Manager of the Cooperative, or his duly authorized representative, should be submitted to the Legal Division of the Revenue Region having jurisdiction over the principal place of business of the cooperative, attaching thereto the following documents: a) Articles of Cooperation and By-Laws; b) Certified true copy of the Certificate of Registration issued by the CDA; c) Certified true copy of the Certificate of Confirmation of Registration from the CDA (in the case of Cooperative already existing and previously registered under P.D. 175, P.D. 775, and E.O. 898, before the creation of the CDA); d) Certificate under oath by the President/General Manager whether the Cooperative is transacting business with members only or with both members and non-members, whichever is applicable;

e) Original copy of the Certificate of Good Standing from the CDA; f) Certification under oath by the Chairman/President/General Manager of the Cooperative (if previously registered as above stated) as certified by the CDA, as to the amount of accumulated reserves and undivided net savings, and that at least 25% of the net income is returned to the members in the form of interest and/or patronage refund; g) Certification under oath of the list of members and the share capital contribution of each member; and h) Latest Financial Statements duly audited by an independent CPA. SECTION 7. Validity Of Tax Exemption Certificate. The Tax Exemption Certificate shall be valid during such period that the Cooperative is in good standing as ascertained by the CDA on an annual basis. SECTION 8. Annual Return And Documents To Be Filed With The Bureau Of Internal Revenue. A copy of the Certificate of Good Standing issued by the CDA to the cooperative shall, together with the Annual Information Return (for non-taxable cooperative) or Income Tax Return (for taxable cooperative) and Financial Statements, be submitted to the Bureau of Internal Revenue on or before the 15th day of the fourth month following the close of the taxable year. SECTION 9. Verification Of Annual Information Return/Income Tax Return, Financial Statements, Attachments And Records. Pursuant to the last paragraph of Section 235 of the Tax Code of 1997, any provision of existing general or special law to the contrary notwithstanding, the books of accounts and other pertinent records, as well as the operations of all cooperatives, may be examined by the Bureau of Internal Revenue annually for purposes of ascertaining compliance with the conditions under which they have been granted
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tax exemptions or tax incentives, and their tax liabilities, if any, upon previous consultation with the CDA. F. INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME SEC. 32. Gross Income. (A) General Definition. Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (1) Life Insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. (2) Amount Received by Insured as Return of Premium. The amount received by the insured, as a return of premiums paid

by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. Gifts, Bequests, and Devises. The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise, or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. Compensation for Injuries or Sickness. Amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. Retirement Benefits, Pensions, Gratuities, etc. (a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that
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at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee. (c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. (e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. (f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. (7) Miscellaneous Items. (a) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments.
(3)
(4)
(5) (6)

(b) Income Derived by the Government or its Political Subdivisions. Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof. (c) Prizes and Awards. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceeding; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. (d) Prizes and Awards in Sports Competition. All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. (e) 13th Month Pay and Other Benefits. Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased
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through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. (f) GSIS, SSS, Medicare and Other Contributions. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals. (g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. (h) Gains from Redemption of Shares in Mutual Fund. Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22(BB) of this Code. Section 39. What gross income includes Repealed by BP 135 and RR 6-82 as amended. Section 40. Composition of personal Repealed by Ibid. Section 41. Compensation paid other than cash - Ibid. Section 42. Compensation paid in promissory notes. - Promissory notes or other evidence of indebtedness received in payment for services and not merely as security for such payment constitute income to the amount of their fair market value. A taxpayer receiving as compensation a note regarded as good for its face value at maturity but not bearing interest, shall treat as income as of the time of receipt the fair discounted value of the note at that time. Thus, if it appears that such a note is or could be discounted on a 6 per cent basis, the recipient shall include such note in his gross income to the amount of its face value less discount computed at the prevailing rate for such transactions.

If the payment due on a note so accounted for are met as they become due there should be included as income in respect of each such payment so much thereof as represents recovery for the discount originally deducted. Section 43. Gross income from business. - In the case of a manufacturing, merchandising, or, mining business, gross income means the total sales less the cost of goods sold plus any income from investments and from incidental or outside operations or sources. In determining the gross income, subtractions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold. Section 44. Long-term contracts. - Income from long-term contracts is taxable for the period in which the income is determined. such determination depending upon the nature and terms of the particular contract. As used herein the term long-term contracts means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases: (a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner of Internal Revenue may permit or require an amended return.
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(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of the completion. Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income. he will not be required to change to either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him should accompany his return. Section 45. Gross income of farmers. - A farmer reporting on the basis of receipts and disbursements (in which no inventory to determine profits is used) shall include in his gross income for the taxable year (1) the amount of cash or the value of merchandise or other property received from the sale of live stock and produced which were raised during the taxable year or prior years; (2) the profits from the sale of any live stock or other items which were purchased, and (3) gross income from all other sources. The profit from the sale of live stock or other items which were purchased is to be ascertained by deducting the cost from the sale price in the year in which the sale occurs, except that in the case of the sale of animals purchased as draft or work animals or solely for breeding or dairy purposes and not for resale, the profit shall be the amount of any excess of the sales price over the amount representing the difference between the cost and the depreciation theretofore sustained and allowed as a deduction in computing net income. In the case of a farmer reporting on the accrual basis (in which an inventory is used to determine profits), his gross profits are

ascertained by adding to the inventory value of live stock and products on hand at the end of the year the amount received from the sale of live stock products, and miscellaneous receipts for hire of teams, machinery, and the like, during the year, and deducting from this sum the inventory value of live stock and products on hand at the beginning of the year and the cost of the live stock and products purchased during the year. In such cases all live stock raised or purchased for sale shall be included in the inventory at their proper valuation determined in accordance with the method authorized and adopted for the purpose. Also, live stock acquired for drafts, breeding, or dairy purposes and not for sale may be included in the inventory, instead of being treated as capital assets subject to depreciation, provided such practice is followed consistently by the taxpayer. In case of the sale of any live stock included in an inventory their cost must not be taken as an additional deduction in the return of income, as such deduction will be reflected in the inventory. In every case of the sale of machinery, farm equipment, or other capital assets (which are not to be included in an inventory if one is used to determine profits) any excess over the cost thereof less the amount of depreciation therefore sustained and allowed as a deduction in computing net income, shall be included as gross income. Where farm products is exchanged for merchandise, groceries, or the like, the market value of the article received in exchange is to be included in gross income. Rents received in crop shares shell be returned as of the year in which the crop shares are reduced to money or a money equivalent. Proceeds of insurance, such as fire and typhoon insurance on growing crops, should be included in gross income if the amount received in cash or its equivalent for the crop injured or destroyed. If a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may be computed upon the crop basis; but in any such cases the entire cost of producing the crop must be taken as a deduction in thc year in which the gross income from the crop is realized.
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As herein used the term farm embraces the farm in the ordinarily accepted sense, and includes stock, dairy, poultry fruit, and truck farms, also plantations, ranches, and all land used for farming operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for gain or profit either as owners, or tenants, are designated farmers. A person cultivating or operating a farm for recreations or pleasure, the result of which is a continual loss from year to year, is not regarded as a farmer. Section 46. Sales of patents and copyrights. - A taxpayer disposing of patents or copyrights by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the cost. The taxable income in the case of patents or copyrights acquired prior to March 1, 1913, should be ascertained in accordance with the provisions of section 136 of these regulations. The profit or loss thus ascertained should be increased or decreased, as the case may be, by the amounts deducted on account of depreciation of such patent or copyrights since March 1, 1913, or since the date of acquisition or subsequent thereto. Section 47. Sale of goodwill. - Gain or loss from a sale of goodwill results only when the business, or a part of it, to which the goodwill attaches is sold, in which case the gain or loss will be determined by comparing the sale price with the cost or other basis of the assets, including goodwill. If specific payment was not made for goodwill acquired after March 1, 1913, there can be no deductible loss with respect thereto, but gain may be realized from the sale of goodwill built up through expenditures which have been currently deducted. It is immaterial that goodwill may never have been carried on the books as an asset, but the burden of proof is on the taxpayer to establish the cost or fair market va1ue on March 1, 1913 of the goodwill sold. Section 48. Annuities and insurance policies. - Annuities paid by religious, charitable, and educational corporations under an annuity contract are subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds the amounts paid by him as

consideration for the contract. An annuity charged upon devised land is taxable to a donee-annuitant, whether paid by the devisee out of the rents of the land or from other sources. The devisee is not required to return as gross income the amount of rent paid to the annuitant, and he is not entitled to deduct from his gross income any sums paid to the annuitant. Amounts received by an insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, such as the so-called dividends of a mutual insurance company, which may be credited against the current premium, are not subject to tax. Distributions on paid-up policies which are made out of earnings of the insurance company subject to tax are in the nature of corporate dividends and should be included in the taxable income of the individual, without any credit for the amount of tax paid by the corporate at source. Section 49. Improvements by lessees. - When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor, and such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following bases: (a) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease. (b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each of the lease all adequate part thereof. If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the year in which the lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the pre-mature
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termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the buildings or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease to the extent that such loss was not compensated for by insurance. Section 50. Forgiveness of indebtedness. - The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his service. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend. Section 51. When income is to be reported. - Gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefor in a later year, income is realized in that year, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1,1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit,

constitute income for the year in which recovered, regardless of the date when amounts were charged off. Section 52. Income constructively received. - Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date the mere crediting on the books of the corporation does not constitute receipt. Section 53. Examples of constructive receipt - When interest coupons have matured and are payable, but have not been cashed, such interest payment, though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in which paid. The distributive share of the profits of a partner in a general co-partnership duly registered is regarded as received by him, although not distributed. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require so many days' notice in advance of cashing depositors' checks, is income to the depositor when credited. An amount credited to shareholders of a building and loan association, when such credit passes without restriction to the shareholder, has a taxable status as income for the year of the credit. Where the amount of such accumulations has not become available to the shareholder until the maturity of a share, the amount of any share in excess of the
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aggregate amount paid in by the shareholder is income for the year of the maturity of the share. Section 54. Creation of corporate sinking fund. - If a corporation in order solely to secure payment of its bonds or other indebtedness, places property in trust or set aside certain amounts in a sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums, from time to time, the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation and any gain arising therefrom is income of the corporation and shall be included as such in its annual return. Section 55. Acquisition or disposition by a Corporation of its own capital stock. - Where the acquisition or disposition by a corporation of share of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of share of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss whether the subscription or issue price be in excess of or less than the par or stated value of such stock. But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transaction is subject to tax and any loss sustained is allowable as deduction where perimitted by the provisions of Title II. Section 56. Contribution by shareholders. - Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary process payments by its

shareholders, the amounts so received being credited to its surplus account or to a special capital account will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as a part of the operating capital of the company. Section 57. Sale and retirement of corporate bonds. - (I) (a) If bonds are issued by a corporation at their face value, the corporation realizes no gain or loss. (b) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price or face value, the excess of the purchase price over the issuing price or face value is a deductible expense for the taxable year. (c) If, however, the corporation purchases and retires any of such bonds at a price less than the issue price or face value, the excess of the issuing price or face value over the purchase price is income for the taxable year. (2) (a) If bonds are issued by a corporation at a premium, the net amount of such premium gain or income which should be prorated or amortized over the life of the bond. (b) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price minus any amount of premium already returned as income, the excess of the purchase price over the issuing price minus any amount of premium already returned as income (or over the face value plus any amount of premiums not yet returned as income) is a deductible expense for the taxable year. (c) If, however, corporation purchases and retires any of such bonds at a price less than the issuing price minus any amount of premium already returned as income, the excess of the issuing price minus any amount of premium already returned as income (or of the face value plus any amount of premium not yet returned as income) over the purchase price is gain or income for the taxable year. (3) (a) If bond are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated or amortized over the life of the bonds. (b) If thereafter the corporation
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purchases and retires any of such bond at a price in excess of the issuing price plus any amount of discount already deducted, the excess of the purchase price over the issuing price plus any amount of discount already deducted, (or over the face value minus any amount of discount not yet deducted) is a deductible expense for the taxable year. (c) If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price plus any amount of discount already deducted, the excess of the issuing price plus any amount of discount already deducted (or of the face value minus any amount of discount not yet deducted) over the purchase price is gain or income for the taxable year. Section 58. Income of Corporation from leased property. - Where a corporation has leased its property in consideration that the lessee shall pay in lieu of other rental an amount equivalent to a certain rate of dividend on the lessors capital stock or the interest on the lessors outstanding indebtedness, together with taxes, insurance or other fixed charges, such payments shall be considered rental payments and shall be returned by the lessor corporation as income, notwithstanding the fact that the dividend and interest are paid by the lessee directly to the shareholders and bondholders of the lessor. The fact that a corporation had conveyed or let its property and has parted with its management and control, or has ceased to engage in the business for which it was originally organized, will not relieve it from liability to the tax. While the payment made by the lessee directly to the bondholders or shareholders of the lessor are rentals to both the lessee and lessor (rentals paid in one case and rentals received in the other), to the bondholders and the shareholders, such amounts are interest and dividend payments received as from the lessor and as such shall be accounted for in their returns. Section 59. Group income of a corporation in liquidation. - When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustee stands in the stead of the corporation for such

purposes. Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. Section 60. Gross income of foreign corporation. - The gross income of a foreign corporation subject to tax consists of its gross income from sources within the Philippines. Gross income from sources within the Philippines, as applied to foreign corporations, shall include interest received on bonds, notes, or other interest-bearing obligations issued by residents, corporate or otherwise, as well as income derived from dividends on the capital stock or from the net earnings of domestic or resident foreign corporations, joint stock companies, associations, or insurance companies, dividends from other foreign corporations to the extent provided in section 37 of the Code, and likewise income from rentals and royalties from all Sources within the Philippines. 1. Definition of Gross Income What is income? A) Definition under the NIRC: all income derived from whatever source, including (but not limited) to the following items: 1) compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar items 2) gross income derived from the conduct of trade or business or the exercise of a profession 3) gains derived from dealings in property 4) interests 5) rents 6) royalties 7) dividends 8) annuities 9) prizes and winnings 10) pensions 11) partner's distributive share from the net income of the general professional partnership
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NOTE: Everything which falls under this definition is part of gross income. BUT, that does not necessarily mean that it is taxable B) Haig-Simmons Definition Personal income may be defined as the algebraic sum of 1) the market value of rights exercised in consumption; and 2) the change in value of the store or property rights between the beginning and the end of the period in question The problem with the definition given: 1) what are property devaluation (e.g. car value depreciation) who decides the value of one's property rights 2) liquidity - without a sale of one's property, an individual may not have available cash to pay for tax on the property, even though the assessed value has increased. C) Eisner v. Macomber definition The gain derived from capital, from labor, or from both combined (this is very restrictive) Net income should include dividends and also gains or profits and income derived from any source whatever, but this does NOT include stock dividends D) Commissioner v. Glenshaw 3 part test to determine the income (this expanded the Eisner definition of income) 1) an accession to wealth (is A richer?) 2) clearly realized (has some event happened such that A received money?) 3) compete dominion over the money Sec 32 of the NIRC follows the Glenshaw definition 2. Exclusions from Gross Income 1) life insurance proceeds (benefits) 2) amount received by insured as return of premium

3) value of property acquired as gifts, bequests, and devises (but its doesn't include income from such property) 4) compensation for injuries or sickness plus damages received 5) income exempt under treaty obligations 6) retirement benefits, pensions, gratuities 7) amount received as a consequence of separation 8) miscellaneous items a) income derived from foreign governments social security benefits, retirement gratuities, pensions and other similar benefits b) benefits due under the laws of the US administered by the US Veterans Administration c) income from investment in the Philippines in loans, bonds or other domestic securities, or from deposits in banks in the Philippines d) income derived by the government or its political subdivisions public utility e) prizes and awards i. the recipient was selected without any action on his part ii. recipient not required to render service as a condition f) prizes and awards in sport competition g) 13th month pay and other benefits h) GSIS, SSS, Medicare and other contributions i) Gains from the sale of bonds, debentures or other certificates of indebtedness j) Gains from redemption of shares in mutual fund Section 61. Exclusion from gross income. - The term gross income as used in the Act does not include those items of income exempted by statute or by fundamental law. Such tax-free income should not be included in the income tax return unless information regarding it is specifically called for. The exclusion of such income should not be confused with the reduction of gross income by the application of allowable deductions.
Section 62. Proceeds of Insurance. - The proceeds of life-insurance policies, paid by reason of the death of an insured to his estate or to any beneficiary (individual, partnership, or corporation, but not a transferee for a valuable consideration), directly or in trust, are excluded from the gross income of the beneficiary. It is immaterial whether the proceeds are received in a single sum or in installments. If, however, such proceeds are held by the insurer under an agreement to pay interest thereon, the interest payments must be included in gross income. Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts) under a life insurance endowment, or annuity contract are excluded from gross income, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income. However, in the case of a transfer for a valuable consideration, by assignment or otherwise of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee are exempt from taxation. Section 63. Amount received as compensation for injuries or sickness. - Thc amounts received by an insured or his estate or beneficiaries through accident or health insurance or under workmens compensation acts as compensation for personal injuries or sickness are excluded from the gross income of the insured, his estate, and other beneficiaries. Any damages recovered by suit or agreement on account of such injuries or sickness are similarly excluded from the gross income of the individual injured or sick, if living, or of his estate or other beneficiaries entitled to receive such damages, if dead. Section 64. Gifts and bequests. - Property received as a gift or received under a will or testament or through legal succession, is exempt from the income tax, although the income therefrom or income derived from its investment, sale, or otherwise is not. An
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amount of principal paid under a marriage settlement is a gift. Neither alimony nor an allowance based on a separation agreement is taxable. CIR v. CA and Castaneda Terminal leave pay, although part of income, is NOT taxable. 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 REPUBLIC ACT NO. 4917: AN ACT PROVIDING THAT RETIREMENT BENEFITS OF EMPLOYEES OF PRIVATE FIRMS SHALL NOT BE SUBJECT TO ATTACHMENT, LEVY, EXECUTION, OR ANY TAX WHATSOEVER The retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action: Provided, That the retiring official or employee has been in the service of the same employer for at least 10 yrs and is not less than 50 yrs of age at the time of his retirement: Provided, further, That the benefits granted under this Act shall be availed of by an official or employee only once: Provided, finally, That in case of separation of an official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, any amount received by him or by his heirs from the employer as a consequence of such separation shall likewise be exempt as hereinabove provided. The term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit sharing plan maintained by an employer
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for the benefit of some or all of his officials and employees, wherein contributions are made by such employer or officials and employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (June 17, 1967) REPUBLIC ACT NO. 7641: AN ACT AMENDING ARTICLE 287 OF PRESIDENTIAL DECREE NO. 442, AS AMENDED, OTHERWISE KNOWN AS THE LABOR CODE OF THE PHILIPPINES, BY PROVIDING FOR RETIREMENT PAY TO QUALIFIED PRIVATE SECTOR EMPLOYEES IN THE ABSENCE OF ANY RETIREMENT PLAN IN THE ESTABLISHMENT In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of 60 years or more, but not beyond 65 years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year. Unless the parties provide for broader inclusions, the term onehalf (1/2) month salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of service incentive leaves. Retail, service and agricultural establishments or operations employing not more than (10) employees or workers are exempted from the coverage of this provision. (December 9, 1992) 3. Exclusions from 13th Month Pay REPUBLIC ACT NO. 7833: AN ACT TO EXCLUDE THE BENEFITS MANDATED PURSUANT TO RA NO. 6686 AND PD NO. 851, AS AMENDED, AND OTHER BENEFITS FROM THE COMPUTATION OF

GROSS COMPENSATION INCOME FOR PURPOSES OF DETERMINING TAXABLE COMPENSATION INCOME, AMENDING FOR THE PURPOSE SECTION 28(B)(8) OF THE NIRC, AS AMENDED A new sub-paragraph to be known as sub-paragraph (F) is hereby inserted at the end of Section 28(b)(8) of the National Internal Revenue Code, as amended, which shall read as follows: (F) 13th month pay and other benefits. (i) Benefits received by officials and employees of the national and local governments pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Presidential Memorandum Order No. 28 dated August 13, 1986 (requiring all employers to pay all their rank-and-file employees a 13th month pay not later than December 24 of every year); (iii) Benefits received by officials and employees not covered by P.D. No. 851, as amended; and (iv) Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding P12,000.00 which shall be integrated in the 13th month pay solely for purposes of R.A. No. 7833. Provided, however, that the exclusion shall only apply to the first P30,000.00. SALIENT FEATURES of RA 7833 1. Before the amendment of Section 28 (b) (8) of the NIRC by R.A. No. 7833, the benefits received by officials and employees of both public (national and local) and private offices, viz: (F) 13th month pay and other benefits. a. Annual Christmas bonus equivalent to one (1) month basic salary and additional cash gift of One Thousand Pesos (P1,000.00) received by National and Local Government officials and employees starting CY 1988 in accordance with R.A. No. 6686; b. Benefits received by employees pursuant to P.D. No. 851 , as amended by Presidential Memorandum Order No. 28 dated August 13, 1986 requiring all employers to pay all their rank-and-
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file employees a 13th month pay not later than December 24 of every year; c. Benefits received by officials and employees not covered by P.D. No. 851, as amended; and d. Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding Twelve Thousand Pesos (P12,000.00) which shall be integrated in the 13th month pay solely for purposes of R.A. No. 7833. were taxable compensation income under Section 21(a) in relation to Section 72, both of the NIRC, as amended, subject to withholding tax under Revenue Regulations No. 6-82, as amended by Revenue Regulations No. 4-93. 2. Under sub-paragraph (F) of Section 28 (b) (8) of the NIRC, as amended by R.A. No. 7833, the 13th month pay and other benefits aforestated, received by officials and employees of the National Government, LGUs and agencies, including GOCCs, as well as by officials and employees of private corporations and entities, are exempt from income tax, and consequently from the withholding tax on wages. Provided, that the exclusions/exemptions from gross compensation income shall cover the 13th month pay and "other benefits" in the aggregate amount not exceeding P30,000 received by the officials and employees paid or accrued beginning January 1, 1994. (April 17, 1998). REVENUE REGULATIONS NO. 2-95: Implementing Republic Act No. 7833, An Act to Exclude the Benefits Mandated Pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as Amended, and other Benefits from the Computation of Gross Compensation Income for the Purposes of Determining Taxable Compensation Income, Amending for the Purpose Section 28 (b) (8) of the National Internal Revenue Code, as Amended. (January 3, 1995) Scope. Pursuant to Section 245 and 72 of the NIRC, as amended, in relation to Section 3 of Republic Act No. 7833, these Regulations are hereby promulgated to implement the provisions of Section 28 (b) (9) (6) of the NIRC, as amended, excluding from the computation of gross

compensation income, for purposes of determining taxable compensation income, the 13th month pay and other benefits. Definition of Terms. For purposes of these Regulations, the following definitions of words and phrases are hereby adopted: b) "Exclusions" shall mean the total benefits which are not included in the computation of gross compensation income for purposes of determining taxable compensation income and are, therefore, exempt from the withholding tax on wages. c) "Gross compensation income" means all remunerations for services performed by an employee for his employer, whether paid in cash or in kind, unless specifically excluded under Secs. 27 and 28 of the NIRC, as amended. e) "Other benefits" refer to all benefits other than the 13th month pay, such as, the annual Christmas bonus given by private offices, 14th month pay, mid-year productivity incentive bonus, gifts in cash or in kind and other similar benefits received by an official or employee for one calendar year in an amount not exceeding Twelve Thousand Pesos (P12,000.00) as maximum limit. g) "13th month pay" refers to the mandatory one month basic salary of an official or employee of the National Government, Local Government Units, agencies and instrumentalities, including government-owned and -controlled corporations, and of private offices received after the 12th month pay. Benefits Exempted from Income Tax. For purposes of determining the taxable compensation income, the following benefits shall be excluded from the gross compensation income, viz: a) 13th month pay equivalent to the mandatory 1 mo. basic salary of officials and employees of the Government (whether national or local), including goccs, and of private offices received after the 12th month pay beginning CY 1994; and b) Other benefits, such as, Christmas bonus given by, private offices to their officials and employees, productivity incentives bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both Government and
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private offices in an amount not exceeding P12,000.00 for 1 calendar year. The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued beginning January 1, 1994 but shall be limited only to an amount not exceeding P12,000.00 in the case of the "other benefits" contemplated under paragraph (b) above, provided, however, that when added to the 13th month pay, the total amount of tax exempt benefits shall not exceed P30,000.00. Refund/Credit of Taxes Withheld from employees Separated from Employment. a) An employee separate from the service of his previous employer but is presently employed by another employer shall be refunded/credited the taxes withheld on his exempt 13th month pay and other benefits by his present employer. (b) An employee who has been separated from a previous employer but has no present employment shall claim his refund of excess tax withheld on his 13th month pay and other benefits by filing with the BIR a refundable income tax return for CY 1994, provided that the refundable ITR for 1994 reflects the taxes withheld on his 13th month pay and other benefits. Concurrent Multiple Employments. An employee is employed by two or more employers at the same time during the taxable year shall be refunded/credited the taxes withheld on his 13th month pay and "other benefits" by his main employer, e.g., the employer paying the highest wage/salary. The said main employer shall determine the maximum allowable 13th month pay and "other benefits" received from both main and secondary employer/s in annualizing the taxable compensation income at year-end adjustment. For this purpose, the secondary employer/s shall furnish the main employer a certification as to the amount of the 13th month pay and other benefits received by the employee.

REVENUE MEMORANDUM CIRCULAR NO. 36-94: Publishing the full text of Republic Act No. 7833 - an Act excluding the benefits mandated pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as amended, and other benefits from the computation of gross compensation income for purposes of determining taxable compensation income, amending for the purpose Section 28 (b) (8) of the National Internal Revenue Code, as amended. (December 14, 1994 ) REVENUE REGULATIONS No. 02-98 SECTION 2.78.1. Withholding of Income Tax on Compensation Income. (B) Exemptions from withholding tax on compensation. The following income payments are exempted from the requirement of withholding tax on compensation: (11) Thirteenth (13th ) month pay and other benefits. (a) Thirteenth (13th) month pay equivalent to the mandatory one (1) month basic salary of officials and employees of the government, (whether national or local), including government-owned or controlled corporations, and or private offices received after the twelfth (12th) month pay; and (b) Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. REPUBLIC ACT NO. 7459: Investors and Invention Incentives Act of the Philippines
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Tax Incentives. Inventors, as certified by the Filipino Inventors Society and duly confirmed by the Screening Committee, shall be exempt from payment of license fees, permit fees and other business taxes in the development of their particular inventions. This is an exception to the taxing power of the local government units. The certification shall state that the manufacture of the invention is made on a commercial scale. Inventors shall exempt from paying any fees involved in their application for registration of their inventions. Tax Exemption. To promote, encourage, develop and accelerate commercialization of technologies developed by local researchers or adapted locally from foreign sources including inventions, any income derived from these technologies shall be exempted from all kinds of taxes during the first ten (10) years from the date of the first sale, subject to the rules and regulations of the Department of Finance: Provided, that this tax exemption privilege pertaining to invention shall be extended to the legal heir or assignee upon the death of the inventor. The technologies, their manufacture or sale, shall also be exempt from payment of license, permit fees, customs duties and charges on imports. (Approved: April 28, 1992) 4. Exemption of Minimum Wage Earners from 13th Month Pay G. ITEMS OF GROSS INCOME SEC. 32. Gross Income. (C) General Definition. Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (12) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (13) Gross income derived from the conduct of trade or business or the exercise of a profession; (14) Gains derived from dealings in property;

(15) Interests; (16) Rents; (17) Royalties; (18) Dividends; (19) Annuities; (20) Prizes and winnings; (21) Pensions; and (22) Partner's distributive share from the net income of the general professional partnership. (D) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (8) Life Insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. (9) Amount Received by Insured as Return of Premium. The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (10) Gifts, Bequests, and Devises. The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise, or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. (11) Compensation for Injuries or Sickness. Amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. (12) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. (13) Retirement Benefits, Pensions, Gratuities, etc.
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(g) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (h) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee. (i) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public.

(j) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. (k) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. (l) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. Miscellaneous Items. (i) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. (j) Income Derived by the Government or its Political Subdivisions. Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof. (k) Prizes and Awards. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: (iii) The recipient was selected without any action on his part to enter the contest or proceeding; and (iv) The recipient is not required to render substantial future services as a condition to receiving the prize or award. (l) Prizes and Awards in Sports Competition. All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the
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Philippines or abroad and sanctioned by their national sports associations. (m) 13th Month Pay and Other Benefits. Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. (n) GSIS, SSS, Medicare and Other Contributions. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals. (o) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. (p) Gains from Redemption of Shares in Mutual Fund. Gains realized by the investor upon redemption of shares
(14)

of stock in a mutual fund company as defined in Section 22(BB) of this Code. 8. COMPENSATION FOR PERSONAL SERVICES a. IN MONEY b. IN KIND i) CONVENIENCE-OF-THE-EMPLOYER RULE HENDERSON V. COLLECTOR, 1 SCRA 649 ii) RR 2-98 AND RR 3-98
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Facts: Arthur Henderson is the President of the American Intl. Underwriters for the Phils. w/c represents a group of American cos. engaged in the business of general insurance (exc. in life insurance). he receives a basic annual salary of P30,000 and allowance for house rentals and utilities. Although he and his wife are childless and are only two in the family, they lived in a large apartment provided for by his employer. As company president, he and his wife had to entertain and put up houseguests for the company. The BIR now seeks to collect taxes on the allowances for rental and utilities expenses. Held: The exigencies of Henderson's high executive position, not to mention social standing, demanded and compelled them to live in a more spacious and pretentious quarters like the ones they had occupied. Because they had to entertain and put up houseguests, the employer had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of those expenses for rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartment chosen by the employer is of no moment, for no part of the allowance redounded to the benefit of the Hendersons. Neither was there an amount retained by them. Their bills for rental were paid directly by the employer to the creditor.
REVENUE REGULATTION 02-98 (A) Compensation Income Defined. In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually. Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them. (1) Compensation paid in kind. Compensation may be paid in money or in some medium other than money, as for example, stocks, bonds or other forms of property. If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as compensation subject to withholding. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair market value of the remuneration received. If a corporation transfers to its employees its own stock as remuneration for services rendered

by the employee, the amount of such remuneration is the fair market value of the stock at the time the services were rendered. (2) Living quarters or meals. If a person receives a salary as remuneration for services rendered, and in addition thereto, living quarters or meals are provided, the value to such person of the quarters and meals so furnished shall be added to the remuneration paid for the purpose of determining the amount of compensation subject to withholding. However, if living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as part of compensation income. (3) Facilities and privileges of a relatively small value. Ordinarily, facilities and privileges (such as entertainment, medical services, or so called "courtesy" discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as compensation subject to withholding if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Commissioner. (4) Tips and gratuities. Tips or gratuities paid directly to an employee by a customer of the employer which are not accounted for by the employee to the employer are considered as taxable income but not subject to withholding. (5) Pensions, retirement and separation pay. Pensions, retirement and separation pay constitute compensation subject to withholding, except those provided under Subsection B of this section. (6) Fixed or variable transportation, representation and other allowances (a) IN GENERAL, fixed or variable transportation, representation and other allowances which are received by a public officer or employee or officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding.
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(b) Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bonafide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied: (i) It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or profession; and (ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/ advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirement of substantiation and to withholding. (7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which are paid notwithstanding his absence from work, constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which were paid to the employee during the year are not subject to income tax and to the withholding tax. (8) Deductions made by employer from compensation of employee. Any amount which is required by law to be deducted by the employer from the compensation of an employee including the withheld tax is considered as part of the employee's compensation and is deemed to be paid to the employee as compensation at the time the deduction is made. (9) Remuneration for services as employee of a nonresident alien individual or foreign entity. The term "compensation" includes remuneration for services performed by an employee of a nonresident

alien individual, foreign partnership or foreign corporation, whether or not such alien individual or foreign entity is engaged in trade or business within the Philippines. Any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation which is not engaged in trade or business within the Philippines is subject to all provisions of law and regulations applicable to an employer. (10) Compensation for services performed outside the Philippines. Remuneration for services performed outside the Philippines by a resident citizen for a domestic or a resident foreign corporation or partnership, or for a non-resident corporation or partnership, or for a non-resident individual not engaged in trade or business in the Philippines shall be treated as compensation which is subject to tax. A non-resident citizen as defined in these regulations is taxable only on income derived from sources within the Philippines. In general, the situs of the income whether within or without the Philippines, is determined by the place where the service is rendered. REVENUE REGULATION NO. 03-98: Implementing Section 33 of the National Internal Revenue Code, as Amended by Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits (January 1, 1998) SPECIAL TREATMENT OF FRINGE BENEFITS Imposition of Fringe Benefits Tax A final withholding tax is hereby imposed on the grossed-up monetary value of fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees as defined in these Regulations, whether such employer is an individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities except when: (1) the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The fringe benefit tax shall be imposed at the following rates: Effective 1/1/1998 - 34%; 1/ 1/1999 - 33%; 1/1/2000 - 32%.
Definition of Fringe Benefit In general, except as otherwise provided under these regulations, for purposes of this Section, the term "FRINGE BENEFIT" means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations) such as, but not limited to the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. Coverage These Regulations shall cover only those fringe benefits given or furnished to managerial or supervisory employees and not to the rank and file. The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial nor supervisory position. The Labor Code of the Philippines, as amended, defines "managerial employee" as one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. "Supervisory employees" are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment.
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Moreover, these regulations do not cover those benefits properly forming part of compensation income subject to withholding tax on compensation in accordance with Revenue Regulations No. 2-98. Fringe benefits which have been paid prior to January 1, 1998 shall not be covered by these Regulations. The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary value of the fringe benefit by the following percentages and in accordance with the following schedule: Effective 1/1/1998 - 66%; 1/ 1/ 1999 - 67%; 1/ 1/2000 - 68%. The grossed-up monetary value of the fringe benefit represents the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property which has been received plus the amount of fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of his employee, pursuant to the provisions of this Section. Determination of the Amount Subject to the Fringe Benefit Tax In general, the computation of the fringe benefits tax would entail (a) valuation of the benefit granted and (b) determination of the proportion or percentage of the benefit which is subject to the fringe benefit tax. That the Tax Code allows for the cases where only a portion (i.e. less than 100 per cent) of the fringe benefit is subject to the fringe benefit tax is clearly stated in Section 33 (a) of R.A. 8424 which stipulates that fringe benefits which are "required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer" are not subject to the fringe benefit tax. Thus, in cases where the fringe benefits entail joint benefits to the employer and employee, the portion which shall be subject to the fringe benefits tax and the guidelines for the valuation of fringe benefits are defined under these rules and regulations. Unless otherwise provided in these regulations, the valuation of fringe benefits shall be as follows: (1) If the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount granted or paid for. (2) If the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred to the
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employee, then the value of the fringe benefit shall be equal to the fair market value of the property as determined in accordance with Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe Real Property Values). (3) If the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property. Taxation of fringe benefit received by a non-resident alien individual who is not engaged in trade or business in the Philippines A fringe benefit tax of twenty-five percent (25%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by seventy-five per cent (75%). Taxation of fringe benefit received by (1) an alien individual employed by regional or area headquarters of a multinational company or by regional operating headquarters of a multinational company; (2) an alien individual employed by an offshore banking unit of a foreign bank established in the Philippines; (3) an alien individual employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines; and (4) any of their Filipino individual employees who are employed and occupying the same position as those occupied or held by the alien employees. A fringe benefit tax of fifteen per cent (15%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by eighty-five per cent (85%). Taxation of fringe benefit received by employees in special economic zones Fringe benefits received by employees in special economic zones, including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone, are also covered by these regulations and subject to the normal rate of fringe benefit tax or the special rates of 25% or 15% as provided above. (For further info. see the original RR 03-98)

H. INTEREST INCOME 1. TAXABLE 2. NOT TAXABLE 3. IMPUTED INTEREST ON INTER-COMPANY LOANS/ADVANCES SEC. 50. Allocation of Income and Deductions. In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business. RMC No. 63-99 REVENUE MEMORANDUM ORDER NO. 63-99: Determination of Taxable Income on Inter-Company Loans or Advances applying Sec. 50 of the NIRC, as amended Coverage: This paper applies to all forms of bona fide indebtedness and includes: 1. Loans or advances of money or other consideration (w/n evidenced by a written instrmt); 2. Indebtedness arising in the ordinary course of business out of sales, leases, or the rendition of services by or between members of the group,, or any other similar transaction; 3. But does not apply to alleged indebtedness w/c was in fact a contribution of capital or a distribution by a corporation w/ respect to its shares. This order adopts the arm's length distribution by a corporation w/ respect to its shares shall be the rate of interest w/c was charged or would have been charged at the time the indebtedness arose in
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independent transaction w/ or between related unrelated parties under similar circumstances. All relevant factors will be considered, incl. the amount and duration of the loan, the security involved, the credit standing of the borrower, and the interest rate prevailing at the situs of the lender or creditor for comparable loans. For domestic transactions, the standard of interest rate is the Bank Reference Rate prescribed by the Central Bank. Sec. 50 applies to both taxable entities and tax exempt organizations. 4. CIR V. FILINVEST Section 43 of the 1993 NIRC (now Section 50) and Section 179 of Revenue Regulation No. 2 do not include the power to impute "theoretical interests" to the controlled taxpayer's transactions. The term gross income is understood to mean all income from whatever source derived, including, but not limited to the following items: compensation for services, including fees, commissions, and similar items; gross income derived from business; gains derived from dealings in property; interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partners distributive share of the gross income of general professional partnership. While it has been held that the phrase "from whatever source derived" indicates a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, the term "income" has been variously interpreted to mean "cash received or its equivalent", "the amount of money coming to a person within a specific time" or "something distinct from principal or capital." There must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. The advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR. FDC resorted to borrowings from commercial banks, the CIR had adduced no concrete proof that said funds were the source of the advances to its

affiliates. The advances were extended to give FLI, FAI, DSCC and FCI financial assistance for their operational and capital expenditures; and, were all temporary in nature since they were repaid within the duration of one week to three months and were evidenced by mere journal entries, cash vouchers and instructional letters. Taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares, the rule is likewise settled that tax statutes must be construed strictly against the government and liberally in favor of the taxpayer. I. INCOME UNDER LEASE AGREEMENT (SEC. 49, RR-2) Section 49. Improvements by lessees. - When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor, and such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following bases: (a) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease. (Option 1: Report FMV upon completion) (b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each of the lease all adequate part thereof. (Option 2: Report over the Remaining Useful Life of the Lease Depreciated Value after Expiration of the Lease Period- Note: This is the salvage value.) If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the year in which the lease is so terminated to the extent that the BAN ANDRADE, RIAH CUA, FAYE DARVIN, JO-ANNE LEGASPI, MILDRED QUE, YUMI VILLANUEVA, AZENITH VIOJAN, STEN YAP 4B 2004
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value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the pre-mature termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the buildings or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease to the extent that such loss was not compensated for by insurance. 1. RENT 2. OBLIGATIONS OF LESSOR TO THIRD PARTIES ASSUMED
AND PAID BY LESSEE
3. ADVANCE RENTAL 4. LEASEHOLD IMPROVEMENTS (Refer to Sec 49 above)

Part 4 J. DIVIDEND INCOME SEC. 73. Distribution of dividends or Assets by Corporations. (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. 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. (D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not.
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Section 250. Dividends. Dividends, for the purpose of the law, comprise any distribution whether in cash or other property, in the ordinary course of business, even though extraordinary in amount made by a domestic or resident foreign corporation, joint-stock company, partnership, joint account, association, or insurance company to the shareholders or members out of its earnings or profits accumulated since March 1, 1913. Although interest on certain Government bonds and other similar obligations is not taxable when received by a corporation, upon amalgamation with the other funds of the corporation, such income loses its identity and when distributed to shareholders, is taxable, the same extent as other dividends. A taxable distribution made by a corporation to individual stockholders or members shall be included in the gross income of the distributees when the cash or other property is unqualifiedly made subject to their demand. Dividends, in cash or other property received by an individual, are subject to tax in his hands in the same manner as other income. Dividends, whether in cash or other property received by a domestic or resident foreign corporation from a domestic corporation are taxable only to the extent of 25 per cent thereof in accordance with Section 24 of the Code. Dividends received by a domestic corporation from a foreign corporation, whether resident or nonresident, are taxable to the extent that they constitute income from sources within the Philippines, as provided in section 37 (a) (2) (b) of the Code. Dividends paid by the domestic corporation to a nonresident foreign corporation are taxable in full. Section 251. Dividends paid in property. - Dividends paid in securities or other property (other than its own stock), in which the earnings of a corporation have been invested, are income to the recipients to the amount of the all market value of such property when receivable by individual stockholders. When receivable by corporations, the amount of such dividends includible for purposes of the tax on corporations are specified in section 24 of the Code. (See

also section 250 of these regulations). A dividend paid in stock of another corporation is not a stock dividend. even though the stock distributed was acquired through the transfer by the corporation declaring the dividends of property to the corporation the stock of which is distributed as a dividend. Where a corporation declares a dividend payable in a stock of another corporation, setting aside the stock to be so distributed and notifying the stockholders of its action, the income arising to the recipient of such stock is its market value at the time the dividend becomes payable. Scrip dividends are subject to tax in the year in which the warrants are issued. Section 252. Stock dividends. - A stock dividend which represents the transfer of surplus to capital account is not subject to income tax. However, a dividend in stock may constitute taxable income to the recipient thereof notwithstanding the fact that the officers or director of the corporation (as defined in section 84) choose to call such distribution as a stock dividend. The distinction between a stock dividend which does not, and one which does, constitute income taxable to the shareholder is the distinction between a stock dividend which works no change in the corporate entity, the same interest In the same corporation being represented after the distribution by more shares of precisely the same character and a stock dividend where there either has been a Change of corporate identity or a change in the nature of the shares issued as dividends whereby the proportional interest of the shareholders after the distribution is essentially different from his former interest. A stock dividend constitutes income if it gives the shareholder an interest different from that which his former stock holdings represented. A stock dividend does not constitute income if the new shares confer no different rights or interest than did the old - the new certificates plus the old representing the same proportionate interest in the net asset of the corporation as did the old. Section 253. Sale of stock received as dividends. - Stock issued by a corporation, as a dividend, does not constitute taxable income to a stockholder in such corporation, but gain may be derived or loss
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sustained by the stockholder, whether individual or corporate, from the sale of such stock, which gain or loss will be treated as arising from the sale or exchange of a capital asset. (See section 34 of the Code.) The amount of gain derived or loss sustained from the sale of such stock, or from the sale of the stock with respect to which it is issued, shall be determined in accordance with the following rules: (a) Where the stock issued as dividend is as or substantially the same character or preference as the stock upon which the stock dividend is paid, the cost of each share (or when acquired prior to March, 1, 1913, the fair market value as of such date) will be the quotient of the cost (or such fair market value) of the old shares of stock divided by the total number of the old and new shares. (b) Where the stock issued as a dividend is in whole or in part of a character or preference materially different from the stock upon which the stock dividend is paid, the cost (and when acquired prior to March 1,1913, the fair market value as of such date) of the old shares of stock shall be divided between such old stock and the new stock, in proportion, as nearly as may be, to the respective value of each class of stock old and new at the time the new shares of stock are issued, and the cost (or when acquired prior to March 1, 1913, the fair market value as of such date) of each share of stock will be the quotient of the cost (or such fair market value as of March 1, 1913) of the class to which such share belongs divided by the number of shares in that class. (c) Where the stock with respect to which a stock dividend is issued was purchased at different times and at different prices and the identity of the lots cannot be determined, any sale of the original stock, will be charged to the earliest purchases, of such stock, and any sale of dividend stock issued with respect to such stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock, to the amount of the dividend chargeable to such stock. (d) Where the stock with respect to which a stock dividend is declared was purchased at different times and at different prices, and the dividend stock issued with respect to such stock cannot be identified as having been issued with respect to any particular lot of

such stock, then any sale of such dividend stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock, to the amount of the stock dividend chargeable to such stock. Section 254. Declaration and subsequent redemption of a stock dividend. - A true stock dividend is not subject to tax on its receipt in the hands of the recipient. Nevertheless, if a corporation, after the distribution of a stock dividend, proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated as a taxable dividend to the extent of the earnings or profits accumulated by such corporation since March 1, 1913 Section 255. Sources of distribution. For the purpose of income taxation every distribution made by a corporation is made out of earnings or profits to the extent thereof and from the most recently accumulated earnings or profits. In determining the source of a distribution, consideration should be given first, to the earnings or profits of the taxable year; second, to the earnings or profits, accumulated since February 28, 1913, only in the case where, and to the extent that, the distribution made during the taxable year are not regarded as out of the earnings or profits of the taxable year and all the earnings or profits accumulated since February 28, 1913, have been distributed; and, fourth, to sources other than earnings or profits only after the earnings or profits have been distributed. Section 256. Distribution in liquidation. - In all case's where a corporation (as defined in section 84) distributes all of its property or assets in complete liquidation or dissolution, the gain realized from the transaction by the stockholder, whether individual or corporate, is taxable to the extent recognized in section 34 (b) of the Code. For this purpose, the term complete liquidation includes anyone of a series of distributions made by a corporation in complete cancellation or
redemption of an of its stocks in accordance with a bona fide plan of liquidation under which the transfer of all the assets under liquidation is to be completed within a reasonable time from the date of the first distribution, usually not to exceed one year from the time of such first distribution. If the amount received by the stockholder in liquidation is less than the cost or other basis of the stock, the loss in the transaction is deductible to the extent allowed in section 34(c) of the Code. Dividend represents a distribution of the profits by a corporations 1. KINDS OF DIVIDENDS RECOGNIZED IN LAW a. CASH - when taxable, the measure of income is the amount of money received b. PROPERTY - when taxable, the measure of income is the FMV of the property received. A dividend paid in shares of stocks of another corporation, or in treasury stocks, is a property dividend. BIR Ruling No. 108-93 Facts: SEA COMMERCIAL COMPANY, INC. (SEACOM), is a domestic corporation with an authorized capital stock of Thirty Million Pesos (P30,000,000.00), divided into Thirty Thousand (30,000) Preferred shares of stock and Two Hundred Seventy Thousand (270,000) Common shares of stock, all with a par value of One Hundred Pesos (P100.00) per share, of which One Hundred Fifty Five Thousand Three Hundred Two (150,302) Common shares of stock are issued and outstanding as of 31 December 1991; and that as of 31 December 1991, it had a total stockholder's equity in the amount of Thirty Four Million Seven Hundred Nine Thousand Five Hundred Five Pesos (P34,709,505.00), which include unrestricted retained earnings in the amount of Nineteen Million Four Hundred Sixty Nine Thousand Four Hundred Forty One Pesos (P19,469,441.00); that on 15 June 1992,
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the Corporation declared all of its unrestricted retained earnings as of 31 December 1991 as dividends in favor of stockholders of record as of 15 June 1992, payable on or before 15 April 1993, that said dividends shall be distributed in the form of cash in the amount of Seven Million Five Hundred Twenty Thousand Three and 08/100 Pesos (P7,520,003.08), and the following properties with a total book value of Eleven Million Nine Hundred Forty Nine Thousand Four Hundred Thirty Seven and 92/100 Pesos (P11,949,437.92). The aforementioned real and personal properties are capital assets of the Corporation, which are not used and not intended to be used by the Corporation in its ordinary course of business; that the properties declared as dividends were recorded in the books of the Corporation at their book values; that the total book value of the property dividends is equivalent only to Twenty-Five and 80/100 percent (25.8%) of SEACOM'S assets for the year ended 31 December 1991; and that the Corporation continues to do business and its stockholders have no intention of liquidating the corporation after the declaration of property dividends.
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stockholders shall not be subject to any income or capital gains tax arising from their receipt of these properties as property dividend. (Section 21(c)(2) of the Tax Code, as amended by Executive Order No. 37). However, certificates authorizing transfer of real estate properties without payment of the capital gains tax shall be secured from the Revenue District Officer of the Revenue District where the property is located before said properties are transferred in the name of the recipient stockholders (BIR Ruling No. 028-89 dated February 22, 1989). Similarly, certificates authorizing transfer of shares of stock without payment of the capital gains tax shall be secured from the Revenue District Officer of the Revenue District where the principal place of office of the corporation declaring the dividends is located. It shall be the ministerial duty of the Revenue District Officer to issue said certificates. SEACOM shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the real estate properties declared and distributed as property dividends. This is because there is no realized gain considering the fact that the value used at the time of distribution is the book value. Upon subsequent sale or other disposition of the property received as dividends by the stockholders, the basis of such shall also be its book value at the time of the dividend distribution. The amount of the documentary stamp tax on the Deeds of Conveyance to be executed between SEACOM and the recipient stockholders covering the real estate properties declared as property dividends shall be based on the book value of said real estate properties. The documentary stamp tax that shall be collected shall be at the rate of ten (10) pesos for every one thousand pesos (P1,000.00), or fractional part thereof, of the book value of the real properties declared as dividends (Section 196, Tax Code). On the other hand, the documentary stamp tax on the Deeds of Conveyance to be executed between SEACOM and the recipient stockholders covering the shares of stock to be declared as property dividends shall be based on the par value of the shares of stocks, at the rate of fifty centavos (P0.50) for each two hundred pesos (P200.00), or fractional part thereof, of the value of the shares of stock declared as property
Ruling: The property dividend shall be recorded at the book value in the books of both the issuing corporation and the recipient stockholder. The BIR Ruling No. 21(c)(2)-028-89-130-89 applying Sections 250 and 251 of Revenue Regulations No. 2 stating that dividends paid in securities or other property (other than its own stock) in which the earnings of a corporation have been invested are income to the recipient to the amount of the full market value of such property when receivable by individual stockholders has already been modified having been rendered obsolete by Executive Order No. 37 (effective August 1, 1986) subjecting to income tax at 0% effective January 1, 1989, dividends received from a domestic corporation and the share of an individual partner in a partnership subject to tax under Section 24(a) of the Tax Code (BIR Ruling No. 276-91 December 26, 1991) The proposed property dividend which shall be received by the stockholders of SEACOM shall be subject to a final withholding tax of zero (0%) percent, and the receiving

dividends (Section 176, Tax Code). In both cases, the documentary stamp tax shall be due and payable on the day of execution of the Deeds of Conveyance (Section 173, Tax Code). c. STOCK COMM. V. MANNING, 66 SCRA 14 Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares of MANTRASCO, and the three private respondents who owned the rest, at 100 shares each, deposited all their shares with the Trustees. The trust agreement provided that upon Reese's death MANTRASCO shall purchase Reese's shares. The trust agreement was executed in view of Reese's desire that upon his death the Company would continue under the management of respondents. Upon Reese's death and partial payment by the company of Reeses's share, a new certificate was issued in the name of MANTRASCO, and the certificate indorsed to the Trustees. Subsequently, the stockholders reverted the 24,700 shares in the Treasury to the capital account of the company as stock dividends to be distributed to the stockholders. When the entire purchase price of Reese's interest in the company was paid in full by the latter, the trust agreement was terminated, and the shares held in trust were delivered to the company. The Bureau of Internal Revenue concluded that the distribution of the 24,700 shares of Reese as stock dividends was in effect a distribution of the "assets or property of the corporation." It therefore assessed respondents for deficiency income taxes as well as for fraud penalty and interest charges. On a petition for review, the Supreme Court held that the newly acquired shares were not treasury shares; their declaration as treasury stock dividends was a complete nullity and that the assessment by the Commissioner of fraud penalty and the imposition of interest charges pursuant to the provision of the Tax Code were made in accordance with law.
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Where by the use of a trust instrument as a convenient technical device, respondents bestowed unto themselves the full worth and value of a deceased stockholder's corporate holding acquired with the very earnings of the companies, such package device which obviously is not designed to carry out the usual stock dividend purpose of corporate expansion reinvestment, e.g., the acquisition of additional facilities and other capital budget items, but exclusively for expanding the capital base of the surviving stockholders in the company, cannot be allowed to deflect the latter's responsibilities toward our income tax laws. The conclusion is ineluctable that whenever the company parted with a portion of its earnings "to buy" the corporate holdings of the deceased stockholders, it was in ultimate effect and result making a distribution of such earnings to the surviving stockholders. All these amounts are consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to the surviving stockholders. Where the surviving stockholders, by resolution, partitioned among themselves, as treasury stock dividends, the deceased stockholder's interest, and earnings of the corporation over a period of years were used to gradually wipe out the holdings therein of said deceased stockholder, the earnings (which in effect have been distributed to the surviving stockholders when they appropriated among themselves the deceased stockholder's interest), should be taxed for each of the corresponding years when payments were made to the deceased's estate on account of his shares. In other words, the Tax Commissioner may not asses the surviving stockholders, for income tax purposes, the total acquisition cost of the alleged treasury stock dividends in one lump sum. However, with regard to payment made with the corporation's earnings before the passage of the resolution declaring as stock dividends the deceased stockholder's interest (while indeed those earnings were utilized in those years to gradually pay off the value of the deceased stockholder's holdings), the surviving stockholders should be liable (in the absence of evidence that prior to the passage of the stockholder's resolution the contributed of each of the surviving stockholder rose corresponding), for income tax purposes, to the extent of the aggregate amount paid by the corporation (prior to such resolution) to buy off the deceased

stockholder's shares. The reason is that it was only by virtue of the authority contained in said resolution that the surviving stockholders actually, albeit illegally, appropriated and petitioned among themselves the stockholders equity representing the deceased stockholder's interest. FISHER V. TRINIDAD, 43 PHIL 973 Are the "stock dividends" in the present case "income" and taxable? A dividend is defined as a corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is declared, the corporate profits belong to the corporation and not to the stockholders, and are liable for the payment of the debts of the corporation. A stock dividend, when declared, is merely a certificate of stock which evidences the interest of the stockholder in the increased capital of the corporation. There is a clear distinction between a cash dividend and a stock dividend. The one is a disbursement to the stockholder of accumulated earnings, and the corporation parts irrevocably with all interest therein; the other involves no disbursement by the corporation; the corporation parts with nothing to its stockholder. When a cash dividend is declared and paid to stockholders, such cash becomes the absolute property of the stockholders and cannot be reached by the creditors of corporation in the absence of fraud. The property represented by a stock dividend, however, still being the property of corporation, and not of the stockholder, it may be reached by an execution against the corporation, and sold as a part of the property of the corporation. In such a case, if all of the property of the corporation is sold under execution, then the stockholders certainly could not be charged with having received an income by virtue of the issuance of the stock dividend. If the ownership of the property represented by a stock dividend is still in the corporation and not in the holder of such stock, certainly such stock cannot be regarded as income to the stockholder. The stockholder has received nothing but a representation of an
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interest in the property of the corporation and, as a matter of fact, he may never receive anything, depending upon the final outcome of the business of the corporation.
Held: "Stock dividends" are not "income," the same cannot be taxed under that provision of Act No. 2833 which provides for a tax upon income. Under the guise of an income tax, property which is not an income cannot be taxed.
2. MEASURE OF INCOME IN CASH AND PROPERTY
DIVIDEND
3. STOCK DIVIDEND A. WHEN TAXABLE - if it gives the shareholder an interest different from that which his former stock represented i) MEASURE OF INCOME - FMV of the shares of stocks received
B. WHEN NOT TAXABLE - if the new shares confer no different interest or rights than the old i) ADJUSTED COST PER SHARE where the stock received as dividend is all of substantially the same character or preference as the stock upon which the stock dividend is paid, the cost of each share shall be equal to the cost of the old shares divided by the total number of the old and new shares. The new basis per share

is used in computing any gain or loss upon any subsequent sale of the shares. 4. LIQUIDATED DIVIDEND BIR Ruling 322-87 Facts: The Company is a trading concern and at present is in the process of liquidation; and that individual stockholders will receive their liquidating dividends in excess of their investment.
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corporation or formal action taken to liquidate it are but evidentiary and not indispensable. "The distinction between a distribution in liquidation and an ordinary dividend is factual; the result in each case depending on the particular circumstances of the case and the intent of the parties. If the distribution is in the nature of a recurring return on stock it is an ordinary dividend. However, if the corporation is really winding up its business or recapitalizing and narrowing its activities, the distribution may properly be treated as in complete or partial liquidation and as payment by the corporation to the stockholder for his stock. The corporation is, in the latter instances, wiping out all or Part of the stockholders' interest in the company . . ." Gains resulting from distributions made in complete liquidation or dissolution of a corporation as specifically contemplated in section 25 (a) of the former Income Tax Law, are taxable as income, whether the stockholder happens to be an individual or a corporation. Section 25 (a) of the law, far from limiting the taxability, provides that the gain thus realized is a "taxable income" under the law so long as a gain is realized, it will be a taxable income whether the distribution comes from the earnings or profits of the corporation or from the sale of all of its assets in general, so long as the distribution is made "in complete liquidation or dissolution." 5. ESSENTIALLY EQUIVALENT TO DISTRIBUTION OF
TAXABLE DIVIDENDS
Ruling: Since the individual stockholders of the Company will receive upon its complete liquidation all its assets as liquidating dividends, they will thereby realize capital gain or loss. The gain, if any, derived by the individual stockholders consisting of the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders of their respective shareholdings in the said corporation (Sec. 83 (a), Sec. 256, Income Tax Regulations) shall be subject to income tax at the rates prescribed under Section 21(a) of the Tax Code, as amended by Executive Order No. 37. Moreover, pursuant to Section 34(b) of the Tax Code, as amended by Executive Order No. 37, only 50% of the aforementioned capital gain is reportable for income tax purposes if the shares were held by the individual stockholders for more than twelve months and 100% of the capital gains if the shares were held for less than twelve months.
WISE & CO. INC., V. MEER, GR. L-48231 A distribution does not necessarily become a dividend by reason of the fact that it is called a dividend by the distributing corporation. "The ordinary connotation of liquidating dividend involves the distribution of assets by a corporation to its stockholders upon dissolution." The determining element therefore is whether the distribution was in the ordinary course of business and with intent to maintain the corporation as a going concern, or after deciding to quit with intent to liquidate the business. Proceedings actually begun to dissolve the
CIR V. CTA & ANSCOR, GR. NO. 108576 Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation A. Soriano Y Cia, predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. The authorized capital stock was increased to P2,500,000.00 divided into 25,000 common shares with

the same par value with only 10,000 issued and all subscribed by Don Andres. Don Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR. Both sons are foreigners. Stock dividends were declared on 1947, 1949 and 1963.On December 30, 1964 Don Andres died. As of that date, he has a total shareholdings of 185,154 shares - 50,495 of which are original issues and the balance of 134,659 shares as stock dividend declarations. One-half of that shareholdings were transferred to his wife, Doa Carmen Soriano, as her conjugal share. The other half formed part of his estate. ANSCOR increased its capital stock to P20M and in 1966 to P30M. In the same year, stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate and Doa Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864 common shares each. On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue Service (IRS), inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme under Section 367 of the 1954 U.S. Revenue Act. By January 2, 1968, ANSCOR reclassified its existing 300,000 common shares into 150,000 common and 150,000 preferred shares. The IRS opined that the exchange is only a recapitalization scheme and not tax avoidance. Consequently, Doa Carmen exchanged her whole 138,864 common shares for 138,860 of the newly reclassified preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its common shares for the remaining 11,140 preferred shares, thus reducing its (the estate) common shares to 127,727. ANSCOR redeemed 28,000 common shares from the Don Andres estate. By November 1968, the Board further increased ANSCORs capital stock to P75M divided into 150,000 preferred shares and 600,000 common shares. About a year later, ANSCOR again redeemed 80,000 common shares from the Don Andres estate further reducing the latters common shareholdings to 19,727. In 1973, after examining ANSCORs books of account and records, Revenue examiners issued a report proposing that ANSCOR be
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assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue Code, for the year 1968 and the second quarter of 1969 based on the transactions of exchange and redemption of stocks. Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act which provides: Sec. 83. Distribution of dividends or assets by corporations. (b) Stock dividends - A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. 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 it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen. (Italics supplied). Specifically, the issue is whether ANSCORs redemption of stocks from its stockholder as well as the exchange of common with preferred shares can be considered as essentially equivalent to the distribution of taxable dividend, making the proceeds thereof taxable under the provisions of the above-quoted law.
General Rule Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue Code of 1928. It laid down the general rule known as the proportionate test wherein stock dividends once issued form part of the capital and, thus, subject to income tax. Specifically, the general rule states that:A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US Revenue Code, this provision originally referred to stock dividends only,

without any exception. Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the mere issuance thereof is not yet subject to income tax as they are nothing but an enrichment through increase in value of capital investment. As capital, the stock dividends postpone the realization of profits because the fund represented by the new stock has been transferred from surplus to capital and no longer available for actual distribution. Income in tax law is an amount of money coming to a person within a specified time, whether as payment for services, interest, or profit from investment. It means cash or its equivalent. It is gain derived and severed from capital, from labor or from both combined - so that to tax a stock dividend would be to tax a capital increase rather than the income. In a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the realization, stock dividends are nothing but a representation of an interest in the corporate properties. As capital, it is not yet subject to income tax. It should be noted that capital and income are different. Capital is wealth or fund; whereas income is profit or gain or the flow of wealth. The determining factor for the imposition of income tax is whether any gain or profit was derived from a transaction. THE EXCEPTION 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 it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied). Although redemption and cancellation are generally considered capital transactions, as such, they are not subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from such transactions. Simply put, depending on the circumstances, the proceeds of redemption of stock dividends are
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essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder. Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of choice. Having realized gain from that redemption, the income earner cannot escape income tax. As qualified by the phrase such time and in such manner, the exception was not intended to characterize as taxable dividend every distribution of earnings arising from the redemption of stock dividends. So that, whether the amount distributed in the redemption should be treated as the equivalent of a taxable dividend is a question of fact, which is determinable on the basis of the particular facts of the transaction in question. No decisive test can be used to determine the application of the exemption under Section 83(b) The use of the words such manner and essentially equivalent negative any idea that a weighted formula can resolve a crucial issue - Should the distribution be treated as taxable dividend. On this aspect, American courts developed certain recognized criteria, which includes the following: 1) the presence or absence of real business purpose, 2) the amount of earnings and profits available for the declaration of a regular dividend and the corporations past record with respect to the declaration of dividends, 3) the effect of the distribution as compared with the declaration of regular dividend, 4) the lapse of time between issuance and redemption, 5) the presence of a substantial surplus and a generous supply of cash which invites suspicion as does a meager policy in relation both to current earnings and accumulated surplus. REDEMPTION AND CANCELLATION For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation; (b) the transaction involves stock dividends and (c) the time and manner of the transaction makes it essentially equivalent to a distribution of taxable dividends. Of these, the most important is the third. Redemption is repurchase, a reacquisition of stock by a corporation

which issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where did the shares redeemed come from? If its source is the original capital subscriptions upon establishment of the corporation or from initial capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares are from stock dividend declarations other than as initial capital investment, the proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain thereon. It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is undisputed that at the time of the last redemption, the original common shares owned by the estate were only 25,247.5. This means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock dividends. Besides, in the absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits, such as stock dividends. The capital cannot be distributed in the form of redemption of stock dividends without violating the trust fund doctrine - wherein the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That doctrine was intended for the protection of corporate creditors With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time alone that lapsed from the issuance to the redemption is not a sufficient indicator to
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determine taxability. It is a must to consider the factual circumstances as to the manner of both the issuance and the redemption. The time element is a factor to show a device to evade tax and the scheme of cancelling or redeeming the same shares is a method usually adopted to accomplish the end sought. Was this transaction used as a continuing plan, device or artifice to evade payment of tax? It is necessary to determine the net effect of the transaction between the shareholder-income taxpayer and the acquiring (redeeming) corporation. The net effect test is not evidence or testimony to be considered; it is rather an inference to be drawn or a conclusion to be reached. It is also important to know whether the issuance of stock dividends was dictated by legitimate business reasons, the presence of which might negate a tax evasion plan. The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be considered a legitimate tax scheme. Redemption cannot be used as a cloak to distribute corporate earnings. Otherwise, the apparent intention to avoid tax becomes doubtful as the intention to evade becomes manifest. Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if the redeemed shares were issued with bona fide business purpose, which is judged after each and every step of the transaction have been considered and the whole transaction does not amount to a tax evasion scheme. It is the net effect rather than the motives and plans of the taxpayer or his corporation that is the fundamental guide in administering Sec. 83(b). This tax provision is aimed at the result. It also applies even if at the time of the issuance of the stock dividend, there was no intention to redeem it as a means of distributing profit or avoiding tax on dividends. The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. It has no relevance in determining dividend equivalence. Such purposes may be material only upon the issuance of the stock dividends. The test of taxability under the exempting clause, when it provides such time and manner as would make the redemption essentially equivalent to the distribution of a taxable
dividend, is whether the redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there may not be a dividend equivalence treatment. The three elements in the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or received, actually or constructively,and (3) it is not exempted by law or treaty from income tax. Any business purpose as to why or how the income was earned by the taxpayer is not a requirement. Income tax is assessed on income received from any property, activity or service that produces the income because the Tax Code stands as an indifferent neutral party on the matter of where income comes from. As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was realized through the redemption of stock dividends. The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholders separate property.Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. A review of the cited American cases shows that the presence or absence of genuine business purposes may be material with respect to the issuance or declaration of stock dividends but not on its subsequent redemption. The issuance and the redemption of stocks are two different transactions. Although the existence of legitimate corporate purposes may justify a corporations acquisition of its own shares under Section 41 of the Corporation Code, such purposes cannot excuse the stockholder from the effects of taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion plan and thus, without legitimate business reasons the redemption becomes suspicious which may call for the application of the exempting clause. The substance of the whole transaction, not its form, usually controls the tax consequences. After considering the manner and the circumstances by which the issuance and redemption of stock dividends were made, there is no other conclusion but that the proceeds thereof are essentially
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considered equivalent to a distribution of taxable dividends. As taxable dividend under Section 83(b), it is part of the entire income subject to tax under Section 22 in relation to Section 21of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in gross income. As income, it is subject to income tax which is required to be withheld at source. The 1997 Tax Code may have altered the situation but it does not change this disposition. EXCHANGE OF COMMON WITH PREFERRED SHARES Exchange is an act of taking or giving one thing for another involving reciprocal transfer and is generally considered as a taxable transaction. The exchange of common stocks with preferred stocks, or preferred for common or a combination of either for both, may not produce a recognized gain or loss, so long as the provisions of Section 83(b) is not applicable. This is true in a trade between two (2) persons as well as a trade between a stockholder and a corporation. In general, this trade must be parts of merger, transfer to controlled corporation, corporate acquisitions or corporate reorganizations. No taxable gain or loss may be recognized on exchange of property, stock or securities related to reorganizations. Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and preferred, and that parts of the common shares of the Don Andres estate and all of Doa Carmens shares were exchanged for the whole 150, 000 preferred shares. Thereafter, both the Don Andres estate and Doa Carmen remained as corporate subscribers except that their subscriptions now include preferred shares. There was no change in their proportional interest after the exchange. There was no cash flow. Both stocks had the same par value. Under the facts herein, any difference in their market value would be immaterial at the time of exchange because no income is yet realized - it was a mere corporate paper transaction. It would have been different, if the exchange transaction resulted into a flow of wealth, in which case income tax may be imposed. Reclassification of shares does not always bring any substantial alteration in the subscribers proportional interest. But the exchange is different - there would be a shifting of the balance of stock features,

like priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor exchange per se, yields realize income for tax purposes. K. INCOME FROM ANY SOURCE WHATEVER 1. BAD DEBT RECOVERY (See Section 50 below.) 2. FORGIVENESS OF INDEBTEDNESS RR-2, Section 50. Forgiveness of indebtedness The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or a capital transaction, dependent upon the circumstances. For example, an individual performs services for a creditor, who, in consideration thereof, cancels the debt, income to that amount is realized by the debtor as compensation for his service. If, however, a creditor merely desires to benefit a debtor without any consideration thereof cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latters gross income. If a corporation to which a stockholder indebted forgives the debt, the transaction has the effect of the payment of the dividend. 3. TAX REFUNDS - for income tax purposes, as a general rule, tax refunds are taxable except: Philippine income tax (except fringe benefit tax); estate or donors tax; special assessments; income paid to a foreign country, if the taxpayer claimed a credit for such tax in the year it was paid; and stock transaction tax. RMC. No. 13-80 Refunds/Tax Credits under Section 295 of the Tax Code. Taxes previously claimed and allowed as deductions, but subsequently refunded or granted as tax credit pursuant to Section 295 of the Tax Code, should be declared as part of the gross income of the taxpayer in the year of receipt of the refund or tax credit. However, the
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following taxes, when refunded or credited, are not declarable for income tax purposes inasmuch as they are not allowable as deductions: a. Income tax imposed in Title III of the Tax Code; b. Income, war-profit and excess profits taxes imposed by authority of a foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for taxes of foreign countries); c. Estate and gift taxes; d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed; e. Stock transaction tax; f. Energy tax; and g. Taxes which are not allowable as deductions under the law. Special Tax Credits granted under R.A. 5186; R.A. 6135 and P.D. 535. These tax credits and their tax consequences are as follows: a. Sales, compensating and specific taxes are paid on supplies and raw materials imported by a registered export producer. Said taxes are given as tax credit to be used in the payment of taxes, duties, charges and fees due to the national government in connection with its operations. (Sec. 7(a), R.A. No. 6135) The tax credits granted should form part of the gross income to the enterprise in the year of receipt of tax credit as said taxes paid are considered allowable deductions for income taxes purposes. b. In some cases, a registered BOI and tourism enterprise assumes payment of taxes withheld and due from the foreign lender-remittee on interest payments on foreign loans. In such cases, the enterprise is given a tax credit for taxes withheld subject to certain conditions. (Sec. 7(f), R.A. No. 5186; Sec. 8(c), P.D. No. 535)

Said taxes assumed by the registered enterprise represent necessary and ordinary expenses incurred by the enterprise; hence, deductible from its gross income. Therefore, the tax credits granted necessarily constitute taxable income of the enterprise. 4. DAMAGE RECOVERY - compensatory damages, as constituting returns of capital, are not taxable. Thus, amounts received as moral damages for personal actions, such as alienation of affections, libel, slander or breach of promise to marry, are not taxable. 5. PRIZES AND WINNINGS - generally taxable. Such payments constitute gains derived from labor. Not taxable if recipient selected without any action on his part to enter the contest or proceedings; and the recipient is not required to render substantial future services as a condition for receiving the prize or award. Those granted to athletes shall be exempt from income tax. Prizes and awards in the nature of gifts are not taxable. 6. INCOME FROM ANY SOURCE WHATEVER (income from illegal sources are taxable) GUTIERREZ V. COLLECTOR, 101 PHIL 743 The compensation or income derived from the expropriation of property located in the Philippines is an income from sources within the Philippines and subject to the taxing jurisdiction of the place. DEDUCTIONS A. CLASSES OF DEDUCTIONS (Sec. 34)
Page 97 Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this section other than Subsection M [Premium payments on Health and/or Hospitalization Insurance of an Individual Taxpayer] hereof, in computing taxable income, subject to income tax under sections
24(A) 25(A) 26 27(A) 27(B) 27(C) 28(A)(1) Individual resident alien Non-resident alien engaged in trade or business within the Philippines members of general professional partnerships domestic corporations proprietary educational institutions and hospitals government-owned or controlled corporations, agencies, or instrumentalities resident foreign corporations
there shall be allowed the following deductions from gross income: (a) Expenses (b) Interest (c) Taxes (d) Losses (e) Bad debts (f) Depreciation (g) Depletion of oil and gas wells and mines (h) Charitable and other contributions (i) Research and development (j) Pension trusts The following are the deductions from the gross income to arrive at the taxable income.
Tax Law Review Atty. Salvador Individuals: Gross compensation income from employer-employee relationship only (a) premium payments on health and/or hospitalization insurance; and (b) personal exemptions Gross income from business or practice of profession
(a) Optional Standard Deduction (b) Itemized Deductions (c) premium payments on health and/or hospitalization insurance; and (d) Personal exemptions
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1. OPTIONAL STANDARD DEDUCTION FOR INDIVIDUALS (OSD) Sec. 34(L) In lieu of the deductions allowed, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding 10% (now 40%) of his gross income.
Discussion (V. D. Reyes):

Corporations: Itemized deductions Formula: Individual All Income - Exclusions (Sec. 32[B]) GROSS INCOME - Allowable deductions (Sec. 34) NET INCOME - Personal Exemptions (Sec. 35) TAXABLE NET INCOME x Tax Rate INCOME TAX DUE - Creditable W/holding Tax - Tax credit INCOME TAX PAYABLE Corporations All Income - Exclusions (Sec. 32[B]) GROSS INCOME - Allowable deductions (Sec. 34) TAXABLE NET INCOME x Tax Rate INCOME TAX DUE - Creditable Withholding Tax - Tax credit INCOME TAX PAYABLE
The OSD is a deduction from gross income allowed to be taken in lieu of the itemized deductions. The OSD can be claimed only by an individual other than a nonresident alien. The taxpayer shall signify in the income tax return his intention to elect the OSD. Unless the taxpayer signifies in his return such intention, he shall be considered as having availed of the itemized deductions. The OSD is an amount equal to 10% of the gross income from business or practice of profession of the taxpayer. The deduction is not available against compensation income arising out of an employer-employee relationship. The election of the OSD is irrevocable for the taxable year for which the choice is made. 2. RA 9504
SEC. 3. Section 34(L) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby amended to read as follows: "SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M)hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B), (C); and 28(A)(1), there shall be allowed the following deductions from the gross income:

(a) "(A) Expenses. (b) "x x x. (c) "(L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. "(M) x x x." (d) (e) (f) (g) (h) (i) (j) (k) (l) (m)
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Expenses Interest Taxes Losses Bad debts Depreciation Depletion of oil and gas wells and mines Charitable and other contributions Research and development Pension trusts
The Sec. of Finance, upon the recommendation of the CIR may prescribe by regulation limitations or ceilings for any of the itemized deductions (a) to (j), subject to the following conditions: (a) only after public hearing shall have been held for such purposes; (b) considering the following factors: 1. adequacy of the prescribed limits on the actual expenditure requirements of each particular industry 2. effects of inflation on expenditure levels (c) no ceiling shall further be imposed on items of expenses already subject to ceilings under present law.
Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income, or for which depreciation or amortization is made, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR.
ITEMS NOT DEDUCTIBLE:

In computing taxable income, no deduction shall in any case be allowed for: (a) personal, living or family expenses;
3. ITEMIZED DEDUCTIONS
A taxpayer may claim the following itemized deductions from gross income from business or practice of profession

(b) any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate; (c) any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; (d) premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. And, no deduction shall be allowed for: (a) losses from sales or exchanges of property; (b) interest expense; (c) bad debts where the transaction is between related taxpayers, as follows: 1) between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; 2) except in the case of distributions in liquidation, between an individual and a corporation more than 50% in value or the outstanding stock of which is owned, directly, or indirectly by or for such individual; 3) except in the case of distribution in liquidation, between two corporations more than 50% 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. (There are no
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more personal holding companies or foreign personal holding companies under the NIRC). 4) Between the grantor and a fiduciary of any trust; 5) Between the fiduciary of a trust and the fiduciary of another trust if the same person is the grantor with respect to each trust; 6) Between a fiduciary of a trust and a beneficiary of such trust. B. EXPENSES IN GENERAL Sec. 34(A), NIRC (1) Ordinary and Necessary Trade, Business or Professional Expenses. (a) In General. There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; (iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking

title or in which he has no equity other than that of a lessee, user or possessor; (iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals, public policy or public order shall in no case be allowed as a deduction. Substantiation Requirements. No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. Bribes, Kickbacks and Other Similar Payments. No deduction from gross income shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a government-owned or -controlled corporation, or to an
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official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. Expenses Allowable to Private Educational Institutions. In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to under Section 27(B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof.
(2)
(b)
(Sec. 65-76, RR-2) Sec. 65. Business Expenses. Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayers trade or business. The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income. Among the items included in business expenses are management expenses, commissions, labor, supplies, incidental repairs, operating expenses of transportation, equipment used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business, advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property. A taxpayer is entitled to deduct the necessary expenses paid in carrying on his business from his gross income from whatever source. Sec. 66. Traveling Expenses. Traveling expenses as ordinarily understood, include transportation expenses and meals and lodging. If the trip is undertaken for other tan business purposes, the transportation expenses are personal expenses, and the meals and lodging are living expenses, and therefore, not deductible. If the trip is solely on business, the reasonable and necessary traveling expenses,
(c)

including transportation expenses, meals, and lodging, become business instead of personal expenses. (a) If, then, an individual, whose business requires him to travel, receives a salary as full compensation for his services, without reimbursement for traveling expenses, or is employed on a commission basis with no expenses allowance, his traveling expenses, including the entire amount expended for meals and lodging, are deductible from gross income. (b) If an individual receives a salary and is also repaid his actual traveling expenses, he shall include in his gross income, the amount so repaid and may deduct such expenses. (c) If an individual receives a salary and also an allowance for meals and lodging, as for example, a per diem allowance in lieu of subsistence, the amount of the allowance should be included in gross income and the cost of such meals and lodging may be deducted therefrom. A payment for the use of a sample room at a hotel for the display of goods is a business expense. Only such expenses are reasonable and necessary in the conduct of the business and directly attributable to it may be deducted. A taxpayer claiming the benefit of the deductions referred to herein must attach to his return a statement showing (1) the nature of the business in which he engaged; (2) the number of days away from home during the taxable year on account of business; (3) the total amount of expenses incident to meals and lodging while absent from home and business during the taxable year; (4) the total amount of other expenses incident to travel and claimed as a deduction. Claim for the deductions referred to herein must be substantiated, when required by the CIR by record showing in detail the amount and nature of the expenses incurred. Sec. 67. Cost of Materials. Taxpayers carrying materials and supplies on hand should include in expenses the charges of materials and supplies only to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that the cost of such materials and supplies has not been
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deducted in determining the net income for any previous year. If a taxpayer carries incidental materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of such supplies and materials as were purchased during the year for which the return is made, provided the net income is clearly reflected by this method. Sec. 68. Repairs. The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditure. Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably prolong the life of the property should be charged against the depreciation reserves if such account is kept. Sec. 69. Professional Expenses. A professional may claim as deductions the cost of supplies used by him in the practice of his profession, expenses paid in the operations and repair of transportation equipment used in making professional calls, dues to professional societies, and subscriptions to professional journals, the rent paid for office rooms, the expenses of the fuel, light, water, telephones, etc., used in such offices, and the hire of office assistants. Amounts currently expended for books, furniture, and professional instruments and equipment, the useful life of which is short, may be deducted. But amounts expended for books, furniture, and professional instruments and equipment of a permanent character are not allowable as deductions. Sec. 70. Compensation for personal services. Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether

they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows: (1) Any amount paid in the form of compensation, but not in fact as the purchase price services, is not deductible. (a) an ostensible salary paid by a corporation may be a distribution of dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholder of the officers or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for the transfer of their business. (2) The form or method of fixing compensation is not decisive as to the deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a continent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid. (3) In any event the allowance for compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like
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circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. Sec. 71. Treatment of excessive compensation. The income tax liability of the recipient in respect of an amount of ostensibly paid to him as compensation, but not allowed to be deducte4d as such by the payer, will depend upon the circumstances of each case. Thus, in the case of excessive payments by corporation, if such payments correspond or bear a close relationship to stockholdings, and are found to be distribution of earnings or profits, the excessive payments will be treated as dividend. If such payments constitute payment for property, they should be treated by the payer as a capital expenditure and by the recipient as part of the purchase price. Sec. 72. Bonuses to employees. Bonuses to employees will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated salaries do not exceed a reasonable compensation, for the services rendered. It is immaterial whether such bonuses are paid in cash or in kind or partly in cash and partly in kind. Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable compensation for services, are not deductible from gross income. Sec. 73. Pensions, compensation for injuries. Amounts paid for pensions to retired employees or to their families or other dependent upon them, or on account of injuries received by employees, and lump-sum amounts paid or accrued as compensation for injuries, are proper deductions as ordinary and necessary expenses. Such deductions are limited to the amount not compensated for by insurance or otherwise. When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs, in recognition of the services rendered by the individual, such

payments may be deducted. Salaries paid by employers to employees who are absent in the military, naval, or other service of the Government, but who intend to return at the conclusion of such service, are allowable deductions. Sec. 74. Rentals. Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return an adequate part of such sum each year, based on the number of years as the lease has to run. Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant and taxable income to the landlord; the amount of the tax being deductible by the latter. The cost borne by lessee in erecting buildings or making permanent improvements on ground of which he is lessee is held to be a capital investment and not deductible as a business expense. In order to return to such taxpayer his investment of capital, an annual deduction may be made from gross income of an amount equal to the cost of such improvements divided by the number of years remaining of the term of the lease, and such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life of the building erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation. Sec. 75. Expenses of farmers. A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts actually expended in the carryon on of the business of arming. The cost of ordinary tools of short life or small cost, such as hand tools, including shovels, rakes, etc., may be included. The cost of feeding and raising livestock may be treated as an expense deduction, in so far as such cost represents actual outlay, but not including the value of farm produce grown upon the far, or the laborer of the taxpayer. Where a farmer is engaged in producing crops which take more than a year from the time of planting to the process of gathering and disposal, expenses deducted may be determined upon the crop basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. The cost of farm
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machinery, equipment, and farm buildings represents a capital investment and is not allowable deduction as an item of expense. Amounts expended in the development of farms, orchards, and ranches, prior to the time when the productive state is reached may be regarded as investments of capital. Amounts expended in purchasing work, breeding or dairy animals are regarded as investments of capital, and may be depreciated unless such animals are included in an inventory in accordance with section 149 of these regulations. The purchase price of transportation equipment if used wholly used in carrying on farm operations, is not deductible but is regarded as an investment of capital. The cost of gasoline or fuel, repairs, and upkeep of the transportation equipment if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipt therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deduction. Sec. 76. When charges are deductible. Each years return, so far as practicable, both as to gross income and deductions therefrom, should be complete in itself, and taxpayers are expected to make every reasonable effort to ascertain the facts necessary to make a correct return. The expenses, liabilities, or deficit of one year cannot be used to reduce the income of a subsequent year. A taxpayer has the right to deduct all authorized allowances and it follows that if he does not within any year deduct certain of his expenses, losses, interests, taxes, or other charges, he cannot deduct them from the income of the next or any succeeding year. If it is recognized, however, that particularly in a going business of any magnitude there

are certain overlapping items both of income and deduction, and so long as those overlapping items do not materially distort the income, they may be included in the year in which the taxpayer, pursuant to a consisting policy, takes them into his accounts. Judgments or other binding judicial adjudication, on account of damages for patent infringement, personal injuries, or other cause, are deductible from gross income when the claim is so adjudicated or paid, unless taken under other methods of accounting which clearly reflect the correct deduction, less any amount or such damages as may have been compensated for by insurance or otherwise. If subsequent to its occurrence, however, a taxpayer first ascertains the amount of a loss sustained during a prior taxable year which has not been deducted from gross income, he may render an amended return for such preceding taxable year including such amount of loss in the deduction from gross income and may in proper cases file a claim for refund of the excess tax paid by reason of the failure to deduct such loss in the original return. A loss from theft or embezzlement occurring in one year and discovered in another is ordinarily deductible for the year in which sustained. 1. REQUISITES FOR DEDUCTIBILITY
Held: disallowance proper. To be deductible, said business expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade or business; that those expenses must also meet the further test of reasonableness in amount, this test being inherent in the phase ordinary and necessary. The explanation to the effect that the supporting papers of some of the expenses had been destroyed when the house of appellants treasurer was burned, is not satisfactory, for appellants records were supposed to be kept in its offices, not in the residence of one of its officers. DISCUSSION:
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An expense must satisfy the following conditions to be deductible from gross income under the category of expenses, in general: (a) it must be ordinary and necessary (b) it must be paid or incurred within the taxable year (c) it must be in carrying on, or directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of profession; and (d) Substantiated by official receipts or other adequate records. An expense is considered ordinary, if it is normal in relation to the taxpayers business and the surrounding circumstances. The expense need not be recurring. The expense is necessary when it is intended to minimize losses or to maximize profits. The two conditions must be satisfied, such that an expense which is ordinary, but not necessary, or necessary, but not ordinary, is not deductible from gross income. A court may decide on when an expense is, or is not ordinary, but as much as possible, will refuse to substitute its judgment for that of the taxpayer on the necessity of the expense. 2. COMPENSATION FOR PERSONAL SERVICES
Visayan Cebu Terminal Co. v. Collector (108 Phil 320)
Doctrine: To be deductible, said business expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade or business Facts: Visayan Cebut Terminal (VCTC) is a corporation organized for the purpose of handling arrastre operations in the port of Cebu. It filed its ITR, certain entries therein were disallowed as expenses pertaining to the salaries of 2 officers, miscellaneous expenses, and representation expenses. VCTC questions the disallowance of deductions claimed for representation expenses.

SEC. 70-72, RR-2 Sec. 70. Compensation for personal services. Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows: (1) Any amount paid in the form of compensation, but not in fact as the purchase price services, is not deductible. (a) an ostensible salary paid by a corporation may be a distribution of dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholder of the officers or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for the transfer of their business. (2) The form or method of fixing compensation is not decisive as to the deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a continent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the
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actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid. (3) In any event the allowance for compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. Sec. 71. Treatment of excessive compensation. The income tax liability of the recipient in respect of an amount of ostensibly paid to him as compensation, but not allowed to be deducte4d as such by the payer, will depend upon the circumstances of each case. Thus, in the case of excessive payments by corporation, if such payments correspond or bear a close relationship to stockholdings, and are found to be distribution of earnings or profits, the excessive payments will be treated as dividend. If such payments constitute payment for property, they should be treated by the payer as a capital expenditure and by the recipient as part of the purchase price. Sec. 72. Bonuses to employees. Bonuses to employees will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated salaries do not exceed a reasonable compensation, for the services rendered. It is immaterial whether such bonuses are paid in cash or in kind or partly in cash and partly in kind. Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable compensation for services, are not deductible from gross income. Kuenzle & Streif, Inc. v. CIR (106 Phil 355)
Doctrine: Bonuses, when made in good faith and as additional compensation for services actually rendered, provided such payments when added to the stipulated salaries do not exceed a reasonable compensation for services, are deductible. Facts: Petitioner filed its ITR and claimed deductions for certain items representing salaries, directors fees and bonuses of its non-resident president and VP, bonuses of some of its resident officers and employees, and interest on earned but unpaid salaries and bonuses of its officers and employees. Held: Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. The conditions precedents to the deduction of bonuses to employees are: (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 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 relation to the business. Other tests are: Payment must be made in good faith. The character of the taxpayers business, the value 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 payments is reasonable, the situation must be considered as a whole. Ordinarily, no single factor is decisive. It is important to keep in mind that it seldom happens that the application of one test can give a satisfactory answer, and that ordinarily, it is the interplay of several factors,
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properly weighed for the particular case, which must furnish the final answer.
Discussion:
Salaries, wages, fees, commissions, and similar compensation payments for services rendered to the taxpayer are deductible from gross income. The payment should be reasonable. Compensation payments Reasonable amount: Deductible from gross income as compensation for personal services; Excess over reasonable amount: Not deductible. This should be treated as distributions of earnings on stock. Fringe benefits furnished or granted by the employed shall be deductible by the employer at the grossed-up monetary value of the fringe benefit, if the final tax imposed thereon on the employed has been paid. 3. TRAVELING/TRANSPORTATION EXPENSES
Sec. 66, RR-2 Traveling Expenses.Traveling expenses as ordinarily understood, include transportation expenses and meals and lodging. If the trip is undertaken for other tan business purposes, the transportation expenses are personal expenses, and the meals and lodging are living expenses, and therefore, not deductible. If the trip is solely on business, the reasonable and necessary traveling expenses, including transportation expenses, meals, and lodging, become business instead of personal expenses. (a) If, then, an individual, whose business requires him to travel, receives a salary as full compensation for his services, without reimbursement for traveling expenses, or is employed on a commission basis with no expenses allowance, his traveling expenses, including the entire amount expended for meals and lodging, are deductible from gross income.

(b) If an individual receives a salary and is also repaid his actual traveling expenses, he shall include in his gross income, the amount so repaid and may deduct such expenses. (c) If an individual receives a salary and also an allowance for meals and lodging, as for example, a per diem allowance in lieu of subsistence, the amount of the allowance should be included in gross income and the cost of such meals and lodging may be deducted therefrom. A payment for the use of a sample room at a hotel for the display of goods is a business expense. Only such expenses are reasonable and necessary in the conduct of the business and directly attributable to it may be deducted. A taxpayer claiming the benefit of the deductions referred to herein must attach to his return a statement showing (1) the nature of the business in which he engaged; (2) the number of days away from home during the taxable year on account of business; (3) the total amount of expenses incident to meals and lodging while absent from home and business during the taxable year; (4) the total amount of other expenses incident to travel and claimed as a deduction. Claim for the deductions referred to herein must be substantiated, when required by the CIR by record showing in detail the amount and nature of the expenses incurred. RR 3-98 (B)(2)(d). Representation and transportation allowances which are fixed in amounts and are regularly received by the employees as part of their monthly compensation income shall not be treated as taxable fringe benefits but the same shall be considered as taxable compensation income subject to the tax imposed under Sec. 24 of the code (NIRC)
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as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax. The expense should be supported by documents proving the actual occurrences of the meetings or conventions The cost of economy and business class airplanes shall not be subject to a fringe benefit tax. However, 30% of the cost of first class airplane ticket shall be subject to a fringe benefit tax. (b) In the absence of documentary evidence showing that the employees travel abroad was in connection with business meetings or conventions, the entire cost of the ticket, including cost of hotel accommodations and other expenses incident thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business meetings shall be evidence by official communications from business associates abroad indicating the purpose of the meetings. Business conventions shall be evidenced by official invitations/comm8nications from the host organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the employee. (c) Traveling expenses which are paid by the employer for the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee.
Discussion:
(B)(7) Expenses for Foreign Travel (a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance, inland travel expenses (such
A reasonable allowance for travel expenses abroad, or in the Philippines while away from home in the pursuit of trade, business or profession, is deductible as gross income. Travel expenses include transportation, meals, and lodging. Requisites (1) Must be paid or incurred while away from home. (2) Must be in the pursuit of trade, business, or profession. 4. COST OF MATERIALS

Sec. 67, RR-2 Taxpayers carrying materials and supplies on hand should include in expenses the charges of materials and supplies only to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that the cost of such materials and supplies has not been deducted in determining the net income for any previous year. If a taxpayer carries incidental materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of such supplies and materials as were purchased during the year for which the return is made, provided the net income is clearly reflected by this method. 5. REPAIRS
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to the tenant and taxable income to the landlord; the amount of the tax being deductible by the latter. The cost borne by lessee in erecting buildings or making permanent improvements on ground of which he is lessee is held to be a capital investment and not deductible as a business expense. In order to return to such taxpayer his investment of capital, an annual deduction may be made from gross income of an amount equal to the cost of such improvements divided by the number of years remaining of the term of the lease, and such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life of the building erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation.
Discussion:
In addition to the periodic payments made by the lessee to the lessor for the use of the latters property, a lessee may take deductions: (a) Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take deduction in his return for an aliquot part of such sum each year, based on the number of years the lease will run; (b) Taxes paid by a lessee to or for the lessor, and other obligations of the lessor paid by the lessee under a lease contract, constitute additional deductible rent expense for the lessee; (c) The cost of leasehold improvements may be recovered by the lessee over the remaining term of the lease, or over the life of the improvements, whichever is shorter. 7. EXPENSES FOR PROFESSIONALS
Sec. 68, RR-2 The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditure. Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably prolong the life of the property should be charged against the depreciation reserves if such account is kept. 6. EXPENSES UNDER LEASE AGREEMENTS
Sec. 74, RR-2 Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return an adequate part of such sum each year, based on the number of years as the lease has to run. Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item
Sec 69, RR-2 A professional may claim as deductions the cost of supplies used by him in the practice of his profession, expenses paid in the operations and repair of transportation equipment used in making

professional calls, dues to professional societies, and subscriptions to professional journals, the rent paid for office rooms, the expenses of the fuel, light, water, telephones, etc., used in such offices, and the hire of office assistants. Amounts currently expended for books, furniture, and professional instruments and equipment, the useful life of which is short, may be deducted. But amounts expended for books, furniture, and professional instruments and equipment of a permanent character are not allowable as deductions. 8. EXPENSES FOR FARMERS
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repairs, and upkeep of the transportation equipment if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipt therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deduction. 9. ENTERTAINMENT EXPENSES
Sec. 75, RR-2 A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts actually expended in the carryon on of the business of arming. The cost of ordinary tools of short life or small cost, such as hand tools, including shovels, rakes, etc., may be included. The cost of feeding and raising livestock may be treated as an expense deduction, in so far as such cost represents actual outlay, but not including the value of farm produce grown upon the far, or the laborer of the taxpayer. Where a farmer is engaged in producing crops which take more than a year from the time of planting to the process of gathering and disposal, expenses deducted may be determined upon the crop basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. The cost of farm machinery, equipment, and farm buildings represents a capital investment and is not allowable deduction as an item of expense. Amounts expended in the development of farms, orchards, and ranches, prior to the time when the productive state is reached may be regarded as investments of capital. Amounts expended in purchasing work, breeding or dairy animals are regarded as investments of capital, and may be depreciated unless such animals are included in an inventory in accordance with section 149 of these regulations. The purchase price of transportation equipment if used wholly used in carrying on farm operations, is not deductible but is regarded as an investment of capital. The cost of gasoline or fuel,
RR 3-98 (B)(2) Expense Account. (a) In general, expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits, except when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the employee. (b) Expenses paid for by the employee but reimbursed by his employer shall be treated as taxable benefits, except only when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the said employee. (c) Personal expenses of the employee (like purchases of groceries for the personal consumption of the employee and his family members) paid for or reimbursed by the employer to the employee shall be treated as taxable fringe benefits of the employee whether or not the same are duly receipted for in the name of the employer.

RR 10-02 Sec. 4. Requisites for Deductibility of Entertainment, Amusement, and Recreation Expense. a. It must be paid or incurred during the taxable year b. It must be: i. Directly connected to the development, management, and operation of the trade, business or profession of the taxpayer; or ii. Directly related to or in furtherance of the conduct of his or its trade, business, or exercise of a profession; c. It must not be contrary to law, morals, good customs, public policy, or public order; d. It must not have been paid, directly or indirectly, to an official or employee of the national government, or any local government unit, or of any GOCC, or of a foreign government , or to a private individual, or corporation, or general professional partnership, or a similar entity, if it constitutes a bribe, kickback, or other similar payment. e. It must be duly substantiated by adequate proof. The official receipts, or invoices, or bills or statements of accounts should be in the name of the taxpayer claiming the deduction; and f. The appropriate amount of withholding tax, if applicable, should have been withheld therefrom and paid to the BIR
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recommendation of the CIR, taking into account the needs as well as the special circumstances, nature, and character of the industry, trade, business, or profession of the taxpayer. 10.
EXPENSES FOR PRIVATE EDUCATIONAL INSTITUTIONS
An expenditure for expansion of facilities is a capital expenditure which under sound accounting practices, has to be capitalized or made part of the cost of the asset. However, for income tax purposes, private educational institutions may: (a) Deduct such expenditures from the gross income of the year in which they were made; or (b) Capitalize the expenditure and claim deduction by way of depreciation. 11. ALHAMBRA CIGAR & CIGARETTE MFG. COLLECTOR (GR L-12026, May 29, 1959) C O.
V.
Discussion:
Whenever a controversy arises on the deductibility for purposes of income tax of certain items for alleged compensation of officers of the taxpayer corporation, two questions become material, namely: (a) Have personal services been actually rendered by said officers? (b) in the affirmative case, what is the reasonable allowance therefore? 12. CALANOC V. COLLECTOR (113 PHIL 499)
Entertainment, amusement, and recreation expenses are allowable as deductions from gross income if: (a) Directly connected to the development, management, and operation of the trade, business or profession of the taxpayer, or (b) Directly related to or in the furtherance of, his trade or business, or exercise of profession The deduction shall not exceed such ceilings as the Sec. of Finance may, by rules and regulations, prescribe, upon the
Facts: Calanoc was authorized to solicit and receive contribution for orphans and destitute children of the Child Welfare Workers Club. He financed and promoted a boxing and wrestling exhibition for the said charitable purpose. CIR demanded payment of amusement tax for the exhibition based on an opinion from the Sec. of Finance that exemption from payment of amusement tax may be denied where the net proceeds are not substantial or where the expenses are

exorbitant. Petitioner admitted that he could not justify the other expenses, such as those for police protection and gifts.
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former partners are not merely for services, but in part constitute payment for the transfer of their business. (2) The form or method of fixing compensation is not decisive as to the deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a continent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid. (3) In any event the allowance for compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. 14. RR 10-2002
Held: The payment for police protection is illegal as it is a consideration given by the petitioner to the police for the performance by the latter of the functions required by them to be rendered by law. The expenditures for the gifts, for parties, and other items for representation are rather excessive, considering that the purpose of the exhibition was for a charitable cause.
13. CONSTRUCTIVE DIVIDENDS
Sec. 70, RR-2 Sec. 70. Compensation for personal services. Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows: (1) Any amount paid in the form of compensation, but not in fact as the purchase price services, is not deductible. (a) an ostensible salary paid by a corporation may be a distribution of dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholder of the officers or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the
Ceilings for Entertainment, Amusement and Recreational Expenses (July 10, 2002)
There shall be allowed a deduction from gross income for entertainment, amusement, and recreation (EAR) expense, in an amount equivalent to the actual EAR expense paid or incurred within the taxable year by the taxpayer, but in no case shall such deduction exceed 0.50% of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale

of goods or properties; or 1.00% of net revenue (i.e., gross revenue less discounts) for taxpayers engaged in 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 EAR expense shall in all cases be determined based on an apportionment formula taking into consideration the percentage of the net sales/net revenue to the total net sales/net revenue, but which in no case shall exceed the minimum percentage ceiling provided. Apportionment formula: Net Sales/net revenue x Actual Expense Total Net sales and net revenue 15. TYPES OF ADVERTISING EXPENSE a. Expenses for Current Sale (Deductible) b. Expenses for Future Sale (To be amortized) c. CIR V GENERAL FOODS
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The subject advertising expense was of the second kind. Not only was the amount staggering; the respondent corporation itself also admitted, in its letter protest to the Commissioner of Internal Revenues assessment, that the subject media expense was incurred in order to protect respondent corporations brand franchise, a critical point during the period under review. The protection of brand franchise is analogous to the maintenance of goodwill or title to ones property. This is a capital expenditure which should be spread out over a reasonable period of time. Respondent corporations venture to protect its brand franchise was tantamount to efforts to establish a reputation. This was akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as business expenses but as capital expenditures. It is the taxpayers prerogative to determine the amount of advertising expenses it will incur and where to apply them. Said prerogative, however, is subject to certain considerations. The first relates to the extent to which the expenditures are actually capital outlays; this necessitates an inquiry into the nature or purpose of such expenditures. The second, which must be applied in harmony with the first, relates to whether the expenditures are ordinary and necessary. Concomitantly, for an expense to be considered ordinary, it must be reasonable in amount. Respondent corporation incurred the subject advertising expense in order to protect its brand franchise. This is a capital outlay since it created goodwill for its business and/or product. The P9,461,246 media advertising expense for the promotion of a single product, almost one-half of petitioner corporations entire claim for marketing expenses for that year under review, inclusive of other advertising and promotion expenses of P2,678,328 and P1,548,614 for consumer promotion, is doubtlessly unreasonable.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayers trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time.

PART V C. INTEREST 1. INTEREST DEDUCTIBLE FROM GROSS INCOME 2. INTEREST NOT DEDUCTIBLE (1) In General. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax: Forty-one percent (41%) beginning January 1, 1998; Thirty-nine percent (39%) beginning January 1, 1999; and Thirty-eight percent (38%) beginning January 1, 2000. Exceptions. No deduction shall be allowed in respect of interest under the succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed as a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year; (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36(B); or (c) If the indebtedness is incurred to finance petroleum exploration.
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(3) Optional Treatment of Interest Expense. At the option of the taxpayer, interest incurred to acquire property used in trade, business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.
No deduction is allowed in respect of interest under the following:
(2)
a. ADVANCE INTEREST - if within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise Provided, that such interest shall be allowed as a deduction in the year the indebtedness is paid. Provided further, that if the indebtedness is payable in periodic amortizations the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as a deduction in such taxable year. **under this provision, the phrase "within the taxable year" assumes a modified meaning. For example, a taxpayer using the cash basis method of accounting borrows money in which interest is paid in advance through discount. He obtains a loan of P1,000,000 in October 1998 subject to 20% interest; hence, after paying the advance interest of P200,000 he receives only P 800,000.00 Can the borrower/taxpayer claim the deduction when he files his ITR in April 1999? It depends on w/n the principal obligation had been paid. i. if the entire principal obligation had been paid, then the entire amount of interest can be claimed as itemized deduction ii. if only 1/2 of the obligation has been paid, only 1/2 interest can be claimed as itemized deduction;

iii. if no payment had been paid on the principal obligation, the advance interest paid cannot be claimed as deduction on the year that it was paid. b. PERSONS UNDER 36b - if both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under section 36B, namely: i. between members of a family ii. between an individual and a corporation more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; and iii. between two corporations more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual; iv. between the grantor and a fiduciary of any trust; or v. between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust vi. between a fiduciary or a trust and a beneficiary c. PETROLEUM OPERATION - if the indebtedness is incurred to finance petroleum operation. 3. PREPAID INTEREST OF INDIVIDUAL ON CASH METHOD OF ACCOUNTING COMM. V. VDA DE PRIETO (109 PHIL 592)
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P117,706.50 as donor's gift tax, interests and compromises due thereon. Of the total sum of P117,706.50 paid by respondent the sum of P55,978.65 represents the total interest on account of delinquency. This sum of P55,978.65 was claimed as deduction. Petitioner, however, disallowed the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of P21,410.38 as deficiency income tax due on the aforesaid P55,978.65, including interest, surcharge and compromise for the late payment.
Issue: w/n the interest paid by respondent for the late payment of her donor's tax is deductible from her gross income Held: YES. 1) Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the late payment of her donor's tax, and the same was paid within the year it is sought to be deducted. 2) The term "indebtedness" has been defined as an unconditional and legally enforceable obligation for the payment of money. Within the meaning of that definition, it is apparent that a tax may be considered an indebtedness. "Although taxes already due have not, strictly speaking, the same concept as debts, they are, however, obligations that may be considered as such. Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a debt. It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible from her gross income under section 30 (b) of the Tax Code above quoted. 3) The uniform ruling is that interest on taxes is interest on indebtedness and is deductible. 4) 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
Facts: Vda. de Prieto conveyed by way of gifts to her 4 children real property with a total assessed value of P892,497.50. After the filing of the gift tax returns, CIR appraised the real property donated for gift tax purposes at P1,231,268.00 and assessed the total sum of

Regulations, the taxpayer is not precluded thereby from claiming said interest payment as deduction under section 30(b) of the same Code. 4. REDUCTION OF INTEREST EXPENSE ON INTEREST INCOME SUBJECTED TO FINAL TAX UNDER TRA OF 1997 From Punongbayan & Araullo The rate of interest limitation is actually the difference between the RCIT and the 20% final tax as a percentage of the RCIT rate, rounded off. That is, RCIT rate less 20%, divided by the RCIT rate. Hence, under the then 32% RCIT, the limitation is equal to (32%-20%) / 32% = 37.5%; under the 35% RCIT, (35%-20%) / 35% = 42.86%; and under the 30% RCIT, (30%-20%) / 30% = 33.33%. Tax arbitrage could be explained by a simplified illustration, as follows: On January 1, 2009, Corporation X borrowed from a local bank an amount of P500,000 at a 10% annual interest (resulting to interest expense). Immediately thereafter, the proceeds of the loan were placed in a local bank deposit account which earns a 10% annual interest rate (resulting to interest income). Assuming that the rule on interest expense limitation is not yet in place, the interest expense of P50,000 (10% of P500,000) will result to a tax benefit of 30% or P15,000 in 2009; while the interest income of P50,000 (10% of P500,000), being a passive income will only be subjected to final tax of 20% or P10,000. The taxpayer would derive a net benefit of P5,000 from the combined effect of a lower rate of final tax liability and a higher rate of tax deductibility. Realizing the negative impact of tax arbitrage on revenue generation, the interest expense limitation was legislated. 5. RR 13-2000 (NOV. 20, 2000)
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SEC. 3. TAX INCENTIVES ACCRUING TO THE ADOPTING PRIVATE ENTITY. A pre-qualified adopting private entity, which enters into an Agreement with a public school, shall be entitled to the following tax incentives: (a) Deduction from the gross income of the amount of contribution/donation that were actually, directly and exclusively incurred for the Program, subject to limitations, conditions and rules set forth in Section 34(H) of the Tax Code, plus an additional amount equivalent to fifty percent (50%) of such contribution/donation subject to the following conditions: (1) That the deduction shall be availed of in the taxable year in which the expenses have been paid or incurred; (2) That the taxpayer can substantiate the deduction with sufficient evidence, such as official receipts or delivery receipt and other adequate records (2.1) The amount of expenses being claimed as deduction; (2.2) The direct connection or relation of the expenses to the adopting private entitys participation in the Adopt-a-School Program. The adopting private entity shall also provide a list of projects and/or activities undertaken and the cost of each undertaking, indicating in particular where and how the assistance has been utilized as supported by the Agreement; and (2.3) Proof or acknowledgment of receipt of the contributed/donated property by the recipient public school. (3) That the application, together with the approved Agreement endorsed by the National Secretariat, shall be filed with the Revenue District Office (RDO) having jurisdiction over the place of business of the
Requirement for deductibility of Interest Expense

donor/adopting private entity, copy furnished the RDO having jurisdiction over the property, if the contribution/donation is in the form of real property. Exemption of the Assistance made by the donor from payment of donors tax pursuant to Sections 101 (A)(2) and (B)(1) of the Tax Code of 1997. (3)
(b)
D. TAXES
Sec. 34, C, NIRC (1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except (a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries); (c) Estate and donor's taxes; and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. (2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines.
(4)
Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and (b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title
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(5) bears to his entire taxable income for the same taxable year. Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require. Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: (a) The total amount of income derived from sources without the Philippines; (b)
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The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and All other information necessary for the verification and computation of such credits.
(c)
(6)
(7)
SEC. 80-82, RR-2 Sec. 80. Taxes in general.As a general rule, taxes are deductible with the exception of those with respect to which the law does not permit deduction. However, in the case of a nonresident alien individual and a foreign corporation, deduction is allowed only if and to the ex that the taxes for which deduction is claimed are connected with income from sources within the Philippines. Import duties paid to the proper customs officers, and business, occupation, license, privilege, excise and stamp taxes and any other taxes of every name or nature paid directly to the Government of the Philippines or to any political subdivision thereof, are deductible. The word taxes means taxes, proper and no deduction should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. Postage is not a tax. Automobile registration fees are considered taxes. Taxes are deductible at most only by the person upon whom they are imposed. Thus the merchants sales tax imposed by law upon sales is not deductible by the individual purchaser even though the tax may be billed to him as a separate item. In computing the net income of an individual no deduction is allowed for the tax is imposed upon his interest as shareholder of a bank or other corporation, which are paid by the corporation without reimbursements from the taxpayer. The amount so paid should not be included in the income of the shareholder. In the case of corporate bonds or other obligations containing a tax-free covenant clause, the corporation paying a tax or any part of it for someone else pursuant to its agreement is not entitled to deduct such payment from gross income on any ground.
Sec. 81. Income tax imposed by the government of the Philippines. The law does not permit the deduction of the income tax paid to or accrued in favor of the Government of the Philippines, and in no case may the taxpayer avail of such deduction. Sec. 82. Income, war-profits, and excess-profits taxes imposed by the authority of a foreign country. Income, war-profits, and excessprofits taxes imposed by the authority of a foreign country (including the United States and possessions thereof) are allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries. In the case of a citizen of a foreign country residing in the Philippines whose income from sources within such foreign country is not subject to income tax, only that portion of the taxes paid to such foreign country which corresponds to his net income subject to the Philippine income tax shall be allowed as deduction. 1. DEDUCTIBLE FROM GROSS INCOME GENERAL RULE: Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction. ** Import duties paid to the proper customs officers and business, occupation, license, privilege, excise and stamp taxes and any other taxes of every name or nature paid directly to the Government of the Philippines or to any political subdivision thereof, are deductible. The word "taxes" means taxes proper and no deduction shall be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. Postage is not a tax. Automobile registration fees are considered taxes. Taxes are deductible as such only by the person upon whom they are imposed. Thus the merchants sales tax imposed by law upon sales is not deductible by the individual purchasers even though the tax may be billed to him as a separate item.
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EXCEPTIONS: a. Income tax b. Income taxes imposed by authority of any foreign country (but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of tax credits paid to foreign countries) c. Estate and donor's taxes d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
Provided, that the taxes allowed under this subsection, when refunded or credited shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.
Others (under Sec 80-82, RR2): a. Taxes paid by a nonresident alien individual and a foreign corporation - taxes are deductible only if and to the extent that the taxes for which deduction is claimed are connected with income from sources within the Philippines; b. Income tax imposed by the Philippine government - the law does not allow the deduction of the income tax paid to or accrued in favor of the government and in no case may the taxpayer avail of such deduction; c. income, war profits, and excess profits taxes imposed by the authority of a foreign country - allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries. In the case of a citizen of a foreign country residing in the Philippines whose income from sources within such foreign country is not subject to income tax, only that portion of the taxes paid to such foreign country which corresponds to his net income subject to the Philippine income tax shall be allowed as deduction.

** In computing the net income of an individual, no deduction is allowed for the tax is imposed upon his interest as shareholder of a bank or other corporation, which are paid by the corps w/o reimbursements from the taxpayer. The amount so paid should not be included in the income of the shareholder. ** In case of corporate bonds or other obligations containing a taxfree covenant clause, the corporation paying a tax or any part of it for someone else pursuant to its agreement is not entitled to deduct such payment from gross income on any ground. 2. NOT DEDUCTIBLE FROM GROSS INCOME Sec. 82-83, RR-2 Sec. 82. Income, war-profits, and excess-profits taxes imposed by the authority of a foreign country. Income, war-profits, and excessprofits taxes imposed by the authority of a foreign country (including the United States and possessions thereof) are allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries. In the case of a citizen of a foreign country residing in the Philippines whose income from sources within such foreign country is not subject to income tax, only that portion of the taxes paid to such foreign country which corresponds to his net income subject to the Philippine income tax shall be allowed as deduction. Sec. 83. Estate, inheritance, and gift taxes; taxes assessed against local benefits. Estates, inheritance, and gist taxes are not deductible. So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk, and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. A tax is considered
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assessed against local benefits when the property subject to the tax is limited to the property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public welfare, by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct assessments paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his business. When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible. 3. MEANING OF THE TERM TAXES Sec. 80, RR-2 The word taxes means taxes, proper and no deduction should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. Postage is not a tax. Automobile registration fees are considered taxes. 4. TAX CREDITS VS. TAX DEDUCTION CIR V. LEDNICKY, ET AL. (11 SCRA 609)
Facts: The respondents, V.E. Lednicky and Maria Valero Lednicky, are husband and wife, both American citizens residing in the Philippines, and have derived all their income from Philippine sources for the taxable years in question. In compliance with Phil tax law, they filed

their income tax return for 1955 and 1956. In 1956, they filed an amended income tax return claiming a tax deduction for federal income taxes which they paid to the United States in the year 1955. In 1959, they likewise claimed a similar tax deduction for the 1956 return. Comm of IR failed to answer the claim for refund, thus they filed a petition with the Tax Court.
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must be entitled to a tax credit (respondent here are NOT entitled to tax credit because all their income is derived from Phil sources), or the option to deduct from gross income disappears altogether. 3. No double taxation exists. Double taxation becomes obnoxious only when the taxpayer is taxed twice for the benefit of the same governmental entity. In the present case, although the taxpayer would have to pay two taxes on the same income but the Philippine government only receives the proceeds of one tax, there is no obnoxious double taxation. 5. FINES AND PENALTIES GUTTIEREZ V. COLLECTOR (14 SCRA 33)
Issue: whether a US citizen residing in the Philippines who derives income wholly from sources within the Republic of the Philippines, may deduct from his gross income the income taxes he has paid to the US government for the taxable year on the strength of sec 30 (c1) of the Phil Internal Revenue Code?7 Held: 1. The wording of Sec 30 shows the code's intent that the right to deduct income taxes paid to foreign government from the taxpayer's gross income is given only as an ALTERNATIVE to his right to claim a tax credit for such foreign income taxes under Sec 30 so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income. The law provides that the deduction shall be allowed if the taxpayer in his return does not signify his desire to have the benefits of tax credits for taxes paid to foreign countries. Thus, the statutes assumes that the taxpayer in question may also signify his desire to claim a tax credit and waive the deduction. 2. No double credit (i.e, for claiming twice the benefits of his payment of foreign taxes, by deduction from gross income and by tax credit) exists here. This danger cannot exist if the taxpayer cannot claim benefit under either of these headings at his option, so that he
Sec. 30. Deductions from gross income- In computing net income there shall be allowed as deductions Taxes - taxes paid or accrued within the taxable year, except B. income, war-profits, and excess profit taxes imposed by the authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph 3 of this subsection (relating to credit for foreign countries)
7
Fines and penalties paid for late payment of taxes are not deductible.
Gutierrez also claimed for deduction the fines and penalties which he paid for late payment of taxes. While Section 30 allows taxes to be deducted from gross income, it does not specifically allow fines and penalties to be so deducted. Deductions from gross income are matters of legislative grace; what is not expressly granted by Congress is withheld. Moreover, when acts are condemned by law and their commission is made punishable by fines or forfeitures, to allow them to be deducted from the wrongdoer's gross income, reduces, and so in part defeats, the prescribed punishment. E. LOSSES Sec. 93-101, RR-2 1. KINDS OF TAXPAYERS AND THEIR LOSSES Individuals To be fully deductible: a. it must not be compensated by insurance

and b. incurred in a taxpayers trade or c. incurred in any transaction entered into for profit or d. of property connected with the trade or business if arising from fires, storm, shipwreck, or other casualty, or from robbery, theft or embezzlement. No loss shall be allowed as deduction if at the time of filing of the return, such loss has been claimed as deduction for estate or inheritance tax purposes in the estate or inheritance tax return. Can deduct losses actually sustained and charged off within the year and not compensated for by insurance or otherwise. Can deduct losses sustained in business or trade conducted within the Philippines, losses of property within the Philippines arising from fires, storms, shipwreck or other casualty and from robbery, theft or embezzlement, and losses actually sustained in transactions entered into for profit in the Philippines, although not connected with their trade or business, not compensated by insurance or otherwise.
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5. A sworn declaration of loss sustained from casualty or robbery, theft or embezzlement during the taxable year must be filed with the Bureau of Internal Revenue within a period of not less than 30 days nor more than 90 days from the date of discovery of the casualty; 6. Must not have been claimed as deduction in the estate tax return. 2. COMPLETED TRANSACTIONS FERNANDEZ HERMANOZ V. CIR, 29 SCRA 552 Facts: Fernandez Hermanos Inc. is a domestic corporation organized for the principal purpose of engaging in business as an investment company. The CIR disallowed the following deductions: 1. losses in Mati Lumber Co in 1950 2. losses or bad debts in Palawan Manganese Mines Inc in 1951 3. losses in Balamban Coal Mines in 1950 and 1951 4. losses in Hacienda Dalupiri and Hacienda Samal from 1950-1954 Held: The Supreme Court discussed the allowance or disallowance of each in the following manner: 1. Allowed. These losses represent the shares of stock (worth P8,050) petitioner acquired from Mati in Jan. 1, 1948. The petitioner was correct in writing off and claiming as a deduction in 1950 the amount on the ground that the lumber company had ceased operations and became insolvent in that year. The CIR was incorrect in arguing that since the company still owned a sawmill and some equipment, the shares of stock still had value. The proper assessment would be to treat as income for the year in which petitioner gets the proceeds from the liquidation of those assets.
Corporations
Nonresident alien and foreign corporations
Summary: Requisites for deductibility of losses 1. Must be incurred in trade, business or profession of the taxpayer, or of property connected with the trade, business or profession, arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement; 2. Must be actually sustained and not merely anticipated, and must be charged off within the taxable year; 3. Must be evidenced by closed and completed transaction; 4. Must not be compensated for by insurance or other form of indemnity

2. Disallowed. These losses represent part of the loans extended by the petitioner to its 100% owned subsidiary. Petitioner advanced financial assistance to Palawan from 1945 to 1952. By way of payment, Palawan was to give petitioner 15% of net profits. Whether Palawan was able to pay the loans or not because it continued to operate at a loss is immaterial. Petitioner cannot properly claim as a loss the advances given to Palawan in 1951 for that year. There can be no partial writing off as a loss or bad debt under the Tax Code. Those losses or bad debts ascertained within the taxable year are deductible in full or not at all. Petitioner continued to give Palawan advances even beyond 1951. It was only in 1956 when Palawan decided to cease operations. 3. Disallowed. These losses represent sums spent by the petitioner for the operation of its Balamban coal mines in 1950 and 1951. The petitioner should have treated them as losses in 1952 when the mines were abandoned and not in 1950 and 1951 on the ground that the mines made no sales of coal during those years. 4. Allowed. These losses represent sums spent by petitioner for the operation of the 2 haciendas. The amounts were properly reported as deductions for the correct years. The only reason why the CIR disallowed them was on the ground that the farms were operated solely for pleasure or as a hobby and not for profit. But the Supreme Court is not convinced, and being for business, the petitioner may properly deduct the same. 3. SPECIAL RULES ON LOSSES a) VOLUNTARY REMOVAL OF BUILDINGS If the building is demolished by the owner for some practical reasons, say the building is no longer safe, then the loss which was sustained in a closed and completed transaction is deductible from gross income.
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If the taxpayer buys real estate with an existing old building with the intention of demolishing it and constructing a new one, then the loss sustained in demolishing the old building is not deductible from gross income, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless building. SEC. 97, RR-2 b) LOSS OF USEFUL VALUE OF ASSETS When, through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as deduction the actual loss sustained. In determining the amount of the loss, adjustment must be made for improvements, depreciation, the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as for example: 1. where any increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or 2. where legislation directly or indirectly makes the continued profitable use of the property impossible. This exception DOES NOT APPLY 1. to a case where the useful life of property terminates solely as a result of those

gradual process for which depreciation allowance are authorized. 2. to inventories other than capital assets This exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. SEC. 98, RR-2 c) SHRINKAGE IN VALUE OF STOCKS A person possessing stock of a corporation cannot subtract from gross income any amount claimed as a loss merely on account of shrinkage in value of a stock through fluctuation of the market or otherwise. The loss allowable in such case is that wholly suffered when the stock is disposed of. If stock of a corporation becomes worthless, its cost or other basis determined in accordance with these regulations may be deducted by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness is made, as in the case of bad debts. SEC. 99, RR-2 4. WAGERING LOSSES Deductible only to the extent of gains from such transactions. Example, if winnings amounted to 10,000 and the losses amounted to 6,000, only 4,000 of the net winnings is taxable. However, if the winnings are 5,000 and losses are 6,000, the 1,000 net losses cannot be claimed as a deduction from gross income. 5. SUBSTANTATION OF LOSSES
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RR 12-77 In general the amount of casualty loss deductible is the difference between the FMV of the property immediately before and the FMV after the casualty, but not exceeding the cost or book value of the property, reduced by any insurance or other compensation received. In case of total destruction of property used in business, the net book value of the property immediately before the loss should be used as the basis of claiming the loss, reduced by any amount of insurance or compensation received. In case of partial destruction of property used in business, the replacement cost to restore the property to its normal operating condition should be used in computing deductible loss, but in no case should it be more than the net book value immediately before the casualty. Depreciation over the remaining useful life is computed by dividing the replacement cost by the remaining useful life of the property. 6. FOREIGN EXCHANGE LOSSES BIR RULING 144-85 Issue: Whether foreign exchange losses, which have accrued by reason of devaluation, are deductible for income tax purposes? Held: Foreign exchange losses which have accrued by reason of devaluation but where remittances have not yet been made are not deductible for income tax purposes. - the annual decrease in the value of property is not normally allowable as a loss. To be allowable, the loss must be realized. - When foreign currency acquired in connection with a transaction in the regular course of business is disposed of, ordinary gain or loss results from the fluctuations. The loss is deductible only for the year it is actually sustained. It is sustained during the year in which the loss occurs as

evidenced by closed and completed transaction and as fixed by identifiable events occurring in that year. A closed transaction is a taxable event which has been consummated. No taxable event has as yet been consummated prior to the remittance of the scheduled amortization. Accordingly, foreign exchange losses sustained as a result of devaluation of the peso vis--vis the foreign currency, but which remittance of scheduled amortization consisting of principal and interest payments on a foreign loan has not actually been made are not deductible from gross income for income tax purposes. INTERBANK GUIDING RATE RMC NO. 26-85 Beginning Jan. 1, 1985, the conversion rate to be applied shall be the prevailing interbank reference rate for the day of the transaction. In the event that the foreign exchange rate as stated in the above paragraph (a) is impractical or not feasible, the average interbank reference during the year shall apply. For the purpose of converting the tax liability in US dollar to Philippine peso, the prevailing interbank rate at the time of payment shall be applied when paid before the due date of the tax or the prevailing interbank reference rate at the due date of tax when paid on or after the due date of the tax. When currency involved is other than US dollar, the foreign currency shall first be converted to US dollar at the prevailing exchange rates between the two currencies. This circular does not apply to transaction covered by RMC 30-84 regarding the imposition of additional 1% gross receipt tax on buying and selling of foreign exchange of peso by bank, non-bank financial intermediaries and other authorized foreign exchange dealers or agents and RMC 32-84 in determining the cost basis of certain commodities imported beginning Jan. 1, 1984, the value and prices thereof are quoted in foreign currency. 7. ABANDONMENT OF LOSSES
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a. In case a contract area where petroleum operations are undertaken is partially or fully abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as deduction; however, those incurred before Jan. 1, 1979 can be deducted only from income derived from the same contract area. In all cases, notice of abandonment shall be filed with the Commissioner. b. The unamortized cost of a producing well subsequently abandoned, and the undepreciated cost of equipment directly used therein are also deductible in the year such well, equipment or facility is abandoned by the contractor. If such abandoned well is recentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated. 8. NET OPERATING LOSS CARRY-OVER (NOLCO) The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss, provided that any net loss incurred in a taxable year during which the taxpayer is exempt from income tax shall not be allowed as a deduction.

The deduction is allowed only if there has been no substantial change in the ownership of the business or enterprise in that a. Not less than 75% in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or b. Not less than 75% of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. For mines other than oil and gas wells, a net operating loss without the benefit of incentives provided under EO No. 226,as amended, incurred in any of the first 10 years of operation may be carried over as a deduction, from taxable income for the next 5 years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the 5 taxable years following the loss, and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining 4 years. Net operating loss = excess of allowable deductions over gross income. RR 14-2001 a) THREE YEAR PERIOD b) NO SUBSTANTIAL CHANGE IN OWNERSHIP (75% RULE) F. BAD DEBTS 1. REQUIREMENTS FOR DEDUCTIBILITY
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I. there must be an existing indebtedness due to the taxpayer which must be valid and legally demandable II. it must be connected with the taxpayers trade, business, or practice of profession III. it must not be sustained in a transaction entered into between related parties enumerated under Sec. 36 (b) IV. it must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year. V. It must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. *Before a debt can be ascertained to be worthless, the creditor must have taken all reasonable steps to collect within the period of prescription, and in the light of the following circumstances, acting in good faith, he may justify an ascertainment of worthlessness of a debt: i. insufficiency of collateral ii. bankruptcy or insolvency iii. loss of evidence of indebtedness iv. disappearance of debtor, who fled leaving no properties v. death of debtor leaving no properties vi. injury to debtor incapacitating him from work vii. fruitless efforts to collect small amounts from debtors scattered all over the country. COLLECTOR V. GOODRICH, 21 SCRA 1336 CRITERIA FOR ASCERTAINING WORTHLESSNESS OF DEBTS.- The statute permits the deduction of debts "actually ascertained to be worthless within the taxable year" obviously to prevent arbitrary action by the taxpayer to unduly avoid tax liability. The ascertainment of worthlessness of bad debts requires proof of two facts: (1) that the taxpayer did in fact ascertain the debt to be worthless in the year the deduction is sought; and (2) in so doing, he acted in good faith. Good

faith is not enough. The taxpayer must show that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him. WHERE SMALL AMOUNTS ARE INVOLVED, WRITING THEM OFF, WHEN JUSTIFIED.- Considering the small amounts involved, the taxpayer may be justified in feeling that the unsuccessful efforts therefore exerted to collect the same would suffice to warrant their being written off. "It is foolish to spend good money after bad." 2. TAX BENEFIT RULE RR 5-99 The recovery of bad debts previously claimed as deduction shall be included as part of gross income in the year of recovery to the extent of the income tax benefit of said deduction. Under the tax benefit rule, the recovery of amounts deducted in previous years from gross income become taxable income unless to the extent thereof, the deduction did not result in any tax benefit to the taxpayer. Example: If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due from him on account of the said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. Conversely, if the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i.e. where the result of his business operation was a net loss even without deduction of the bad debts written-off), then his subsequent recovery thereof shall be treated as a mere recovery or return of capital, hence, not treated as receipt of realized taxable income. - not deductible. - Refer to E10 above on who are related taxpayers. 3. BAD DEBTS BETWEEN RELATED PARTIES
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Losses from sale or exchange of property that are not deductible - those made between related taxpayers. Who are related taxpayers? 1. members of a family (brothers/sisters of the whole or half blood, spouse, ancestors and lineal descendants 2. an individual and corporation, if the individual owns, directly or indirectly, more than 50% in value of the outstanding stock 3. two corporations, if more than 50% in value of the outstanding stock in both is owned, directly or indirectly, by the same individual, if either one of such corporations was a personal holding company or a foreign personal holding company 4. the grantor and a fiduciary of any trust 5. fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust 6. fiduciary of a trust and a beneficiary of such trust. SEC. 30 [B], NIRC) (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; 4. REQUIREMENTS FOR DEDUCTIBILITY OF BAD DEBTS INCLUDING
BANKS
RR 5-99 See F1 on requirements In the case of banks, in lieu of requisite no. 5 above, the BSP, thru its Monetary board, shall ascertain the worthlessness and

uncollectibility of the bad debts and it shall approve the writing off of the said indebtedness from the banks books of accounts at the end of the taxable year. The bank though should still comply with requisites nos. 1-4 as enumerated above before it can avail of the benefit of deduction. Amount not deductible i. if partially secured by a mortgage, the portion not covered by the mortgage is deductible. ii. In case of insolvency of the debtor, the difference between the amount of the claim and the amount received in distribution of assets of the bankrupt. iii. The difference between the amount received by a creditor of a decedent in distribution of the assets of the decedents estate and the amount of the claim. iv. The purchase price paid by a purchaser of accounts receivable which cannot be collected and charged off as bad debts in his books. v. The amount absolved if the debt is compromised and the debtor is insolvent. G. DEPRECIATION Depreciation reasonable allowance for the exhaustion, wear and tear, obsolescence and inadequacy of a property used in trade, business or profession of the taxpayer. Requisites for deduction as depreciation expense: 1. asset must be used in connection with the taxpayers trade, business or profession 2. asset must have a limited useful life. Sec. 105-115, RR-2 1. DEPRECIATION BASE -
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the capital sum to be replaced by depreciation allowances is the cost or other basis of the property, to which should be added from time to time the cost of improvements, additions and betterments, and from which should be deducted from time to time the amount of any definite loss or damage sustained by the property through casualty. In case of patent or copyright, the capital sum to be replaced is the cost or other basis of the intangible, which allowance should be computed by an apportionment of the cost or other basis of the intangible over its life since its acquisition or grant. No depreciation is allowed where the property has been amortized to its scrap value and is no longer in use. Nonresident aliens and foreign corporations engaged in business in the Philippines may deduct depreciation only on properties located in the Philippines. if property is held by one person for life transferable to another person upon death, the deduction shall be computed as if the life tenant were the absolute owner of the property and depreciation shall be allowed to the life tenant. If property is held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each. Farmers may deduct depreciation on farm buildings, farm machinery and other tangible properties used in the farm, livestock acquired for work, or for breeding or dairy purposes, unless included in an inventory to determine profits. For properties used in petroleum operations, an allowance for depreciation is allowed on all properties

directly related to production of petroleum initially placed in service in a taxable year under the straight line method or declining balance method at the option of the service contractor over an estimated useful life of 10 years or such shorter life as may be permitted by the CIR. Properties not used directly in production of petroleum shall be depreciated under the straight line method over an estimated useful life of 5 years. For properties used in mining operations, an allowance for depreciation is computed as follows: - at the normal rate of depreciation if the expected life is 10 years of less; or - depreciated over any number of years between 5 years and the expected life if the latter is more than 10 years, and the depreciation thereon allowed as deduction from taxable income, provided that the contractor notifies the CIR at the beginning of the depreciation period which depreciation rate will be used. for non-resident aliens engaged in trade or business in the Philippines or resident foreign corporation, a reasonable allowance for the deterioration of property arising out of its use or employment or its non-use in the business, trade or profession shall be permitted only when such property is located in the Philippines. Where the taxpayer and the CIR have agreed in writing about the useful life and rate of depreciation of any property, the same shall be binding on both, under the regulations of the Secretary of Finance. Any change in the agreed rate and useful life shall not be effective for the taxable years before the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating the change. In addition to depreciation, a reasonable allowance for obsolescence may be allowed if the taxpayer clearly shows that the whole or any portion of physical property
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is being affected by economic conditions that will result in its being abandoned before the end of its natural life, so that depreciation deduction alone is insufficient to return the cost at the end of its economic term of usefulness. ZAMORA V. COLLECTOR, 8 SCRA 163 Petitioner Mariano Zamora alleges that the CTA erred in disallowing 3% per annum as the rate of depreciation of the Bay View Hotel Building but only 2-%. In justifying depreciation deduction of 3%, Mariano Zamora contends that (1) the Ermita District, where the Bay View Hotel is located, is now becoming a commercial district; (2) the hotel has no room for improvement; and (3) the changing modes in architecture, styles of furniture and decorative designs, "must meet the taste of a fickle public". It is a fact, however, that the CTA, in estimating the reasonable rate of depreciation allowance for hotels made of concrete and steel at 2-%, the three factors just mentioned had been taken into account already. Said the CTA Normally, an average hotel building is estimated to have a useful life of 50 years, but inasmuch as the useful life of the building for business purposes depends to a large extent on the suitability of the structure to its use and location, its architectural quality, the rate of change in population, the shifting of land values, as well as the extent and maintenance and rehabilitation. It is allowed a depreciation rate of 2-% corresponding to a normal useful life of only 40 years (1955 PH Federal Taxes, Par 14 160-K). Consequently, the stand of the petitioners can not be sustained. As the lower court based its findings on Bulletin F, petitioner Zamora, argues that the same should have been first proved as a law, to be subject to judicial notice. Bulletin F, is a publication of the US Federal Internal Revenue Service, which was made after a study of the lives of the properties. In the words of the lower court: "It contains the list of

depreciable assets, the estimated average useful lives thereof and the rates of depreciation allowable for each kind of property. It is true that Bulletin F has no binding force, but it has a strong persuasive effect considering that the same has been the result of scientific studies and observation for a long period in the United States after whose Income Tax Law ours is patterned." Verily, courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involved. Zamora also contends that his basis for applying the 3-% rate is the testimony of its witness Mariano Katipunan, who cited a book entitled "Hotel Management Principles and Practice" by Lucius Boomer, President, Hotel Waldorf Astoria Corporation. As well commented by the Solicitor General, "while the petitioner would deny us the right to use Bulletin F, he would insist on using as authority, a book in Hotel management written by a man who knew more about hotels than about taxation. All that the witness did (Katipunan) . . . is to read excerpts from the said book, which admittedly were based on the decision of the U.S. Tax Courts, made in 1928". The 2-% rate of depreciation of the Bay View Hotel building, is approximately correct. The next items in dispute are the undeclared capital gains derived from the sales in 1951 of certain real properties in Malate, Manila and in Quezon City, acquired during the Japanese occupation. The Manila property (Esperanza Zamora v. Coll. of Int. Rev., Case No. L-15289). The CTA held in this case, that the cost basis of property acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency in accordance with the Ballantyne Scale of values, and that the determination of the gain derived or loss sustained in the sale of such property is not affected by the decline at the time of sale, in the purchasing power of the Philippine currency. It was found by the CTA that the purchase price of P132,000.00 was not entirely paid in Japanese War notes but thereof or P66,000.00 was in Philippine currency, and that during certain periods of the enemy occupation, the value of the Japanese war notes was very much less than the value of the genuine Philippine currency. On this point, the CTA declared
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Finally, it is alleged that the purchase price of P132,000.00 was not entirely paid in Japanese war notes, Mariano Zamora, co-owner of the property in question, testified that P66,000.00 was paid in Philippine currency and the other P66,000.00 was paid in Japanese war notes. No evidence was presented by respondent to rebut the testimony of Mariano Zamora; it is assailed merely as being improbable. We have examined this question thoroughly and we are inclined to give credence to the allegation that a portion of the purchase price of the property was paid in Philippine money. In the first place, it appears that the Zamoras owned the Farmacia Zamora which continued to engage in business during the war years and that a considerable portion of its sales was paid for in genuine Philippine currency. This circumstance enabled the Zamoras to accumulate Philippine money which they used in acquiring the property in question and another property in Quezon City. In the second place, P132,000.00 in Japanese war notes in May, 1944 is equivalent to only P11,000.00. The property in question had at the time an assessed value of P27,031.00 (in Philippine currency). Considering the well known fact that the assessed value of real property is very much below the fair market value, it is incredible that said property should have been sold by the owner thereof for less than one-half of its assessed value. These facts have convinced us of the veracity of the allegation that of the purchase price of P132,000.00 the sum of P66,000.00 was paid in Philippine currency, so that only the sum of P66,000.00 was paid in Japanese War notes. This being the case, the Ballantyne Scale of values, which was the result of an impartial scientific study, adopted and given judicial recognition, should be applied. As the value of the Japanese war notes in May, 1944 when the Manila property was bought, was 1 of the genuine Philippine Peso (Ballantyne Scale), and since the gain derived or loss sustained in the disposition of this property is to reckoned in terms of Philippine Peso, the value of the Japanese war notes used in the purchase of the property, must be reduced in terms of the

genuine Philippine Peso to determine the cost of acquisition. It, therefore, results that since the sum of P66,000.00 in Japanese war notes in May, 1944 is equivalent to P5,500.00 in Philippine currency (P66,000.00 divided by 12), the acquisition cost of the property in question is P66,000.00 plus P5,500.00 or P71,500.00 and that as the property was sold for P75,000.00 in 1951, the owners thereof Mariano and Felicidad Zamora derived a capital gain of P3,500.00 or P1,750.00 each. The Quezon City Property (Mariano Zamora v. Coll. of Customs, Case No. 15290). The Zamoras alleged that the entire purchase price of P68,959.00 was paid in Philippine currency. The collector, on the other hand, contends that the purchase price of P68,959.00 was paid in Japanese war notes. The CTA, however, giving credence to Zamora's version, said . . . If , as contended by respondent, the purchase price of P68,959.00 was paid in Japanese war notes, the purchase price in Philippine currency would be only P17,239.75 (P68,959.00 divided by 4, 34.00 in war notes being equivalent to P1.00 in Philippine currency). The assessed value of said property in Philippine currency at the time of acquisition was P46,910.00. It is quite incredible that real property with an assessed value of P46,910.00 should have been sold by the owner thereof in Japanese war notes with an equivalent value in Philippine currency of only P17,239.75. We are more inclined to believe the allegation that it was purchased for P68,959.00 in genuine Philippine currency. Since the property was sold for P94,000.00 on February 9, 1951, the gain derived from the sale is P15,361.75, after deducting from the selling price the cost of acquisition in the sum of P68,959.00 and the expense of sale in the sum of P9,679.25. 2. METHODS OF DEPRECIATION a. Straight line- provides for a uniform periodic diminution of the property. Formula: Annual Depreciation
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Cost Estimated Scrap Value = Estimated Useful Life
b. Declining balance- provides decreasing charges by applying a constant percentage rate to a declining asset book value. The most popular rates are 1.5 times the straight-line rate often referred to as 150% declining balance and 2 times the straight line rate, often referred to as double-declining balance depreciation. Residual value is not used in the computations under this method; however, it is generally recognized that depreciation should not continue once the book value is equal to residual value. c. Sum of the years digit this method of decreasing charges is based on applying a decreasing rate of depreciation of a constant depreciable cost. The denominator of the rate fraction is equal to the sum of the digits in reverse order. For example if an asset had an estimated service life of 5 years, the denominator would be 15. In the first year, the rate fraction would be 5/15, second year 4/15 and so on. The rate fraction is multiplied by the depreciable cost (cost less salvage) to obtain each years charge to expense.
d. Depreciation rates there is a table provided for in RR 1986, Annex A. 3. DEPRECIATION RATES a) BULLETIN F b) RR 19-86, ANNEX A

H. DEPLETION Wasting assets refers to natural resources, which are physically consumed and once consumed, are irreplaceable. Examples include coal, oil, ore, precious metals like gold and silver and timber. *Depletion is the exhaustion of natural resources such as mines, oil and gas wells due to production or severance from such mines or wells. Depletion enables the taxpayer to recover his capital interest in the property free of income tax, at its cost or on some other basis. Only mining entities owning economic interest in mineral deposits are allowed depletion deduction. Economic interest means interest in minerals in place acquired by investment therein or secured by operating or contract agreement for which income is derived, and return of capital expected, from the extraction of the mineral. The adjusted cost basis of the property is the accumulated exploration and development expenses incurred on the mining property as of Dec. 31, 1974 for those on a calendar year basis, and June 30, 1975 for those on the fiscal year basis beginning July 1, 1975 minus accumulated cost of depletion that should have been deducted as of the same date on the same property. Exploration expenses are those incurred or paid for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore, or other mineral before the beginning of the development stage of the mine or deposit. Development expenses are those paid or incurred during the development stage of the mine or other natural deposit, or when deposits of ore or other mineral are shown to exist in sufficient commercial quantity and quality. Allowable cost depletion allowance 1) In the case of oil and gas wells and mines, a reasonable allowance for depletion or amortization computed in accordance with the cost depletion method shall be granted
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under the rules and regulations prescribed by the Secretary of Finance. 2) When the allowance shall equal the capital invested no further allowances shall be granted. 3) After production in commercial quantities has commenced, certain intangible exploration and development drilling costs (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred, or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract are. 4) Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis or the purpose of computing allowable cost depletion. Limitation of cost depletion The basis for cost depletion of mineral deposits does not include amount recoverable through depreciation, through deferred expenses and through deductions other than depletion and the residual value of improvements at the end of operation. The annual allowable cost of depletion shall not exceed the market value as used for purposes of imposing the mining ad valorem taxes in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made. The allowable cost depletion deduction shall be limited only to the extent of the capital invested in the particular mining property. No further deduction for cost shall be allowed when the sum of the cost depletion equals the cost or adjusted basis of the property plus allowable capital additions. In computing taxable income from mining operations, the taxpayer may, at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion

as of date of prospecting, as well as exploration and development expenditures paid or incurred during the taxable year; provided that the total amount deductible for exploration and development expenditures shall not exceed 25% of the net income from mining operations computed without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures minus 25% of the net income from mining shall be carried forward to the succeeding years until fully deducted. The election by the taxpayer to deduct exploration and development expenditures is irrevocable and binding in succeeding taxable years. Computation of cost depletion 1. In general: Adjusted cost Basis Mineral units remaining = As of the taxable year
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for depletion of oil and gas wells or mines shall be authorized only in respect to oil and gas wells or mines located within the Philippines. RR 5-76 I. PENSION TRUST
Depletion per mineral unit
An employer establishing or maintaining a pension trust for the payment of reasonable pensions to his employees, may deduct from his gross income: 1. Contributions to such trust during the taxable year representing the liability accruing during the year; and 2. One tenth (1/10) of a reasonable amount paid to the trust during the taxable year covering the pension liability applicable to the years prior to the taxable year (if not theretofore allowed as deduction) in excess of such contributions. Requisites for deductibility: 1. Employer must have established a pension plan. 2. Pension plan must be reasonable and actuarially sound. 3. It must be funded by the employer. 4. Amount contributed by employer must no longer be subject to his control. 5. Payment has not been allowable as a deduction. Sec. 118, RR-2 RA 9505
No. of mineral units sold X depletion per mineral unit for the year = cost depletion within the taxable year 2. In the case of natural gas and oil wells: No. of cu. Ft. of gas or barrels of Oil recovered during the year Cost depletion Expected reasonable no. of cu.ft. of the year Gas or barrels of oil at the end Of the year, plus No. of cu.ft. of Gas or barrels of oil recovered During the year. Adjusted cost X basis of property = for
In the case of non-resident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance
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
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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 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, annuity contract, insurance pension products, pre-need pension plan, shares of stock and other securities listed and traded in a local exchange, exchangetraded 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 nonspeculative, 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) "Oveseas 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 (P l00,000.00) or its equivalent in any convertible foreign
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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 (P l00,000.00) 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 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 there from are immediately transferred to another PERA investment and/or another Administrator. 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:
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(a) For payment of accident or illness-related hospitalization in excess of thirty (30) days; and (b) 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. RR 17-2011 (Implements PERA) A qualified contributor shall be entitled to a tax credit equivalent to 5 percent of the aggregate qualified PERA contribution during the calendar year which may be credited against the contributors income tax liability. A qualified employer is allowed to contribute to its employees PERA, which they may claim as deduction from gross income. J. CHARITABLE AND OTHER CONTRIBUTIONS
Kinds of Charitable contributions: 1. Ordinary those that are subject to the following limitations: Individuals 10% of net income before charitable contribution Corporation 5% of net income before charitable contribution c. Donations to or for the use of the Government of the Philippines or any of its agencies or political subdivision for exclusively public purposes. d. Donations to accredited domestic corporations or associations organized and operated exclusively for

religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans. Social welfare institutions or non-governmental organizations, provided no part of the net income of which inures to the benefit of any private stockholder or individual. those that are deductible in full Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by NEDA, in consultation with appropriate government agencies, including its regional development councils and private philanthropic persons and institutions. Donations to foreign institutions or international organizations, which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments, entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws. Donations to accredited non-government organizations: i. organized and operated exclusively for scientific, research, educational, character building, youth and sports development, health, social welfare, cultural, charitable purposes, no part of the net income of which inures to the benefit of any private individuals; ii. which not later than the 15th day of the third month after the close of the taxable year in which contributions are received, makes
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utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance. with administrative expenses not exceeding 30% of the total expenses upon dissolution, the assets would be distributed to another non-profit domestic corporation organized for similar purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized.
e.
iii. iv.
2. Special a.
b.
c.
By virtue of PD 507 contributions, donations, gifts and bequests to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual, are deductible in full in computing the donors taxable net income. Under special laws, donations to the following, among others, are deductible in full: a. The Artesian Well Fund b. The IRRI c. The National Science Development Board and its agencies and to public or recognized private educational institutions, and scientific and research foundations d. The University of the Philippines and other state colleges and universities. e. The Philippine Rural Reconstruction Movement f. The Cultural Center of the Philippines g. The Trustees of the Press Foundation of Asia, Inc. h. The National Commission on Culture i. The Humanitarian Science Foundation j. The Integrated Bar of the Philippines

k. l. Development Academy of the Philippines Agriculture Department of the Southeast Asian Fisheries Development Center m. National Social Action Council n. Task Force on Human Settlement o. Donations to the National Museum, Library and Archives Valuation acquisition cost of property contributed other than money. RR 13-98 Donations or gifts made by a corporation, an individual engaged in trade or business, or an individual engaged in the practice of his profession, to accredited non-stock, non-profit corporations or nongovernment organizations (NGOs) qualified donee institutions may be claimed as deduction from their gross income. In addition, these donations are exempt from the donors tax. However, as a condition to the exemption from the donors tax, not more than thirty percent (30%) of the said donations and gifts for the taxable year shall be used by such accredited non-stock, non-profit corporations or NGOs for administration purposes. The amount of donation that will be allowed as deduction from gross income is determined in accordance with the following rules: a. Limited Deductibility. Donations, contributions or gifts actually paid or made within the taxable year to accredited non-stock, non-profit corporationsmust not exceed ten percent (10%) of the income of an individual donor, and five percent (5%) for a corporate donor. The maximum amount of deductible donation will be computed based on donors taxable income without the benefit of this deduction. a. Full deductibility. The full amount of donations, contributions or gifts actually paid or made within the
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taxable year to accredited NGOs are allowed as deduction. Accreditation of Qualified Donee Institutions A non-stock, non-profit corporation/organization refers to a corporation or association organized under Philippine laws exclusively for one or more of the following purposes: o Religious o Charitable o Scientific o Athletic o Cultural o Rehabilitation of veterans o Social Welfare No part of the net income or asset of the corporation or association should belong to or inure to the benefit of any member, organizer, officer or any specific person. On the other hand, a non-government organization (NGO) is a nonstock non-profit domestic corporation/organization organized and operated exclusively for any of the following purposes: o Scientific o Research o Educational o Character-building, youth and sports development o Health o Social welfare o Cultural o Charitable In addition to the condition that no part of the net income inures to the benefit of any private individual, the entity must also comply with the following requisites to be considered as an NGO: 1. It utilizes the contributions directly for the active conduct of the activities constituting its intended

purpose(s). This must be achieved not later than the 15thday of the 3rd month after the close of the taxable year when the contributions were received, unless an extended period has been granted by the Secretary of Finance. 2. The level of administrative expenses on annual basis does not exceed thirty percent (30%) of the total expenses for the taxable year; and 3. In the event of dissolution, the assets would be distributed to another accredited NGO organized for similar purpose, or to the State for public purpose. In selecting the Accrediting Entity, the DOF must select the organization that has a countrywide membership composed of NGOs which belong to the sector that the Private Accrediting Entity intends to certify; NGOs which have been in existence for at least five (5) years; and NGOs not more than 50% of the members of which belong to other existing NGOs or private accrediting agencies. Based on this criteria, the Secretary of Finance has designated the Philippine Council for NGO Certification, Inc. (PCNC) as the Accrediting Entity. Application for accreditation of donee institutions will be undertaken as follows: 1. Newly organized and existing non-stock, non-profit corporations and NGOs will apply with the Accrediting Entity for accreditation and submit to a process of examination and evaluation. 2. The Accrediting Entity will evaluate and accredit nonstock, non-profit corporations/NGOs using identified criteria such as mission and goals; resources; program implementation and evaluation; and planning for the future. 3. The Secretary of Finance, upon the recommendation of the Accrediting Entity, can waive the submission of audited financial statements for newly-organized nonstock, non-profit corporations/NGOs which have been
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organized to carry out programs of national significance. 4. The Accrediting Entity will issue a Certificate of Accreditation to qualified non-stock, non-profit corporation/NGO. This certification is valid for a maximum of five (5) years for existing non-stock, non-profit corporations/NGOs, and three (3) years for newly-organized institutions. 5. The Accrediting Entity shall notify applicants who fail to meet the criteria for accreditation. Such entities will have one year within which to implement the recommendations of the Accrediting Entity, after which it may re-apply for accreditation. The Secretary of Finance and the BIR Commissioner will oversee, monitor and coordinate with the Accrediting Entity to ensure that the rules for accreditation as set forth under the regulations are complied with. Those who have qualified as donee institutions under BIR-NEDA Regulations No. 1-81 are given three (3) years from the effectivity of the new rules within which to secure a Certificate of Accreditation from the Accrediting Entity. During this period, donations to these entities will still be allowed as deductible expense on the part of the donors. After the three-year period, only donations and contributions to non-stock, non-profit corporations/NGOs which have been newly accredited by the Accrediting Entity will be allowed as deduction from gross income. Additional Requirements for Deductibility of Donations The taxpayer must present the Certificate of Donation which accredited non-stock, non-profit/NGOs are required to issue on every donation they received. Following the prescribed BIR form, the certification is required to be distributed within thirty (30) days after the receipt of the donation. The certification should contain the following information: o Actual receipt of donation o Date of receipt

o Amount of donation if in cash. If the donation is in the form of a property, whether real or personal, the certificate must indicate the acquisition cost of said property.
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Sec. 34 (I), NIRC 1. In general- a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. 2. AMORTIZED FOR 60 MONTHS Sec. 34 (I), NIRC 2. Amortization of Certain Research and Development Expenditures- at the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the following research and development expenditures may be treated as deferred expenses: (1) paid or incurred by the taxpayer in connection with his trade, business or profession (2) not treated as expenses under paragraph 1 hereof (3) chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). L. IMPOSITION OF CEILINGS ON DEDUCTIONS BY THE SECRETARY OF FINANCE Sec. 34, NIRC: last par.: Notwithstanding the provisions of the preceding subsections, the Secretary of Finance, upon recommendation of the Commissioner, after public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections (A) to (J) of this section: Provided, that for purposes of
For every donation worth over P1.0 Million, the donor is required to notify the BIR Revenue District Office where his business is located. The notice must be submitted within thirty (30) days after the receipt of the Certificate of Donation from the donee institution, which must be attached to said notice. Upon filing of their income tax returns/annual information return, accredited non-stock, non-profit corporations/NGOs must furnish the BIR RDO of the place where it is located with the following information: o List of donations received during the year showing the name and address of the donors; sources of income; amount or market value of each donation o List of the activities and/or projects undertaken by the institution o List of projects, their corresponding costs; the amount set aside and status of funds o A declaration that the required utilization of the donations are complied with o A declaration that no part of the net income inures to the benefit if any private stockholder or individual, and o A declaration of the status of project implementation.
K. RESEARCH AND DEVELOPMENT EXPENSES 1. WHEN PAID OR INCURRED; OR

determining such ceilings or limitations, the Secretary of Finance shall consider the following factors: i) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry; ii) effects of inflation o expenditure levels Provided, further, That no ceilings shall further be imposed on items of expense already subject to ceilings under present law. M. ADDITIONAL REQUIREMENT FOR DEDUCTIBILITY Sec. 34 (K), NIRC: Additional Requirements for Deductibility of Certain Payments- any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this section, sections 58 and 81 of this Code. RMO No. 38-83 on Deficiency Withholding Guidelines for Allowance of Deductions for Certain Income Payments Under Section 30 (1) of the Tax Code. Section 30 (1) of the National Internal Revenue Code, as amended by Batas Pambansa Blg. 1 25, provides: Additional requirement for deductibility of certain payments. Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income for which depreciation or amortization may be allowed under this section and Section 29, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this section, Sections 54 and 93 of this Code. The above-quoted provisions of the Tax Code is frequently cited by Revenue Examiners in their reports of investigation to justify disallowances of certain expense and other itemized deductions for
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which the taxpayer is obliged to make a withholding under Sections 54 and 93 of the Code and implementing regulations. Since the amounts otherwise deductible are substantial, some taxpayers have vigorously protested the literal application of the said provision in the audit and investigation of their income tax liabilities. In order to minimize audit controversies and to achieve uniformity in implementing the aforequoted provision of Section 30(1), this Revenue Memorandum Order is hereby issued to prescribe guidelines that shall be observed by revenue officers for allowing or disallowing items of deductions referred to in the said Section. Considering that the existing ad valorem (surcharges and interests), as well as the specific penalties (fine and imprisonment), are adequate to compel taxpayers/withholding agents to comply with the requirements of the withholding tax law and regulations, outright disallowance of deductions representing income payment for mere failure to withhold and remit will in effect, in case of corporations, be tantamount to the imposition of additional 25% or 35% surcharge (equivalent to the normal corporate tax rates). In order to minimize the onerous effect of literal application of Section 30(1), allowance or disallowance of a deduction falling under the said paragraph of Section 30 shall be determined in accordance with the following guidelines. Guidelines For Applying Section 30(1): An amount claimed as deduction on which a tax is supposed to have been withheld under Sections 54 and 93 shall be allowed if in the course of his audit and/or investigation, the examiner discovers that: No withholding of creditable or final tax was made but the 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. No withholding of creditable or final tax was made and the 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. The 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, interest and penalties incident to such error. N. ITEMS NOT DEDUCTIBLE
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Sec. 36, NIRC: Items not Deductible(A) General Rule - in computing net income, no deduction shall in any case be allowed in respect to: 1. personal, living or family expenses 2. any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate This subsection shall not apply to intangible drilling and development costs incurred in petroleum operations which are deductible under subsection G(1) of sec 34 of this Code. 3. any amount expended in restoring property or in making food the exhaustion thereof for which an allowance is or has been made 4. premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. (B) Losses from Sales or Exchanges of Property- in computing net income, no deduction shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly: 1. between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether whole or half-blood), spouse, ancestors, and lineal descendants 2. except in the case of distributions in liquidation, between an individual and a corporation more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual 3. except in the case of distributions in liquidation, between two corporations more than 50% 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 4. between a grantor and a fiduciary of any trust 5. between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust 6. between a fiduciary of a trust and a beneficiary of such trust Secs. 119-122, RR-2 Sec.119, RR-2: Personal, living and family expenses- personal, living and family expenses are not deductible 1) insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and not deductible 2) 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, 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 is deductible. 3) Alimony and an allowance unpaid under a separation agreement are not deductible from gross income. Sec. 120, RR-2: Capital Expense: 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 taxpayers property, or for the amount expended for restoring property or in making good the exhaustion thereof for which an allowance for depreciation expended for securing 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 part of the cost of the property and is not a
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deductible expense. The amount expended for architects services is part if the cost of the building. Commissions paid in purchasing securities are on offset against the selling price. Expenses of the administration of an estate, such as court costs, attorneys fees and executors commissions, are chargeable against the corpus of the estate and are not allowable deductions. In the case of the corporation, expenses for organization, such as incorporation fees, attorneys 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 for which they are incurred. A holding company which guarantees dividends at a specified rate on the stock of a subsidiary may not deduct amounts paid in carrying this guaranty in computing its net income, but such payments may be added to the cost of its stock to the subsidiary. Sec. 121, RR-2: Premiums on Life Insurance of Employees- any amounts paid for premium 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 which the taxpayer is directly a beneficiary under such policy are not deductible. Sec. 122, RR-2: 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. The family of an individual shall include only his brothers and sisters (whether 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 50% 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% 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 f. between a fiduciary of a trust and a beneficiary of such trust ATLAS CONSOLIDATED V. CIR, GR. L-26911 Facts: Atlas is being assessed of deficiency income tax. Atlas protested the assessment asking for its reconsideration and cancellation. It is the contention of Atlas that the amount paid for as annual public relations expenses is a deductible expense from gross income under sec 30 of the NIRC. Atlas claimed that it was paid for services of a public relations firm, P.K. Macker, a reputable public relations consultant in New York, hence an ordinary and necessary business expense. ISSUE: Whether or not the expenses paid to create a favorable image of the corporation is a deductible expense? HELD: No, efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses related thereto are not business expense but capital expenditures. To be deductible as business expense, the following requisites are imposed: 1. the expense must be ordinary and necessary, 2. paid and incurred within the taxable year, 3. paid or incurred in carrying in a trade or business. PART 6 I. SALE OR EXCHANGE OF PROPERTY A. CAPITAL ASSETS
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Sec. 39, NIRC - Capital Assets: The term capital assets means property held by the taxpayer (whether or not connected with his trade or business), but does NOT include stock in trade by the taxpayer, or other property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection F of 34, or real property used in trade or business of the taxpayer 1. DEFINITION OF CAPITAL ASSET RR NO. 7-2003, Dec. 27, 2002 Guidelines in determining whether a real property is capital or ordinary asset Providing the Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1) of the National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax under Sections 24(D), 25(A)(3), 25(B) and 27(D)(5), or the Ordinary Income Tax under Sections 24(A), 25(A) & (B), 27(A), 28(A)(1) and 28(B)(1), or the Minimum Corporate Income Tax (MCIT) under Sections 27(E) and 28(A)(2) of the same Code Scope. Pursuant to Section 244 of the National Internal Revenue Code of 1997 (Code), these Regulations are hereby promulgated to implement Sec. 39(A)(1), providing for the purpose the guidelines in determining whether a particular real property is a capital asset or an ordinary asset.

SECTION 2. Definition Of Terms. For purposes of these Regulations, the following terms shall be defined as follows: a. Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets under Sec. 39(A)(1) of the Code. b. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets under Sec. 39(A)(1) of the Code, namely: 1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or 2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or 4. Real property used in trade or business of the taxpayer. Real properties acquired by banks through foreclosure sales are considered as their ordinary assets. However, banks shall not be considered as habitually engaged in the real estate business for purposes of determining the applicable rate of withholding tax imposed under Sec. 2.57.2(J) of Revenue Regulations No. 2-98, as amended. c. Real property shall have the same meaning attributed to that term under Article 415 of Republic Act No. 386, otherwise known as the "Civil Code of the Philippines." d. Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate. e. Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial
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units, townhouses and other similar units for his own account and offering them for sale or lease. f. Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent. g. Taxpayers engaged in the real estate business shall refer collectively to real estate dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayers not engaged in the real estate business" shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business for purposes of these Regulations. SECTION 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or Ordinary Asset. a. Taxpayers engaged in the real estate business. Real property shall be classified with respect to taxpayers engaged in the real estate business as follows: 1. Real Estate Dealer. All real properties acquired by the real estate dealer shall be considered as ordinary assets. 2. Real estate Developer. All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition, and all real properties which are field by the real estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets. 3. Real Estate Lessor. All real properties of the real estate lessor, whether land and/or improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business shall likewise be considered as ordinary assets.

4. Taxpayers habitually engaged in the real estate business. All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real estate shall be considered as ordinary assets. Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate. If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be deemed to be engaged in the real estate business through the establishment of substantial relevant evidence (such as consummation during the preceding year of at least six (6) taxable real estate sale transactions, regardless of amount; registration as habitually engaged in real estate business with the Local Government Unit or the Bureau of Internal Revenue, etc.). A property purchased for future use in the business, even though this purpose is later thwarted by circumstances beyond the taxpayer's control, does not lose its character as an ordinary asset. Nor does a mere discontinuance of the active use of the property change its character previously established as a business property. b. Taxpayer not engaged in the real estate business. In the case of a taxpayer not engaged in the real estate business, real properties, whether land, building, or other improvements, which are used or being used or have been previously used in the trade or business of the taxpayer shall be considered as ordinary assets. These include buildings and/or improvements subject to depreciation and lands used in the trade or business of the taxpayer. A depreciable asset does not lose its character as an ordinary asset, for purposes of the instant provision, even if it becomes fully depreciated, or there is failure to take depreciation during the period of ownership. Monetary consideration or the presence or absence of profit in the operation of the property is not significant in the characterization of the property. So long as the property is or has been used for business purposes, whether for the benefit of the owner or any of its members or stockholders, it shall still be considered as an ordinary asset. Real property used by an exempt corporation in its exempt operations, such as a corporation included in the enumeration of Section 30 of the
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Code, shall not be considered used for business purposes, and therefore, considered as capital asset under these Regulations. Real property, whether single detached; townhouse; or condominium unit, not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration, in case of condominium unit, townhouse or apartment, and as validated from the existing available records of the Bureau of Internal Revenue, owned by an individual engaged in business, shall be treated as capital asset. c. Taxpayers changing business from real estate business to non-real estate business. In the case of a taxpayer who changed its real estate business to a non-real estate business, or who amended its Articles of Incorporation from a real estate business to a non-real estate business, such as a holding company, manufacturing company, trading company, etc., the change of business or amendment of the primary purpose of the business shall not result in the re-classification of real property held by it from ordinary asset to capital asset. For purposes of issuing the certificate authorizing registration (CAR) or tax clearance certificate (TCL), as the case may be, the appropriate officer of the BIR shall at all times determine whether a corporation purporting to be not engaged in the real estate business has at any time amended its primary purpose from a real estate business to a non-real estate business. d. Taxpayers originally registered to be engaged in the real estate business but failed to subsequently operate. In the case of subsequent non-operation by taxpayers originally registered to be engaged in the real estate business, all real properties originally acquired by it shall continue to be treated as ordinary assets. e. Treatment of abandoned and idle real properties. Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in the real estate business shall not

result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2(g) hereof are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties. f. Treatment of real properties that have been transferred to a buyer/transferee, whether the transfer is through sale, barter or exchange, inheritance, donation or declaration of property dividends. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules: 1. Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the heir or donee. 2. Real property received as dividend by the stockholders who are not engaged in the real estate business and who do not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the recipients even if the corporation which declared the real property dividend is engaged in real estate business. 3. The real property received in an exchange shall be treated as ordinary asset in the hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property received in the exchange. g. Treatment of real property subject of involuntary transfer. In the case of involuntary transfers of real properties, including
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expropriation or foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such real property in the hands of the involuntary seller, either as capital asset or ordinary asset, as the case may be. 2. DEFINITION OF INCOME Sec 22 (z) the term ordinary income includes any gain from sale or exchange of property which is not a capital asset. Any gain from the sale or exchange of property which is treated or considered under other provisions of this title, as ordinary income shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in sec 39 A. Calasanz v.CIR 144 SCRA 664 (October 9, 1986) Facts: Ursula Calasanz inherited from her father an agricultural land. Improvements were introduced to make such land saleable and later in it was sold to the public at a profit. The Revenue examiner adjudged Ursula and her spouse as engaged in business as real estate dealers and required them to pay the real estate dealers tax. Issue: Whether or not the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains taxable at capital gain rates? Held: The activities of Calasanz are indistinguishable from those invariably employed by one engaged in the business of selling real estate. One strong factor is the business element of development which is very much in evidence. They did not sell the land in the condition in which they acquired it. Inherited land which an heir subdivides and makes improvements several times higher than the original cost of the land is not a capital asset but an ordinary asses. Thus, in the course of selling the subdivided lots, they engaged in the real estate business and accordingly the gains from the sale of the lots are ordinary income taxable in full.

3. NET CAPITAL GAIN, NET CAPITAL LOSS Net Capital Gain-means the excess of the gains from the sales or exchanges of capital assets over the losses from such sales or exchanges. Net Capital Loss-means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges. 4. ORDINARY LOSS Ordinary loss- includes any loss from the sale or exchange of property which is not a capital asset. 5. PERCENTAGE TAKEN INTO ACCOUNT Percentage Taken into Account- in the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: a. one hundred percent (100%) if the capital asset has been held for not more than 12 months b. fifty percent (50%) if the capital asset has been held for more than12 months 6. LIMITATION ON CAPITAL LOSS
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B. DETERMINATION OF GAIN OR LOSS FROM SALE OR TRANSFER OF PROPERTY 1. COMPUTATION OF GAIN OR LOSS Sec 40, NIRC: computation of gain or loss: the gain from sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property received. 2. COST OR BASIS FOR INCOME TAX PURPOSES The basis of property shall bea. the cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired by purchase b. the fair market price or value as of the date of acquisition, if the same was acquired by inheritance c. if the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor, except if that if such basis is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss, the basis shall be such fair market value d. if the property was acquired for less than an adequate consideration in money or moneys worth, the basis is the amount paid by the transferee for the property 3. EXCHANGE OF PROPERTY AX-FREE EXCHANGE
Limitation on Capital Loss - Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges.
General rule: upon exchange or sale of property, the entire amount of the gain or loss, as the case may be, shall be recognized. Exception: no gain or loss shall be recognized if in pursuance of a plan of merger or consolidation-

a. a corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation b. a shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation c. a security holder of a corporation, which is a party to the merger of consolidation exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation. i. Merger or Consolidation
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P10.00 per share are issued and outstanding, one (1) DFI share shall be issued for approximately 4.9561EFI shares; that Ignacio shall receive 114,369.41 DFI shares for his 566,825 EFI shares, while PPC shall receive 40,015.48 DFI shares for its 242,925 EFI shares (including the four (4) qualifying shares in the names of its four (4) nominees; that in order to avoid fractional shares, Ignacio and PPC agree that the latter shall waive in favor of the former its fractional share, with the additional payment by Ignacio of P5.00 to complete one (1) whole share, that the Articles of Incorporation of DFI shall simultaneously be amended to increase its authorized capital stock by P40 million, or from P10 million to P50 million, and at least 25% of which increase or P16,338,500.00 equivalent to 163,385 shares shall be issued as aforementioned in exchange for the 809,750 outstanding shares of EFI worth of P16,338,495.00 and the additional payment in cash of P5.00 as aforementioned, that after the effective date of the merger, all EFI stockholders will become DFI stockholders, and that simultaneous with the merger the Articles of Incorporation of the surviving corporation, DFI shall be amended and its name shall be Evergreen Farms, Inc. immediately after the effectivity of the merger. RULING: The above reorganization is a merger within the contemplation of Section 35(c)(2) and (5(b) of the Tax Code because a corporation (DFI) acquired all of the properties of another corporation (EFI) solely for stocks, the transaction undertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by EFI of all its assets and liabilities to DFI solely, in exchange for the latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to EFI upon the distribution of DFI shares to EFI stockholders in complete redemption of their stocks under Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to EFI stockholders upon the exchange of their stocks solely for DFI stocks under Section 35(c)(2) of the Tax Code. The basis of the assets received by DFI shall be the same as it would be in the hands of EFI. The basis of DFI stocks received by the
BIR Ruling No. 383-87, Nov. 25, 1987 This is a ruling as to whether the merger of Delta Farms, Inc. (DFI) and Evergreen Farms, Inc. (EFI) qualifies as a tax-exempt reorganization under Section 35(c)(2) of the Tax Code, as amended. It is represented that DFI and EFI are both domestic corporations duly registered to engage in agricultural development projects in the Philippines; that 70% of the equity of both corporations are owned by Mr. Juanito R. Ignacio (Ignacio) while 30% thereof, belongs to Philippine Packing Corporation (PPC) which is another domestic corporation and its four (4) individual nominees who are merely holders of one qualifying share each; that prompted by the desire of both companies to achieve efficiency and economy of operation by reducing administrative and operating costs and to strengthen DFI, a merger has been proposed wherein EFI shareholders will exchange all their EFI shares solely for shares in DFI; that as a result of the merger, DFI will be the surviving corporation which will continue to be owned 70% by Ignacio and 30% by PPC, with EFI then ceasing to exist, that based on the Audited Financial Statements of EFI as of March 31, 1987, since the net worth of EFI is P16,338,495.00, EFI stockholders shall receive the equivalent amount in DFI shares of stock or P163,384.95 DFI shares with a par value of P100.00 per share; that considering that 809,750 shares of EFI with a par value of

stockholders of EFI shall be the same as the basis of the EFI stocks surrendered in exchange therefor. If the total liabilities to be assumed by DFI upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets transferred by EFI, the excess shall be recognized as gain of EFI. It is understood, however, that upon the subsequent sale or exchange of the assets or shares of stocks acquired by the parties, the gain derived from such sale or exchange shall be subject to income tax. The abovementioned transactions shall not be subject to the gift tax as there is no intention to donate on the part of any of the parties. However, in order that the above-described reorganization can be considered a merger under Section 35(c)(2) of the Tax Code, the parties to the merger should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred, a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: (1) A copy of the plan of reorganization, together with a statement executed under the penalties of perjury showing in full the purposes thereof and in detail all transactions incident to or pursuant to the Plan. (2) A complete statement of the cost or other basis of all property, including all stocks or securities, transferred incident to the plan. (3) A statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distributions or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange.
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(4) A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. B. Every taxpayer, other than a corporation a party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange including: (1) A statement of the cost or other basis of the stock or securities transferred in the exchange; and (2) A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amount of each kind of stock or securities and other property (other liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereto at the date of the exchange. C. Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject), in order to facilitate the determination of gain or loss from a subsequent disposition of such stock or securities and other property received from the exchange. In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporations participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received as a consequence of the merger. COMMISSIONER v. RUFINO, L-33665-68

Facts: The private respondents were the majority stockholders of the defunct Eastern Theatrical Co. It had an original capital stock of P500,000.00, which was increased in 1949 to P2,000,000.00, divided into 200,000 shares at P10.00 per share, and was organized to engage in the business of operating theaters, opera houses, places of amusement and other related business enterprises, more particularly the Lyric and Capitol Theaters in Manila. The President of this corporation (hereinafter referred to as the Old Corporation) during the year in question was Ernesto D. Rufino. They are also the majority and controlling stockholders of another corporation, the Eastern Theatrical, Inc. This corporation is engaged in the same kind of business as the Old Corporation. The GeneralManager of this corporation (hereinafter referred to as the New Corporation) at the time was Vicente A. Rufino. In a special meeting of stockholders of the Old Corporation on December 17, 1958, to provide for the continuation of its business after the end of its corporate life, and upon the recommendation of its board of directors, a resolution was passed authorizing the Old Corporation to merge with the New Corporation by transferring all its business, assets, goodwill, and liabilities to the latter, which in exchange would issue and distribute to the shareholders of the Old Corporation one share for each share held by them in the said Corporation. It was expressly declared that the merger of the Old Corporation with the New Corporation was necessary to continue the exhibition of moving pictures at the Lyric and Capitol Theaters even after the expiration of the corporate existence of the former, in view of its pending booking contracts, not to mention its collective bargaining agreements with its employees. The aforesaid transfer was eventually made by the Old Corporation to the New Corporation, which continued the operation of the Lyric and Capitol Theaters and assumed all the obligations and liabilities of the Old Corporation beginning January 1, 1959. The Bureau of Internal Revenue examined later, resulting in the petitioner declaring that the merger of the aforesaid corporations was not undertaken for a bona fide business purpose but merely to avoid
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liability for the capital gains tax on the exchange of the old for the new shares of stock. Accordingly, he imposed the deficiency assessments against the private respondents. Held: The Court of Tax Appeals did not err in finding that no taxable gain was derived by the private respondents from the questioned transaction. There was a valid merger although the actual transfer of the properties subject of the Deed of Assignment was not made on the date of the merger. The Court finds no impediment to the exchange of property for stock between the two corporations being considered to have been effected on the date of the merger. That, in fact, was the intention, and the reason why the Deed of Assignment was made retroactive to January 1, 1959. Such retroaction provided in effect that all transactions set forth in the merger agreement shall be deemed to be taking place simultaneously on January 1. 1959, when the Deed of Assignment became operative. The certificates of stock subsequently delivered by the New Corporation to the private respondents were only evidence of the ownership of such stocks. Although these certificates could be issued to them only after the approval by the SEC of the increase in capitalization of the New Corporation, the title thereto, legally speaking, was transferred to them on the date the merger took effect, in accordance with the Deed of Assignment. Our ruling then is that the merger in question involved a pooling of resources aimed at the continuation and expansion of business and so came under the latter and intendment of the National Internal Revenue code, as amended by the above-cited law, exempting from the capital gains tax exchanges of property effected under lawful corporate combinations. The basis consideration, of course, is the purpose of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger "must be undertaken for a bona fide" business purpose and not solely for the purpose of escaping the burden of taxation." ii. Transfer of substantially all the assets

The phrase substantially all the properties of another corporation is defined in BIR General Circular No V-253 dated July 16, 1957 to 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. iii. Transfer of Property for Shares of Stocks RMR No. 1-2001, 29 November 2001 Tax Consequences of Tax-Free Exchange of Property for Shares of Stock of a Controlled Corporation This Revenue Memorandum Ruling is issued to consolidate, provide, clarify and harmonize the existing guidelines on the tax consequences of a non-recognition transaction consisting of a tax-free exchange of property for shares of stock under Section 40(C)(2) of the Tax Code of 1997. This Revenue Memorandum Ruling shall apply solely and exclusively to, and may be relied upon only in situations in which the facts are substantially similar to the facts stated below, but subject to the principles of substance over form. I. FACTS 1. A domestic corporation (the "Transferor") owns certain property, consisting, for example, of the following: 1.1 Land encumbered by a real estate mortgage (REM); 1.2 Buildings; 1.3 100 shares of stock in G Corporation with a par value of P10 per share; 1.4 50 shares of stock in D Corporation without par value; 1.5 Unsecured receivables; 1.6 Loans to Q ("Borrower/Mortgagor"), secured by a real estate mortgage; 1.7 Cash. 2. X Corporation (the "Transferee") is a domestic corporation. 3. The Transferor transfers the property to the Transferee. In exchange, the Transferee issues shares to the Transferor out of the unissued portion of its existing authorized capital stock, or, if such
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existing authorized capital stock is insufficient, out of shares from an increase in the Transferee's authorized capital stock. The Transferor does not receive any money or property other than the aforementioned shares of the transferee. 4. The property transferred by the Transferor-corporation constitutes less than 80% of the Transferor's assets, including cash. 5. In addition to the transfer of the property, the Transferee assumes liabilities of the Transferor. However, the sum total of the amount of liabilities assumed, plus the amount of the encumbrance or REM on the Land (as stated in Section 40(C)(4) of the Tax Code of 1997 "liabilities to which the property is subject") do not exceed the basis of the property transferred. 6. The shares are neither issued in payment for services, nor for settlement of an outstanding liability that arises from the performance of services rendered by the Transferor to the Transferee. 7. As a result of the above-mentioned transfer, the Transferor acquires at least 51% of the total outstanding capital stock of the Transferee entitled to vote. II TAX CONSEQUENCES 1. Income tax. The Transferor 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, or 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. The last paragraph of Section 40(C)(2) and (6)(c) of the Tax Code of 1997 state: "No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property." "(c) The term "control", when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote."

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. Section 40(C)(4) of the Tax Code of 1997 states: "(4) Assumption of liability. (a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as a part of the consideration, another party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property, subject to a liability, then such assumption or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange from being within the exceptions. (b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total amount of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be." In addition, 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. Section 55 of Revenue Regulations No. 2 ("Income Tax Regulations") states: "Section 55. Acquisition or disposition by a corporation of its own capital stock. . . . . The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than the par or stated value of such stock. However, stocks shall not be issued for a consideration less than par or issued price thereof. (Section 62, Corporation Code of the Philippines)
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2. Donor's tax. 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 being no intent to donate on the part of the Transferor. 3. Value added tax. 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 under Title IV of the Tax Code of 1997. 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, since the Transferor gains control of the Transferee. Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, as amended states: "(b) Not subject to output tax. The VAT shall not apply to goods or properties existing as of the occurrence of the following: 1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders, Example: transfer of property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code [now 40(C)(2) and (6)(c) of the Tax Code of 1997]. 4. Documentary stamp tax. The documentary stamp tax consequences of the transfer are as follows: 4.1 Either the Transferor or the Transferee is subject to documentary stamp tax as follows: 4.1.1 On the transfer of real property (Section 196, Tax Code of 1997) P15 on each P1,000 or fractional part thereof, based on the higher of: (i) the consideration contracted to be paid for such real property, and (ii) the fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997. 4.1.1.1 The "consideration contracted to be paid for such real property" shall be computed in accordance with the following rules. "Stock in a corporation is a valuable consideration for the transfer of real property." (Section 177, Revenue Regulations No. 26) Therefore, the consideration for the real property shall be computed as the par/stated value of the Transferee shares issued to the Transferor in exchange for such property plus the value of such property in excess of such par/stated value recognized in the books of the Transferee as

premium, additional capital contribution, or donated surplus, or the like. For instance, if the value of the property is P1,000,000, but only shares with an aggregate par value of P250,000 are issued, there being a premium above par of P750,000, which the Transferee records as additional capital contribution, donated surplus, or the like, the consideration is P1,000,000 (that is, par value of P250,000 + premium of P750,000). 4.1.1.2 On the other hand, the fair market value of the property as determined in accordance with Section 6(E) of the Tax Code of 1997 whichever is higher between (1) the fair market value as determined by the Commissioner (that is, zonal value), and (2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. 4.1.1.3 The value of the improvements thereon shall be based on the formula provided under Revenue Audit Memorandum Order (RAMO) No. 1-2001 but shall not be lower than the fair market value in the Tax Declaration in the year of exchange. According to the said RAMO, the value of the improvement shall be determined by deducting the zonal value of the land from the total selling price/consideration per Deed of Exchange. Thus, if the total selling price/consideration per Deed of Exchange is P1,000,000.00 and the zonal value of the land is P600,000.00, then the value of the improvement is P400,000.00. The fair market value of the improvement shall be determined per latest tax declaration at the time of its sale or disposition (in this particular case, the exchange of such property). If the tax declaration was issued three (3) or more years prior to the date of sale or disposition, the Transferor shall be required to submit a certification from the city/municipal assessor as to the fact that such tax declaration is the latest tax declaration covering the real property. Absent such certification, the Transferor must secure a copy of the latest tax declaration duly certified by the assessor. 4.1.2 On the transfer of shares of stock held by the Transferor (Section 176, Tax Code of 1997)
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4.1.2.1 The transfer of the shares of G Corporation, which have a par value, is subject to documentary stamp tax of P1.50 on each P200 or fractional part thereof of the par value of such shares. 4.1.2.2 The transfer of the shares of D Corporation, which are without par value, is subject to the documentary stamp tax of 25% of the documentary stamp tax that was paid when those shares were originally issued. 4.1.3 Transfer of mortgage (Section 198, in relation to Section 195, Tax Code of 1997) The transfer of the real estate mortgage, as a consequence of the transfer of the loan to Q ("Borrower/Mortgagor"), is subject to documentary stamp tax at the following rate: (a) When the amount secured does not exceed five thousand pesos (P5,000) twenty pesos (P20); (b) On each five thousand pesos (P5,000), or fractional part thereof in excess of five thousand pesos (P5,000), an additional tax of ten pesos (P10). 4.2 The Transferee is subject to documentary stamp tax on the original issuance of its shares (Section 175, Tax Code of 1997), at the following rate, depending on whether such shares are par or no-par shares: 4.2.1 If the Transferee's shares are with par value, the documentary stamp tax is imposed at the rate of P2 on each P200 or fractional part thereof of the par value of such shares, regardless of whether the shares are issued at par value or for a premium (that is, for a consideration in excess of par value). 4.2.2 If the Transferee's shares are without par value, the documentary stamp tax is imposed at the rate of P2 on each P200 or fractional part thereof of the actual consideration paid for such shares. 5. Time of Payment of Taxes. The time for the payment of the documentary stamp tax liabilities, whether the taxpayer is an e-filer or not, shall be as follows: 5.1 With respect to the transfer of property mentioned in 4.1, above, the documentary stamp tax shall be paid on or before the fifth (5th) day after the close of the month when the deed of assignment/transfer transferring such property was executed, made,

signed, accepted, or transferred (Section 5, Revenue Regulations No. 6-2001). 5.2 With respect to the original issuance of shares mentioned in 4.2, above, the documentary stamp tax shall be paid on or before the fifth (5th) day after the close of the month of 5.2.1 Approval of SEC registration, in case of original incorporation; 5.2.2 Approval of the increase in authorized capital stock, in case the shares issued to the Transferee come from the increase in authorized capital stock of the Transferee; or 5.2.3 Execution of the deed of assignment/transfer of the property for which the Transferee's shares are issued, in case the shares issued to the Transferor come from the unissued portion of the Transferee's existing authorized capital stock. iv. Administrative requirements in case of Tax-free Exchanges RMO 32-2001, 29 NOV. 2001 Prescribing the new conditions & requirements of tax-free exchange Guidelines Implementing Revenue Regulations No. 18-2001 on the Monitoring of the Basis of the Property Transferred and Shares of Stock Received. In order to facilitate the monitoring of the basis of properties transferred and shares received in an exchange transaction, and in the determination of whether a transaction involving the transfer of properties by individual/s or corporation/s in exchange for shares of stock of another corporation or unit of participation in a partnership, as well as a transaction involving a merger or consolidation, is a taxfree exchange that falls under Section 40(C)(2), in relation to Section 40(6)(b) and (c) of the Tax Code of 1997, the requirements hereunder stated must be complied with by both transferor(s)/absorbed corporation and transferee/surviving/consolidated corporation. I. DOCUMENTATION REQUIREMENTS A. BIR Certification/Ruling Any application to be filed with the Law Division for a BIR Certification/Ruling on the tax consequence of the exchange of
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properties described hereunder shall be made in a form which the BIR will provide for the purpose under the cover of a transmittal letter providing a brief overview of the transaction that contains all the material facts of the exchange transaction, and shall be accompanied by three (3) copies of each of the following documents: (1) In the case of transfer of property to a controlled corporation/partnership (a) Deed of Transfer/Assignment/Exchange; (b) Duly registered Articles of Incorporation or Partnership with SEC of the transferor corporation and transferee corporation/partnership, and By-Laws; (c) Copies of the Transfer Certificates of Title/Condominium Certificates of Title/Certificates of Stock to the properties to be transferred pursuant to the tax-free exchange, as certified by the appropriate Registrar of Deeds or Corporate Secretary, as the case may be; (d) Copies of the latest Tax Declaration of the properties to be transferred pursuant to the tax-free exchange, as certified by the appropriate local government unit's Assessor. It is understood that any improvement is separately declared and therefore, covered by a Tax Declaration distinct from the Tax Declaration on the land. Further, if the tax declaration was issued three (3) or more years prior to the exchange transaction, the Transferor shall include in the certification by the local government unit's Assessor that such declaration is the latest tax declaration covering the real property; (e) Certification of the fair market value or zonal value of the real property involved in the exchange. The zonal value shall be certified, as a general rule, by the Chief, Asset Valuation Division at the 10th Floor, BIR National Office. However, the Revenue District Officer or the Revenue Regional Director can also issue the certification whenever access to the latest schedule of zonal values is electronically available to them. (f) Sworn certification by the individual transferor or in the case of a juridical person, by the Chief Financial Officer or his equivalent as to the basis of the property to be transferred. The original or adjusted basis, as the case may be, of each real property/share of stock/or

other property transferred must be itemized in the certification, instead of a single lump sum in order to enable the Registrar of Deeds or the corporate secretary, as the case may be, to annotate the substituted basis on the reverse side of the Transfer/Condominium Certificate of Title to the real property involved or of the Certificate of Stock, and in order to facilitate the determination of gain or loss from a subsequent disposition of real properties/shares of stock and other properties received in the exchange. (g) Sworn statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the properties acquired in the exchange is subject. The proper officer to issue the statement shall be the Chief Financial Officer or his equivalent and confirmed by the President or the Chief Executive Officer or Country Chairman or their equivalent; (h) Audited Financial Statements of Transferor-corporation, as of the transaction date. (2) In the case of Merger or Consolidation (a) The documents stated in (1) above; (b) Plan of Corporate Merger or Consolidation; (c) Statement of the amount and nature of the assets to be transferred by the absorbed corporation to the surviving/consolidated corporation. (d) Articles of Incorporation duly registered with SEC of the merged or consolidated corporation; and (e) Audited Financial Statements duly submitted or to be submitted to the SEC in connection with the application for merger or consolidation. The material facts in the submitted documents, including an analysis of their bearing on the issues and a specification of the applicable provisions thereof, must be stated also in the covering letter. B. No Application/Request for Certification-Ruling will be processed unless the foregoing requirements are complied with in all respects. C. In the case of executed and/or completed transactions, either original executed and notarized copies or certified true copies of the above-mentioned documents must be submitted, together with proof of payment of the applicable documentary stamp taxes on the transactions. In the case of issuance of shares/unit of participation by
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the transferee, the due dates for the payment of the corresponding documentary stamp tax prescribed under Revenue Memorandum Order No. 8-98 dated February 10, 1998, as amended by Revenue Regulations No. 6-2001 and 12-2001 dated July 31, 2001 and September 7, 2001, respectively, shall apply. D. Records to be kept and information to be filed. The parties to the transaction shall comply with the pertinent provisions of Revenue Regulations No. 18-2001 dated November 13, 2001, regarding the records to be kept and information to be filed in connection with the tax-free exchange, provided that, any violation thereof, including the failure of the parties to present proof of annotation of the substituted basis within the period provided in Section 7 of such Regulations shall be referred to the Prosecution Division for appropriate action. II. FORM OF REQUEST FOR RULING AND CERTIFICATION To the extent applicable, the request for certification-ruling shall be prepared and submitted in the form provided in Annex "A" hereof under the heading "Application and Joint Certification". For this purpose, soft copies of the Form shall be available either from the Taxpayers' Information and Education Division at the Ground Floor, BIR National Office Building or from the Law Division at the 7th Floor of the same building. If the application is to be signed and submitted not by the taxpayer himself, but only by his authorized representative, the appropriate special power of attorney shall be submitted with the application for a certification-ruling. Otherwise, the request shall not be accepted by the BIR. In the case of a juridical person, the corporate secretary shall issue a sworn statement that the signing officer (i.e., at the very least, the Chief Financial Officer) has been authorized by the Board of Directors to represent the company and has personal knowledge of the facts of the exchange transaction. III. PROCESSING AND CERTIFICATION FEE The taxpayer/applicant shall pay the applicable processing and certification fee as provided in Revenue Regulations No. 18-2001 dated November 13, 2001, before filing of the request for certificationruling. The applicant must submit proof of payment of the processing

and certification fee, with the original presented, upon filing of the application for certification-ruling with the Law Division. Otherwise, the application shall not be accepted for processing. The processing and certification fee shall accordingly be adjusted if additional transfer certificates of title/condominium certificates of title/certificates of stock are submitted for processing. IV. DECLARATION UNDER OATH Declarations in the application and joint certification form, the documents to be submitted, and the facts represented in support of the requested certification-ruling, including the covering letter, shall be sworn under oath, under penalties of perjury, by the taxpayer himself, or, in the case of a juridical person, by the Chief Financial Officer or his equivalent who has personal knowledge of the facts to be true, correct and complete. Actual submission of the application/request and follow-up thereof may be done by an authorized representative, clothed with a special power of attorney, and subject to the provisions of Revenue Regulations No. 15-99 dated July 16, 1999 on accreditation of tax agents V. ISSUANCE OF CERTIFICATE AUTHORIZING REGISTRATION (CAR)/TAX CLEARANCE (TCL) The CAR/TCL for the real property or share of stock/unit of participation/interest involved in the exchange shall be issued by the Revenue District Officer (RDO) or by the Authorized Internal Revenue Officer (AIRO), on the basis of the certification-ruling issued by the Commissioner or his duly authorized representative to the effect that the transaction qualifies as a tax-free exchange or corporate reorganization under Section 40(C)(2) of the Tax Code of 1997. The necessary proof of payment of appropriate documentary stamp taxes must also be presented. The CAR/TCL to be issued shall specify, among others, that the transaction involved is a tax-free exchange under Section 40(C)(2) of the Tax Code of 1997; the date of exchange; the original or adjusted basis as represented by the taxpayer, and substituted basis of the properties as stated in the certification or ruling issued by the Bureau of Internal Revenue. v. De Facto Merger
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RMR NO. 1-2002, APRIL 25, 2002 Tax consequences of de facto merger This Revenue Memorandum Ruling is issued to consolidate, provide, clarify and harmonize the existing guidelines on the tax consequences of a de facto merger under Section 40(C)(2) and (6)(b) of the Tax Code of 1997. This Revenue Memorandum Ruling shall apply solely and exclusively to, and may be relied upon only in, situations in which the facts are substantially similar to the facts stated below, but subject to the principle that for such transaction to be considered a de facto merger within the purview of Section 40(C)(2) in relation to 40(6)(b) of the Tax Code of 1997, the same must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. I Facts 1. A domestic corporation (the "Transferor") owns certain property, consisting, for example, of the following: 1.1 Land encumbered by a real estate mortgage (REM); 1.2 Buildings; 1.3 100 shares of stock in G Corporation with a par value of P10 per share; 1.4 50 shares of stock in D Corporation without par value; 1.5 Unsecured receivables; 1.6 Loans to Q ("Borrower/Mortgagor"), secured by a real estate mortgage; 1.7 Cash. 2. The property transferred by the Transferor constitutes at least 80% of the Transferor's assets, including cash. 3. The Transferor transfers the property to the Transferee. In exchange, the Transferee issues shares to the Transferor out of the unissued portion of its existing authorized capital stock, or, if such existing authorized capital stock is insufficient, out of shares from an increase in the Transferee's authorized capital stock. The Transferor does not receive any money or property other than the aforementioned shares of the transferee.

4. In addition to the transfer of the property, the Transferee assumes liabilities of the Transferor. However, the sum total of the amount of liabilities assumed, plus the amount of the encumbrance or REM on the Land (as stated in Section 40(C)(4) of the Tax Code of 1997 "liabilities to which the property is subject") do not exceed the basis of the property transferred. II. GENERAL PRINCIPLES 1. A de facto merger involves the acquisition by one corporation of all or substantially all the properties of another solely for stock. Section 40(C)(6)(b) of the Tax Code of 1997 states: "The term "merger" or "consolidation," when used in this Section, shall be understood to mean: (i) the ordinary merger or consolidation; or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: Provided, finally, That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term "property" shall be taken to include the cash assets of the transferor." The phrase "substantially all the properties of another corporation" is defined in BIR General Circular No V-253 dated July 16, 1957 to 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 concur: (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
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undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. One basic difference between a de facto merger and a statutory merger is that the Transferor is not automatically dissolved in the case of the former. Likewise, there is no automatic transfer to the Transferee of all the rights, privileges, and liabilities of the Transferor. It is, in fact, in procedure, similar to a transfer to a controlled corporation under the same Section 40(C)(2) of the Tax Code of 1997, except that at least 80% of the Transferor's assets, including cash, are transferred to the Transferee, with the element of permanence and not merely momentary holding. However, a de facto merger and a transfer to a controlled corporation are different in that, (1) the Transferor in a de facto merger is a corporation, while in a transfer to a controlled corporation, the Transferors may either be a corporation or an individual, and (2) in a de facto merger, there is no requirement that the transferor gains control (that is, 51% of the total voting powers of all classes of stocks of the Transferee entitled to vote) of the Transferee as a prerequisite to enjoying the benefit of nonrecognition of gain or loss. What is essential in a de facto merger is that the Transferee acquires all or substantially all of the properties of the Transferor. III TAX CONSEQUENCES 1. Income tax. The Transferor 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. Section 40(C)(4) of the Tax Code of 1997 states: "(4) Assumption of liability.

(a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as a part of the consideration, another party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property, subject to a liability, then such assumption or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange from being within the exceptions. (b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total amount of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be." Moreover, 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: Section 55 of Revenue Regulations No. 2 ("Income Tax Regulations") states: "Section 55. Acquisition or disposition by a corporation of its own capital stock. . . . The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than the par or stated value of such stock. However, stocks shall not be issued for a consideration less than par or issued price thereof. (Section 62, Corporation Code of the Philippines) 2. Donor's tax. 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 being no intent to donate on the part of the Transferor. 3. Value-added tax. 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 under Title IV of the Tax Code of
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1997. 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. Section 4.100-5(b)(1) & (3) of Revenue Regulations No. 7-95, as amended states: "(b) Not subject to output tax. The VAT shall not apply to goods or properties existing as of the occurrence of the following: 1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders, Example: transfer of property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(c) of the Code [now 40(C)(2) and (6)(c) of the Tax Code of 1997]. 3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation as of the date of merger or consolidation shall be absorbed by the surviving or new corporation." Thus, since a de facto merger is considered within the definition of a merger under Section 40(C)(6) of the Tax Code of 1997, the transfer of the property by the Transferor to the Transferee shall not be subject to VAT. However, the second sentence of Section 4.1005(b)(3), supra, is inapplicable in de facto mergers, and therefore, the Transferor's unused input tax cannot be absorbed by or transferred to the Transferee. The above sentence contemplates only a statutory merger or consolidation that, by operation of law, results in a "dissolved corporation" and a "surviving or new corporation". 4. COST OR BASIS IN TAX-FREE EXCHANGES RR 18-2001, 13 NOV. 2001 Guidelines on monitoring basis of Property in Tax-free exchange Basis. A. Substituted Basis of Stock or Securities Received by the Transferor. The substituted basis of the stock or securities received by the transferor on a tax-free exchange shall be as follows: 1. The original basis of the property, stock or securities to be transferred; 2. Less: (a) money received, if any, and (b) the fair market value of the other property received, if any;

3. Plus: (a) the amount treated as dividend of the shareholder, if any, and (b) the amount of any gain that was recognized on the exchange, if any. However, the property received as 'boot' shall have as basis its fair market value. The term "boot" refers to the money received and other property received in excess of the stock or securities received by the transferor on a tax-free exchange. If the transferee of property assumes, as part of the consideration to the transferor, a liability of the transferor or acquires from the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of computing the substituted basis, be treated as money received by the transferor on the exchange. Finally, if the transferor receives several kinds of stock or securities, the Commissioner is authorized to allocate the basis among the several classes of stocks or securities. B. Substituted Basis of the Transferred Property in the Hands of the Transferee. The substituted basis of the property transferred in the hands of the transferee shall be as follows: (a) the original basis in the hands of the transferor; (b) Plus: the amount of the gain recognized to the transferor on the transfer. C. The Original Basis of Property to be Transferred. The original basis of the property to be transferred shall be the following, as may be appropriate: (a) The cost of the property, if acquired by purchase on or after March 1, 1913; (b) The fair market price or value as of the moment of death of the decedent, if acquired by inheritance; (c) The basis in the hands of the donor or the last preceding owner by whom the property was not acquired by gift, if the property was acquired by donation. If the basis, however, is greater than the fair market value of the property at the time of donation, then, for purposes of determining loss, the basis shall be such fair market value; or,
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(d) The amount paid by the transferee for the property, if the property was acquired for less than an adequate consideration in money or money's worth. (e) The adjusted basis of (a) to (d) above, if the acquisition cost of the property is increased by the amount of improvements that materially add to the value of the property or appreciably prolong its life less accumulated depreciation. (f) The substituted basis, if the property was acquired in a previous tax-free exchange under Section 40(C)(2) of the Tax Code of 1997. D. Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of Property Subject of the Tax-free Exchange. The substituted basis as defined in Section 40(C)(5) of the Tax Code of 1997, and implemented in Section 2.A and 2.B above, shall be the basis for determining gain or loss on a subsequent sale or disposition of property subject of the tax-free exchange. Submission of Information on the Basis of Properties. The parties to a tax-free exchange of property for shares under Section 40(C)(2) of the Tax Code of 1997 who are applying for confirmation that the transaction is indeed a tax-free exchange shall, together with such information as the Commissioner of Internal Revenue may require, submit the following: (a) A sworn certification on the basis of the property to be transferred pursuant to such exchange. The basis of each real property/share of stock or other property transferred must be itemized in the certification in order to enable the BIR to determine the basis for subsequent disposition and to make it possible for the Register of Deeds or the corporate secretary, as the case may be, to annotate the information on such basis for each property/share of stock on the reverse side of the Transfer Certificate of Title/Condominium Certificate of Title of the real property involved, or of Certificate of Stock. The sworn declaration must be executed by the transferor himself, or in case the transferor is a juridical entity, by an official with rank of no less than the Chief Financial Officer or his equivalent. The Commissioner of Internal Revenue is authorized to prescribe the form in which such sworn declaration shall appear.

(b) Certified true copies of the Transfer Certificates of Title and/or Condominium Certificates of Title of the real properties to be transferred; (c) Certified true copies of the corresponding latest Tax Declaration of the real properties to be transferred. It is understood that any improvement is separately declared and therefore, covered by a Tax Declaration distinct from the Tax Declaration on the land. Further, if the tax declaration was issued three (3) or more years prior to the exchange transaction, the Transferor shall include in the certification by the local government unit's Assessor that such tax declaration is the latest tax declaration covering the real property; (d) Certified true copies of the certificates of stocks evidencing shares of stock to be transferred; and (e) Certified true copy of the inventory of other property/ies to be transferred. No certification/ruling will be issued by the Bureau of Internal Revenue unless the foregoing requirements, in addition to such other documents that the Commissioner of Internal Revenue may require, are submitted. Information to be Contained in Certification/Ruling by the Bureau of Internal Revenue. All certifications or rulings issued by the Bureau of Internal Revenue confirming that an exchange of property for shares complies with the provisions of Section 40(C)(2) of the Tax Code of 1997 shall include a statement on the substituted basis of the property transferred. Conditions for the Issuance of Certificate Authorizing Registration (CAR) or Tax Clearance (TCL). The CAR/TCL for the real property or share of stock/unit of participation/interest involved in the exchange shall be issued by the Revenue District Officer/Authorized Internal Revenue Officer on the basis of the certification or ruling to be issued in triplicate by the Commissioner or his duly authorized representative to the effect that the transaction qualifies as a tax-free exchange under Section 40(C)(2) of the Tax Code of 1997. The CAR/TCL to be issued shall specify, among others, that the transaction involved is a tax-free exchange under Section 40(C)(2) of the Tax Code of 1997; the date of exchange; and the substituted basis
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of the properties as stated in the certification or ruling issued by the Bureau of Internal Revenue. 5. ASSUMPTION OF LIABILITY IN TAX FREE EXCHANGES a. If the taxpayer receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as part of the consideration, another party to the exchange assumes a liability of the taxpayer, subject to a liability, then such assumption or acquisition shall not be treated as money and or property, and shall not prevent the exchange from being within the exceptions. b. If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset. Sec 40 ( c ) (4), NIRC 6. BUSINESS PURPOSE Gregory v. Helvering, 293 U.S. 465 Facts: Petitioner in 1928 was the owner of all the stock of United Mortgage Corporation. For the sole purpose of procuring a transfer of these shares to herself in order to sell them for her individual profit, and, at the same time, diminish the amount of income tax which would result from a direct transfer by way of dividend, she sought to bring about a 'reorganization' under section 112(g) of the Revenue Act of 1928. To that end, she caused the Averill Corporation to be organized under the laws of Delaware on September 18, 1928. Three days later, the United Mortgage Corporation transferred to the Averill Corporation the 1,000 shares of Monitor stock, for which all the shares of the Averill Corporation were issued to the petitioner. On September 24, the Averill Corporation was dissolved, and liquidated by

distributing all its assets, namely, the Monitor shares, to the petitioner. No other business was ever transacted, or intended to be transacted, by that company. Petitioner immediately sold the Monitor shares for $133,333. 33. She returned for taxation, as capital net gain, the sum of $76,007.88, based upon an apportioned cost of $57,325.45. It is not disputed that if the interposition of the so-called reorganization was ineffective, petitioner became liable for a much larger tax as a result of the transaction. The Commissioner of Internal Revenue, being of opinion that the reorganization attempted was without substance and must be disregarded, held that petitioner was liable for a tax as though the United corporation had paid her a dividend consisting of the amount realized from the sale of the Monitor shares. In a proceeding before the Board of Tax Appeals, that body rejected the commissioner's view and upheld that of petitioner. Upon a review of the latter decision, the Circuit Court of Appeals sustained the commissioner and reversed the board, holding that there had been no 'reorganization' within the meaning of the statute. 69 F.(2d) 809. Petitioner applied for a writ of certiorari, which the government, considering the question one of importance, did not oppose. Held: The writ was granted. Section 112 of the Revenue Act of 1928 deals with the subject of gain or loss resulting from the sale or exchange of property. Such gain or loss is to be recognized in computing the tax, except as provided in that section. The provisions of the section, so far as they are pertinent to the question here presented, follow: 'Sec. 112. ... (g) Distribution of Stock on Reorganization. If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock of securities shall be recognized. ... '(i) Definition of Reorganization. As used in this section ...
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'(1) The term 'reorganization' means ... (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred. ... ' It is earnestly contended on behalf of the taxpayer that since every element required by the foregoing subdivision (B) is to be found in what was done, a statutory reorganization was effected; and that the motive of the taxpayer thereby to escape payment of a tax will not alter the result or make unlawful what the statute allows. It is quite true that if a reorganization in reality was effected within the meaning of subdivision ( B), the ulterior purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended. When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made 'in pursuance of a plan of reorganization' (section 112(g) of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose-a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death.

In these circumstances, the facts speak for themselves and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose. 7. PAYMENT OF CAPITAL GAINS TAX AND DST ON AN EXTRAJUDICIAL FORECLOSURE OF BANKS
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Deeds, and a brief memorandum thereof shall be made by the Register of Deeds on the certificate of title of the mortgagor. If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at a foreclosure sale shall be registered with the Register of Deeds; whereupon the title of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. (b) If the mortgage was foreclosed extrajudicially, a certificate of sale executed by the officer who conducted the sale shall be filed with the Register of Deeds who shall make a brief memorandum thereof on the certificate of title. In the event of redemption by the mortgagor, the same rule provided for in the second paragraph of this section shall apply. In case of non-redemption, the purchaser at foreclosure sale shall file with the Register of Deeds, either a final deed of sale executed by the person authorized by virtue of the power of attorney embodied in the deed of mortgage, or his sworn statement attesting to the fact of nonredemption; whereupon, the Register of Deeds shall issue a new certificate in favor of the purchaser after the owner's duplicate of the certificate has been previously delivered and cancelled. It is clear from the above provision of the "Property Registration Decree" that where the right of redemption of the mortgagor exists, the certificate of title of the mortgagor shall not be cancelled yet even if the property had already been subjected to foreclosure sale, BUT INSTEAD only a brief memorandum shall 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 shall 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. 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
RR No. 4-99, 9 March 1999 Further Amending Revenue Memorandum Order No. 29-86 dated September 3, 1986, as Amended by Revenue Memorandum Order No. 16-88 dated April 18, 1988, Relative to the Payment of Capital Gains Tax and Documentary Stamp Tax on Extra-Judicial Foreclosure Sale of Capital Assets Initiated by Banks, Finance and Insurance Companies Foreclosure of Mortgage Provision Under Presidential Decree No. 1529, Otherwise Known as "Property Registration Decree". Section 63 of P.D. No. 1529, otherwise known as the "Property Registration Decree" provides as follows: Foreclosure of Mortgage. (a) If the mortgage was foreclosed judicially, a certified copy of the final order of the court confirming the sale shall be registered with the Register of Deeds. If no right of redemption exists, the certificate of title of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. Where the right of redemption exists, the certificate of title of the mortgagor SHALL NOT BE CANCELLED, but the certificate of sale and the order confirming the sale shall be registered by a BRIEF MEMORANDUM thereof made by the Register of Deeds upon the certificate of title. In the event the property is redeemed, the certificate or deed of redemption shall be filed with the Register of

mortgagor and no sale or transfer of real property was realized. A certification to that effect or the deed of redemption shall be filed with the Revenue District Office having jurisdiction over the place where the property is located which certification or deed shall likewise be filed with the Register of Deeds and a brief memorandum thereof shall be made by the Register of Deeds on the Certificate of Title of the mortgagor. (2) In case of non-redemption, the capital gains tax on the foreclosure sale imposed under Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based on the bid price of the highest bidder but only upon the expiration of the one-year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration of the said one-year redemption period. Documentary Stamp Tax. (1) In case the mortgagor exercises his right of redemption, the transaction shall only be subject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of 1997 because no land or realty was sold or transferred for a consideration. (2) In case of non-redemption, the corresponding documentary stamp tax shall 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; Provided, That whenever one party to the taxable document enjoys exemption from the tax, the other party thereto who is not exempt shall be the one directly liable for the tax. The tax return prescribed under the Code shall be filed within ten (10) days after the close of the month following the lapse of the one-year redemption period, and the tax due under Sec. 196 of the Tax Code of 1997 shall be paid based on the bid price at the same time the aforesaid return is filed. Tax Clearance Certificate/Certificate Authorizing Registration. In case of non-redemption, a tax clearance certificate (TCC) or Certificate Authorizing Registration (CAR) in favor of the purchaser/highest bidder shall only be issued upon presentation of the capital gains and documentary stamp taxes returns duly validated by an authorized
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agent bank (AAB) evidencing full payment of the capital gains and documentary stamp taxes due imposed under Secs. 3 and 4 of these Regulations on the sale of the property classified as capital asset. The AAB must be located at the Revenue District Office having jurisdiction over the place where the property is located. C. LOSSES FROM WASH SALES OF STOCK AND SECURITIES SEC. 32., NIRC Gross Income. "(A) General Definition. Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: "(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; "(2) Gross income derived from the conduct of trade or business or the exercise of a profession; "(3) Gains derived from dealings in property; "(4) Interests; "(5) Rents; "(6) Royalties; "(7) Dividends; "(8) Annuities; "(9) Prizes and winnings; "(10) Pensions; and "(11) Partner's distributive share from the net income of the general professional partnership. "(B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: "(1) Life Insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.

"(2) Amount Received by Insured as Return of Premium. The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. "(3) Gifts, Bequests, and Devises. The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise, or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. "(4) Compensation for Injuries or Sickness. Amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. "(5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. "(6) Retirement Benefits, Pensions, Gratuities, etc. "(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and
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employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. "(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee. "(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. "(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. "(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. "(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. "(7) Miscellaneous Items. "(a) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign

governments, and (iii) international or regional financial institutions established by foreign governments. "(b) Income Derived by the Government or its Political Subdivisions. Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof. "(c) Prizes and Awards. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: "(i) The recipient was selected without any action on his part to enter the contest or proceeding; and "(ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. "(d) Prizes and Awards in Sports Competition. All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. "(e) 13th Month Pay and Other Benefits. Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
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(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. "(f) GSIS, SSS, Medicare and Other Contributions. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals. "(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. "(h) Gains from Redemption of Shares in Mutual Fund. Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22(BB) of this Code. RR-2 Sec. 131. Losses from wash sales of stock and securities (a) A taxpayer cannot deduct any loss claimed to have been sustained from the sale or other disposition of stock or securities, if, within a period beginning thirty days before the date of such sale or disposition and ending thirty days after such date (referred to in this section as the sixty-one-day period), he has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities. However, this prohibition does not apply in the case of a dealer in stock or securities if the sale or other disposition of stock or securities is made in the ordinary course of its business as such dealer. (b) Where more than one loss is claimed to have been sustained within the taxable year from the sale or other disposition of stock or securities, the provisions of this section shall be applied to the losses

in the order in which the stock or securities the disposition of which resulted in the respective losses were disposed of (beginning with the earliest disposition). If the order of disposition of stock or securities disposed of at a loss on the same day cannot be determined, the stock or securities will be considered to have been disposed of in the order in which they were originally acquired (beginning with earliest acquisition). (c) Where the amount of stock or securities acquired within the sixtyone-day period is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the loss from the sale or other disposition of which is not deductible shall be those with which the stock or securities acquired are matched according to the following rule: The stock or securities acquired will be matched in accordance with the order of their acquisition (beginning with the earliest acquisition) with an equal number of shares of stock, or securities sold or otherwise disposed of. (d) Where the amount of stock or securities acquired within the sixtyone-day period is not less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stocks or securities the acquisition of which resulted in the non-deductibility of the loss shall be those with which the stock or securities disposed of are matched in accordance with the following rule: The stock or securities sold or otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired in accordance with the order of acquisition (beginning with the earliest acquisition) on the stock securities acquired. (e) The acquisition of any share of stock or any security which results in the non-deductibility of a loss under the provisions of this section shall be disregarded in determining the deductibility of any other loss. (f) The word acquired as used in this section means acquired by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law, and comprehends cases where the taxpayer has entered into a contract or option within the sixty-one-day period to acquire by purchase or by such an exchange.
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D. EXEMPTION FROM CAPITAL GAINS TAX OF CERTAIN INDIVIDUALS FROM THE SALE OR EXCHANGE OF PRINCIPAL RESIDENCE Sec. 24, NIRC. Income Tax Rates. (D) Capital Gains from Sale of Real Property. "(1) In General. The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or -controlled corporations shall be determined either under Section 24(A) or under this Subsection, at the option of the taxpayer; "(2) Exception. The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, That if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains

tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon. RR No. 13-99 as amended by RR No. 14-2000 dated November 20, 2000. Revenue regulation No. 13-99 as amended by RR No. 14-2000 requires the taxpayer to have actually commenced with the construction of her new principal residence or has actually entered into a contract for the purchase of her new principal residence within eighteen (18) months from the date of sale or disposition with the intention of using the entire proceeds of sale for the acquisition or construction of said principal residence, so that the sale of the principal residence remains exempt from the payment of capital gains tax under section 24 (D) (2) of the NIRC. E. TAX AMNESTY RA 9480 SECTION 1. Coverage. There is hereby authorized and granted a tax amnesty which shall cover all national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefore, that have remained unpaid as of December 31, 2005: Provided, however, That the amnesty hereby authorized and granted shall not cover persons or cases enumerated under Section 8 hereof. SEC. 2. Availment of the Amnesty. Any person, natural or juridical, who wishes to avail himself of the tax amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue (BIR) a notice and Tax Amnesty Return accompanied by a Statement of Assets, Liabilities and Networth (SALN) as of December 31, 2005, in such form as may be prescribed in the implementing rules and
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regulations (IRR) of this Act, and pay the applicable amnesty tax within six months from the effectivity of the IRR. SEC. 3. What to Declare in the SALN. The SALN shall contain a declaration of the assets, liabilities and networth as of December 31, 2005, as follows: 1. Assets within or without the Philippines, whether real or personal, tangible or intangible, whether or not used in trade or business: Provided, That property other than money shall be valued at the cost at which the property was acquired: Provided, further, That foreign currency assets and/or securities shall be valued at the rate of exchange prevailing as of the date of the SALN; 2. All existing liabilities which are legitimate and enforceable, secured or unsecured, whether or not incurred in trade or business; and 3. The networth of the taxpayer, which shall be the difference between the total assets and total liabilities. SEC. 4. Presumption of Correctness of the SALN. The SALN as of December 31, 2005 shall be considered as true and correct except where the amount of declared networth is understated to the extent of thirty percent (30%) or more as may be established in proceedings initiated by, or at the instance of, parties other than the BIR of its agents: Provided, That such proceedings must be initiated within one year following the date of the filing of the tax amnesty return and the SALN. Findings of or admission in congressional hearings, other administrative agencies of government, and/or courts shall be admissible to prove a thirty percent (30%) under-declaration. SEC. 5. Grant of Tax Amnesty. Except for the persons or cases covered in Section 8 hereof, any person, whether natural or juridical, may avail himself of the benefits of tax amnesty under this Act, and pay the amnesty tax due thereon, based on his networth as of December 31, 2005 as declared in the SALN as of said period, in accordance with the following schedule of amnesty tax rates and minimum amnesty tax payments required: (a) Individuals (whether resident or 5% or P50,000, nonresident citizens, including resident whichever is higher or nonresident aliens), Trusts and

Estates (b) Corporations (1) With subscribed capital of 5% or P500,000 above P50 Million whichever is higher (2) With subscribed capital of 5% or P250,000, above P20 Million up to P50 whichever is higher Million (3) With subscribed capital of P5 5% or P100,000, Million to P20 Million whichever is higher (4) With subscribed capital of below P5 Million 5% or P25,000, whichever is higher
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administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. 2. The taxpayer's Tax Amnesty Returns and the SALN as of December 31, 2005 shall not be admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar as such proceedings relate to internal revenue taxes, before judicial, quasijudicial or administrative bodies in which he is a defendant or respondent, and except for the purpose of ascertaining the networth beginning January 1, 2006, the same shall not be examined, inquired or looked into by any person or government office. However, the taxpayer may use this as a defense, whenever appropriate, in cases brought against him. 3. The books of accounts and other records of the taxpayer for the years covered by the tax amnesty availed of shall not be examined: Provided, That the Commissioner of Internal Revenue may authorize in writing the examination of the said books of accounts and other records to verify the validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes withheld on wages), tax incentives, and/or exemptions under existing laws. All these immunities and privileges shall not apply where the person failed to file a SALN and the Tax Amnesty Return, or where the amount of networth as of December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more, in accordance with the provisions of Section 3 hereof. SEC. 7. When and Where to File and Pay. The filing of the Tax Amnesty Return and the payment of the amnesty tax for those availing themselves of the tax amnesty shall be made within six months starting from the effectivity of the IRR. It shall be filed at the office of the Revenue District Officer which has jurisdiction over the legal residence or principal place of business of the filer. The Revenue District Officer shall issue an acceptance of payment form authorizing an authorized agent bank, or in the absence thereof, the collection agent or municipal treasurer concerned, to accept the amnesty tax payment
(c) Other juridical entities, including, 5% or P50,000, but not limited to, cooperatives and foundations, that have become taxable as of December 31, 2005 whichever is higher. (d) Taxpayers who filed their balance sheet/SALN, together with their income tax returns for 2005, and who desire to avail of the tax amnesty under this Act shall amend such previously filed statements by including still undeclared assets and/or liabilities and pay an amnesty tax equal to five percent (5%) based on the resulting increase in networth: Provided, That such taxpayers shall likewise be categorized in accordance with, and subjected to the minimum amounts of amnesty tax prescribed under the provisions of this Section. SEC. 6. Immunities and Privileges. Those who availed themselves of the tax amnesty under Section 5 hereof, and have fully complied with all its conditions shall be entitled to the following immunities and privileges: 1. The taxpayer shall be immune from the payment of taxes, as well as addition thereto, and the appurtenant civil, criminal or

SEC. 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases existing as of the effectivity of this Act: 1. Withholding agents with respects to their withholding tax liabilities; 2. Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government; 3. Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft and Corrupt Practices Act; 4. Those with pending cases filed in court involving violation of the Anti-Money Laundering Law; 5. Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X of the National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and transactions, and malversation of public funds and property under Chapters III and IV of Title VII of the Revised Penal Code; and 6. Tax cases subject of final and executory judgment by the courts. SEC. 9. Unlawful Divulgence of Tax Amnesty Return and Statement of Assets, Liabilities and Networth. Except as otherwise provided herein and in Section 14 hereof, it shall be unlawful for any person having knowledge of the Tax Amnesty Return and SALN filed pursuant hereto, to disclose any information relative to such declaration and statement, and any violation hereof shall subject the offender to the penalties under Section 10 (c) of this Act: Provided, however, That the Commissioner of Internal Revenue may disclose the content of the Tax Amnesty Return and the SALN upon the request of Congress pursuant to and in accordance with Section 20(A) or Section 290of the National Internal Revenue Code of 1997, as amended. SEC. 10. Penalties. 1. Any person who, having filed a statement or Tax Amnesty Return under this Act, willfully understates his networth to the extent of thirty percent (30%) or more shall, upon conviction, be subject to the penalties of perjury under the Revised Penal Code. 2. The willful failure to declare any property in the statement and/or in the Tax Amnesty Return shall be deemed in prima facie evidence of fraud and shall constitute a ground upon which attachment of such
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property may be issued in favor of the BIR to answer for the satisfaction of any judgment that may be acquired against the declarant. In addition to the penalties provided in paragraphs (a) and (b) above, immediate tax fraud investigation shall be conducted to collect all taxes due, including increments, and to criminally prosecute those found to have willfully evaded lawful taxes due. In the case of associations, partnerships, or corporations, the penalty shall be imposed on the partner, president, general manager, branch manager, treasurer, officer-in-charge and employees responsible for the violation. 3. Any person who makes an unlawful divulgence of the Tax Amnesty Return or the SALN shall be penalized by a fine of not less than Fifty thousand pesos (P50,000.00) and imprisonment of not less than six years but not more than ten (10) years. If the offender is an officer or employee of the BIR or any government entity, he/ she shall likewise suffer an additional penalty of perpetual disqualification to hold public office to vote and to participate in any public election. SEC. 11. Moratorium on the Grant of Tax Amnesty. In order to encourage and improve tax compliance by taxpayers, it is hereby declared the policy of this Congress that the grant of tax amnesty, in whatever manner and form, shall not henceforth be allowed: Provided, That this moratorium shall likewise apply to any administrative tax amnesty by the BIR. SEC. 12. Information Management Program. For purposes of enhancing revenue administration, revenue collection and policy formulation, the Department of Finance, in coordination with the BIR, Land Registration Authority, Department of Trade and Industry, Securities and Exchange Commission, Land Transportation Office, and other concerned agencies shall institute an Information Management Program for the effective use of information declared or obtainable from the Tax Amnesty Returns and the SALNs required to the filed under this Act. SEC. 13. Disposition of Proceeds from the Tax Amnesty. An amount equivalent to Four hundred million pesos (P400,000,000.00) of the

collection from the tax amnesty herein granted shall accrue to the Department of Finance and shall be used exclusively for purposes of instituting a Management Information System as mandated under Section 12 of this Act. SEC. 14. Publication of List of Taxpayers and Filers. Following the implementation of the tax amnesty authorized and granted under this Act, the provisions of Sections 71 and 270 of the National Internal Revenue Code of 1997, as amended, and Section 26 of Republic Act No. 6388, to the contrary notwithstanding, the Commissioner of Internal Revenue shall, on or before May 31 following the close of each calendar year, prepare a list containing the names of all taxpayers, their gross income and amount of income taxes paid for the immediately preceding taxable year, and allow the publication of the same in at least two newspapers of general circulation or the Bureau of Internal Revenue website. DEPARTMENT ORDER 29-2007 Estates and trusts; RULE I Corporations; TITLE PURPOSE AND CONSTRUCTION SECTION 1. Title and Purpose. - These rules and regulations to be known and cited as the "Implementing Rules and Regulations (IRR) of Republic Act (RA) No. 9480. "Otherwise known as "Tax Amnesty Act of 2007", are hereby promulgated to govern the availment by qualified persons and/or entities of the tax amnesty granted under RA 9480, covering all unpaid internal revenue taxes for the taxable year 2005 and prior years. SEC. 2. Construction. These Rules shall be construed and applied in accordance with and in furtherance of the policies and objectives of RA 9480. In case of conflict or ambiguity, which may arise in the implementation of these Rules, the Department of Finance (DOF), in coordination with the Bureau of Internal Revenue (BIR), shall issue the necessary clarification. RULE II COVERAGE
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SEC. 3. Taxes Covered. - The tax amnesty shall cover all national revenue taxes imposed by the National Government for the taxable year 2005 and prior years, with or without assessments duly issued therefore, that have remained unpaid as of December 31, 2005. SEC. 4. Who May Avail of Tax Amnesty. - The following may avail of the tax amnesty under RA 9480. Individuals, whether resident or nonresident citizens, or resident or nonresident aliens;
Cooperatives and tax exempt entities that have become taxable of December 31, 2005; and Other judicial entities including partnerships. For this purpose, an individual taxpayer in his/her own capacity shall be treated as a different taxpayer when he acts as administrator/executor of the estate of a deceased taxpayer. The pertinent provisions of Sec. 236 of the Tax Code on the registration of the estate of the decedent by the administrator or executor and the issuance of new TIN shall be complied with. Therefore, an individual taxpayer, seeking to avail of the tax amnesty and who at the same time is an executor or administrator of the estate of deceased taxpayer who would also like to avail of the tax amnesty, shall file two (2) separate amnesty returns, one

for himself as a taxpayer and the other in his capacity as executor or administrator of the estate of the decedent with respect to the revenue and other income earned or received by the estate. SEC. 5. Exceptions. The tax amnesty shall not extend to the following persons of cases existing as of the effectivity of RA 9480: Withholding agents with respect to their withholding tax liabilities; Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government; Those with pending cases involving unexplained or unlawfully acquired wealth, revenue or income under the Anti-Graft and Corrupt Practices Act; Those with pending cases filed in court involving violation of the Anti-Money Laundering Law; Those with pending criminal cases filed in court or in the Department of Justice for tax evasion and other criminal offenses under Chapter II of Title X of the National Internal Revenue Code of 1997, as amended. Tax cases subject of final and executory judgment by the courts. RULE III AVAILMENT AND PAYMENT OF AMNESTY SEC. 6. Method of Availment of Tax Amnesty. Forms/Documents to be filed. To avail of the general tax amnesty, concerned taxpayers shall file the following documents/requirements:
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Notice of Availment in such forms as may be prescribed by the BIR. Statement of Assets, Liabilities and Networth (SALN) as of December 31, 2005 in such forms, as may be prescribed by the BIR. Tax Amnesty Return in such form as may be prescribed by the BIR. Place of Filing of Amnesty Tax Return. The Tax Amnesty Return, together with the other documents stated in Sec. 6 (1) hereof, shall be filed as follows: Residents shall file with the Revenue District Officer (RDO)/Large Taxpayer District Office of the BIR which has jurisdiction over the legal residence or principal place of business of the taxpayer, as the case may be. Non-residents shall file with the office of the Commissioner of the BIR, or with the RDO. At the option of the taxpayer, the RDO may assist the taxpayer in accomplishing the forms and computing the taxable base and the amnesty tax payable, but may not look into, question or examine the veracity of the entries contained in the Tax Amnesty Return, Statement of Assets, Liabilities and Networth, or such other documents submitted by the taxpayer. Payment of Amnesty Tax and Full Compliance. - Upon filing of the Tax Amnesty Return in accordance with Sec. 6 (2) hereof, the taxpayer shall pay the amnesty tax to the authorized agent bank or in the absence thereof, the Collection Agents or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business.

The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed by the BIR for the use of-or to be accomplished by the bank, the collection agent or the Treasurer, showing the acceptance by the amnesty tax payment. In case of the authorized agent bank, the branch manager or the assistant branch manager shall sign the acceptance of payment form. The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty Return shall be submitted to the RDO, which shall be received only after complete payment. The completion of these requirements shall be deemed full compliance with the provisions of RA 9480. Time for Filing and Payment of Amnesty Tax. The filing of the Tax Amnesty Return, together with the SALN, and the payment of the amnesty tax shall be made within six (6) months from the effectivity of these Rules. SEC. 7. Tax Amnesty Rates. In order to enjoy the benefits of the tax amnesty program, the qualified taxpayers are required to pay an amnesty tax equivalent to five percent (5%) of their total declared networth as of December 31, 2005, as declared in the SALN as of the said period, or resulting increase in networth by amending such previously filed statements for purposes of this tax amnesty, thereby including still undeclared assets and/or liabilities, as the case may be, as of December 31, 2005, or the absolute minimum amnesty payment, whichever is higher, in accordance with the following schedule: 1.Individual (whether resident or nonresident, including resident or nonresident aliens) Estates and Trusts 2. Corporations 5% or P50,000 whichever is higher (a) With subscribed capital above P50 Million (b) With subscribed capital above P20 Million up to P50 Million
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5% or P500,000 whichever is higher 5% or P250,000 whichever is higher
(c) With subscribed capital of P5 Million 5% or P100,000 to P20 Million whichever is higher (d) With subscribed capital of P5 Million 3. Other judicial entities, including partnerships, but not limited to, cooperatives and foundations, that have become taxable as of December 31, 2005 4. Taxpayers who filed their balance sheets/SALN, together with their income tax returns for 2005, and who desire to avail of the tax amnesty under this Act by amending such previously file statements thereby including still undeclared assets and/or liabilities 5% or P25,000 whichever is higher 5% or P50,000 Whichever is higher
5% base on the resulting increase in networth or the minimum absolute amounts of amnesty tax prescribed above, whichever is higher.
RULE IV STATEMENT OF ASSETS, LIABILITIES AND NETWORTH SEC. 8. Contents of the SALN. The SALN shall contain a true and complete declaration of assets, liabilities and networth of the taxpayer as of December 31, 2005, as follows:

Assets within or without the Philippines, whether real or personal, tangible or intangible, whether or not used in trade or business: Real properties shall be accompanied by a description of their classification, exact location, and valued at acquisition cost, if acquired by purchase or the zonal valuation or fair market value, whichever is higher, if acquired through inheritance or donation; Personal properties other than money, shall be accompanied by a specific description of the kind and number of assets (i.e. automobiles, shares of stock, etc.) or other investments, indicating the acquisition cost less depreciation or amortization, in proper cases, if acquired by purchase, or the fair market price or value at the time of receipt, if acquired through inheritance or donations; Assets denominated in foreign currency shall be converted into the corresponding Philippine currency equivalent, at the rate of exchange prevailing as of December 31, 2005; and Cash on hand and in bank in peso as of December 31, 2005, as well as Cash on Hand and in Bank in foreign currency, converted to peso as of December 31, 2005. All existing liabilities which are legitimate and enforceable, secured and unsecured, whether or not incurred in trade or business, disclosing or indicating clearly the name and address of the creditor and the amount of the corresponding liability. The total networth of the taxpayer, which shall be difference between the total assets and total liabilities. SEC. 9. Presumption of Correctness of SALN. The corresponding SALN as of December 31, 2005 filed by the taxpayer desiring to avail of the tax amnesty shall be presumed true and correct, except in the following cases:
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Where the amount of the declared networth is understated to the extent of thirty percent (30%) or more as may be established in proceedings initiated within one (1)-year following the date of filing of the Tax Amnesty Return and the SALN, by, or the instance of parties other than the BIR or its agents, as when any person, entity or government agency informs the BIR, with sufficient evidence, that the amount of the declared networth is understated to the extent of thirty percent (30%) or more. When findings of or admission in congressional hearings or proceedings in administrative agencies of the government, and in courts, prove that there is a least thirty percent (30%) underdeclaration. RULE V IMMUNITIES AND PRIVILEGES SEC. 10. Immunities and Privileges. Taxpayers who have fully complied with the conditions under RA 9480 and these rules shall be entitled to the following immunities and privileges: The taxpayer shall be immune from the payments of taxes, as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes year 2005 and prior years. The taxpayer's Tax Amnesty Return and the SALN as of December 31, 2005 shall not be admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or administrative bodies in which he is a defendant or respondent and, except for the purpose of ascertaining the networth beginning January 1, 2006, the same shall not be

examined, inquired or looked into by any person or government office. However, the taxpayer may use this as a defense, whenever appropriate, in cases brought against him. The books of accounts and other records of the taxpayer for the years covered by the tax amnesty availed of shall not be examined by the BIR. However, the Commissioner of Internal Revenue may authorize in writing the examination of the said books of accounts an other records to verify the validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes withheld on wages), tax incentives, and/or exemptions under existing laws. The above-stated immunities and privileges shall not apply where the person failed to file a SALN and the Tax Amnesty Return, or where the amount of networth as of December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more, in accordance with the provisions of Section 4 of RA 9480 and Section 9; Rule IV hereof. RULE VI OFFENSES AND PENALTIES SEC. 11. Penalties. For violation of RA 9480, the following rules on sanctions and penalties shall apply: Any person who, having filed a Tax Amnesty Return or SALN under this Act, willfully understates his networth to the extent of thirty percent (30%) or more shall, upon conviction, be subject to the penalties of perjury under the Revised Penal Code. The willful failure to declare any property in the SALN and/or in the Tax Amnesty Return shall be deemed a prima facie evidence of fraud and shall constitute a ground upon which attachment of such property may be issued in favor of the BIR to answer to the
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satisfaction of any judgment that may be acquired against the declarant. In addition to the penalties provided in paragraph (1) and (2) above, immediate tax fraud investigation shall be conducted to collect all taxes due, including increments and to criminally prosecute those found to have willfully evaded lawful taxes due. In the case of association, partnerships, or corporations, the penalty shall be imposed on the partner, presidents, general manager, branch manager, treasurer, officer-in-charge and employees responsible for the violation. If the offender is an officer or employee of the BIR or any government entity, he/she shall likewise suffer an additional penalty of perpetual disqualification to hold public office, to vote and to participate in any public election. SEC. 12. Unlawful Divulgence. - any person who makes an unlawful divulgence of the Tax Amnesty Return for the SALN shall be penalized by a fine of not less than Fifty Thousand Pesos (P50,000.00) and imprisonment of not less than six years but not more than ten (10) years. However, the Commissioner of Internal Revenue may disclose the content of the Tax Amnesty Return and the SALN upon request of the Congress and in aid of legislation pursuant to and strictly in accordance with Section 20 (A) or Section 290 of the Tax Code. F. TAXATION OF SHARES OF STOCK RR 6-2008 From P&A In case of cash sale the selling price is the total consideration as indicated in the deed of sale;

If the consideration is partly in money and partly in kind the selling price is the cash or money received plus the fair market value of the property received; In case of exchanges the selling price is the fair market value of the property received. If the fair market value of the shares of stock disposed is higher than the amount of amount and/or fair market value of the property received, the excess of the fair market value of the shares of stock disposed over the amount of money and the fair market value of the property, if any, received as consideration shall be deemed a gift subject to the donors tax. PART 7
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A. SITUS OF TAXATION SOURCES FROM WITHIN AND WITHOUT THE PHILIPPINES SEC. 42, NIRC Income from Sources Within the Philippines. A. Gross Income From Sources Within the Philippines. The following items of gross income shall he treated as gross income from sources within the Philippines: (1) Interests. Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise; (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and (b) From a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources. (3) Services. Compensation for labor or personal services performed in the Philippines; (4) Rentals and Royalties. Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill,

trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial or commercial knowledge or information; (d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and (g) The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting. (5) Sale of Real Property. Gains, profits and income from the sale of real property located in the Philippines; and (6) Sale of Personal Property. Gains, profits and income from the sale of personal property, as determined in Subsection (E) of this Section.
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B. Taxable Income From Sources Within the Philippines. (1) General Rule. From the items of gross income specified in Subsection (A) of this Section, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable income from sources within the Philippines. (2) Exception. No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in Subsection (A) unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Philippines. C. Gross Income From Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret

processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines. D. Taxable Income From Sources Without the Philippines. From the items of gross income specified in Subsection (C) of this Section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the Philippines. E. Income From Sources Partly Within and Partly Without the Philippines. Items of gross income, expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or
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formulas of general apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines. "Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement. F. Definitions. As used in this Section the words 'sale' or 'sold' include 'exchange' or 'exchanged'; and the word 'produced' includes 'created,' 'fabricated, 'manufactured,' 'extracted,' 'processed,' 'cured' or 'aged'. Sec 152-165, RR-2 Sec 152. Income from sources within the Philippines. The law divides the income of taxpayers into three classes:

(1) Income which is derived in full from sources within the Philippines; (2) Income which is derived in full from sources without the Philippines; and (3) Income which is derived partly from sources within and without the Philippines. Nonresident alien individuals and foreign corporations are taxable only upon income from sources within the Philippines. Citizens and residents of the Philippines and domestic corporations are taxable upon income derived from sources both within and without the Philippines. The taxable income from sources within the Philippines include that derived in full from sources within the Philippines and that portion of the income which is derived partly from sources within and partly from sources without the Philippines which is allocated or apportioned to sources within the Philippines. Sec 153. Interest Interest on bonds or notes or other interestbearing obligations of residents, corporations or otherwise, constitutes income from sources within the Philippines. Sec 154. Dividends. Gross income from sources within the Philippines includes dividends, defined by Sec 83 of the Code: (a) From a domestic corporation; and (b) From a foreign corporation unless less than 50 per cent of its gross income for the three-year period ending with the close of its taxable year preceding the declaration of such dividends, or for such part of such period as it has been in existence, was derived from sources within the Philippines; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources. Dividends will be treated as an income from sources within the Philippines unless the taxpayer submits sufficient data to establish to
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the satisfaction of the Commissioner of Internal Revenue that they should be excluded from gross income under section 37 (a) (2) (B). Sec 155 Compensation for labor or personal services. Gross income from source within the Philippines includes compensation for labor or personal services performed within the Philippines regardless of the residence of the payor, of the place in which the contract for service was made, or of the place of payment. If a specific amount is paid for labor or personal services performed within the Philippines, such amount shall be included in the gross income. If no accurate allocation or segregation of compensation for labor or personal services performed in the Philippines can be made, or when such labor or service is partly made within and partly without the Philippines, the amount to be included in the gross income shall be determined by an appointment of time basis, i.e, there shall be included in the gross income an amount which bears the same relation to the total compensation as the numbers of days of performance of the labor or services within the Philippines bears to the total number of days of performance of labor or personal services for which the payment is made. Wages received fore services rendered inside the territorial limits of the Philippines and wages of an alien seaman earned on a costwise vessel are to be regarded as from sources within the Philippines. Sec 156 Rentals and Royalties Rentals and royalties from property located in the Philippines from any interest in such property, includes rentals or royalties for (A) the use of, or privilege to use in the Philippines any copyright, patent, design, or model, plan, secret, formula or process, goodwill, trademark, trade brand of other like property or right; (B) the use, the right to use in the Philippines any industrial, commercial or scientific equipment; (C) the supply of scientific, technical, industrial or commercial knowledge or information;

(D) the supply of any assistance that is ancillary and subsidiary to , and furnished as a means of enabling the application or enjoyment of , any such property, or right as is mentioned in paragraph (A), any such equipment as is mentioned on paragraph (B) or any such knowledge or information as is mentioned in paragraph (C); or (E) the supply of services by a nonresident person or his employee in connection with the use of the property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from, such nonresident person; (F) any other amounts paid in consideration of technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme, and (G) the use of the right to use (i) motion picture films (ii) films or video tapes for use in connection with television; or (iii) tapes for use in connection with radio broadcasting. (As amended by section 9 paragraph (4) of Revenue Memorandum Circular No. 80-78 dated August 15, 1978 publishing the amendments effected by PD No. 1457 to Title II, Income Tax of the National Internal Revenue Code of 1977, as amended.) Sec 157Sale of Real Property Gross income from sources within the Philippines includes gain, computed under the provisions of section 35, derived from the sale or other disposition of real property located in the Philippines. For the treatment of capital gains and losses, see sections 132 to 135 of these regulations. Sec 158 Income from sources without the Philippines Gross Income from sources without the Philippines includes:
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Interest other than that specified in section 37 (a)(1), as being derived from sources without the Philippines 1. Dividends other than those derived from sources within the Philippines as provided in section 37 (a)(2); 2. Compensation for labor or personal services performed without the Philippines; 3. Rentals or royalties derived from property without the Philippines or from any interest in such property, including rentals or royalties for the use of or the privilege for using without the Philippines, patents, copyrights, secret process and formulas, goodwill, trademarks, trade brands, franchises, and other like property; and 4. Gains derived from the sale of real property located without the Philippines. Sec 159 Sale of personal property Income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which sold. The word sold includes exchanged. The country in which sold ordinarily means the place where the property is marketed. This section does not apply to income from the sale of personal property produced (in whole or in part) by the taxpayer without and sold within the Philippines. (See section 162 of these regulations.) Sec 160 Apportionment of deductions - From the items specified in section 37 (a) as being derived specifically from sources within the Philippines there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and ratable part of any expenses, losses or deductions which can not definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. Sec 161 Other income from sources within the Philippines Items of gross income other than those specified in section 37 (a) and (c) shall be allocated or apportioned to sources within or without the Philippines as provided in section 37 (e).

The income derived from the ownership or operation of an farm, mine, oil or gas well, other natural deposit, or timber, located within the Philippines, and from the sale by the producer of the products thereof within or without the Philippines, shall ordinarily be included in gross income from sources within the Philippines. If, however, it is shown to the satisfaction of the Commissioner of Internal Revenue that due to the peculiar condition of production and sale in a specific case of for other reasons all of such gross income should not be allocated to sources within the Philippines, in apportionment thereof to sources within the Philippines and to source without the Philippines shall be made as provided in section 162 of these regulations. Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted therefrom, in computing net income, the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. Sec 162 Income from the sale of personal property derived from sources partly within and partly without the Philippines. Items of gross income not allocated by sections 152 to 159 or 161 of these regulations to sources from within or without the Philippines shall (unless unmistakably from a source within or a source without the Philippines) be treated as derived from sources partly within and partly without the Philippines. The portion of such income derived from sources partly within the Philippines and partly within a foreign country which is attributable to sources within the Philippines shall be determined according to the following rules and cases: Personal property produced and sold. Gross income derived from the sale of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold within a foreign country, or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines shall be treated as derived partly from sources within the Philippines and partly from sources within a foreign country under one of the cases below. As used herein,
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the word produced includes created, fabricated, manufactured, extracted, processed, cured or aged. Case 1. Where the producer or manufacturer regularly sells a part of his output to wholly ____ distributors or other selling concerns in such a way as to establish fairly an independent factory or production price or shows to the satisfaction of the Commissioner of Internal Revenue that such an independent factory or production price has been otherwise established, unaffected by considerations of tax liability, and the selling or distributing branch or department of the business is located in a different country from that in which the factory is located or the production carried on, the net income attributable to sources within the Philippines shall be computed by an accounting which treats the products as sold by the factory or productive department of the business to the distributing or selling department as the independent factory price as established. In all such cases the basis of the accounting shall be fully explained in a statement attached to the return. Case 2. Where an independent factory or production price has not been established as provided under Case 1, the net income shall first be computed by deducting from the gross income derived from the sale of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold within a foreign country or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines, the expenses, losses, or other deductions properly apportioned or allocated thereto ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. Of the amount of net income so determined, one-half shall be apportioned in accordance with the value of the taxpayers property within the Philippines and within the foreign country, the portion attributable to sources within the Philippines being determined by multiplying such one-half by a fraction the numerator of which consists of the value of the taxpayers property within the Philippines, the denominator of which consists of the value of the taxpayers property both within the Philippines and

within the foreign country. The remaining one-half of such net income shall be apportioned in accordance with the gross sales of the taxpayer within the Philippines and within the foreign country, the portion attributable to sources within the Philippines being determined by multiplying such one-half by a fraction the numerator of which consists of the taxpayers gross sales for the taxable year or period within the Philippines and the denominator of which consists of the taxpayers gross sales for the taxable year or period within the Philippines and within the foreign country. The gross sales of the taxpayer within the Philippines means the gross sales made during the taxable year which were principally secured, negotiated, or effected by employees, agents, offices, or branches of the taxpayers business resident or located in the Philippines. The term gross sales as used in this paragraph refers only to the sales of personal property produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines, and the term property includes only the property held or used to produce income which is derived from such sales. Such property should be taken at its actual value, which in the case of property valued or appraised for purposes of inventory, depreciation, depletion, or other purposes of taxation shall be the highest amount at which so valued or appraised, and which in other cases shall be deemed to be its book value in the absence of affirmative evidence showing such value to be greater or less than the actual value. The average value during the taxable year or period shall be employed. The average value of property as above prescribed at the beginning and end of the taxable year or period ordinarily may be used, unless by reason of material changes during the taxable year or period such average does not fairly represent the average for such year or period, in which event the average shall be determined upon a monthly or daily basis. Bills and accounts receivable shall (unless satisfactory reason for a different treatment is shown) be assigned or allocated to the Philippines when the debtor resides in the Philippines. Case 3. Application for permission to base the return upon the taxpayers books of account will be considered by the Commissioner of
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Internal Revenue in the case of any taxpayer who, in good faith and unaffected by considerations of tax liability, regularly employs in his books of account a detailed allocation of receipts and expenditures which reflects more clearly than the process or formulas herein prescribed, by income derived from source within the Philippines. Sec 163 Foreign steamship companies Repealed by section 12 of Revenue Regulations No. 8-75 dated October 29, 1975. Section 1. Definition of gross Philippine Billing Section 2 (b) (1) of Revenue Regulations No. 8-75 is hereby amended to read as follows: 1. International carriers shall pay a tax of 2 of their gross Philippine billings. For the purpose of section 24 (b) (2) of the National Internal Revenue Code, gross Philippine billings means the gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage, cargo or mail, provided the cargo or mail originates from the Philippines. The gross revenues realized from the said cargo or mail shall include the gross freight charges up to the final destination. The gross freight charges in the airway bills, bills of lading and/or value of tickets sold by each international carrier doing business in the Philippines shall be prima facie evidence of its gross lifted revenue. For the purpose of this definition, the phrase doing business in the Philippines include the regular sale of tickets in the Philippines by off-line international airlines either by themselves or through its agents. In the case of off-line airlines, the general sales agents (GSA) or duly authorized representatives in the Philippines are hereby constituted as withholding agents pursuant to section 53 of the National Internal Revenue Code. Revenue Regulations No. 3-76 amending RR No. 8-75, dated March 15, 1976. Sec 164 Telegraph and cable service A foreign corporation carrying on the business of transmission of telegraph or cable messages between points in the Philippines and points outside the Philippines

derives income partly from sources within and partly from sources without the Philipines. (1) Gross Income The gross income from sources within the Philippines derived from such service shall be determined by adding (a) its gross revenues derived from messages originating in the Philippines and (b) amounts collected abroad on collect message originating in the Philippines and deducting from such sum amounts paid or accrued for transmission of messages beyond the companys own circuit. Amounts received by the company in the Philippines with respect to collect messages originating without the Philippines shall be excluded from the gross income. (2) Net Income In computing net income from sources within the Philippines there shall be allowed as deductions from gross income determined in accordance with paragraph (1): (a) all expenses incurred in the Philippines (not including any general overhead expenses), incident to the carrying on of the business in the Philippines, (b) all direct expenses incurred abroad in the transmission of messages originating in the Philippines (not including general overhead expense, maintenance, repairs, and depreciation of cable and not including any amount already deducted in computing gross income); (c) depreciation of property (other than cables) located in the Philippines and used in the trade or business therein; and (d) a proportionate part of the general overhead expenses (not including any items incurred abroad corresponding to those enumerated in (a), (b) and (c), and of maintenance, repairs and depreciation of cables of the entire cable system of the enterprise based on the ratio which the number of words originating in the Philippines bears to the total words transmitted by the enterprise. Sec 165 Computation of Income If a taxpayer has a gross income from sources within or without the Philippines as defined by section 37 (a) or (c) together with gross income derived partly from sources within and partly from sources without the Philippines, the amounts
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thereof, together with the expenses and investment applicable thereto, shall be aggregated, and the net income from sources within the Philippines shall be separately computed therefrom. 1. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES BOAC V COMMISSIONER (149 SCRA 395) BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom. It is engaged in the international airline business and is a member-signatory of the Interline Air Transport Association (IATA). As such, it operates air transportation service and sells transportation tickets over the routes of the other airline members. During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a ninemonth period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB. Thus, it did not carry passengers and/or cargo to or from the Philippines but it maintained a general sales agent in the Philippines Warner Barnes and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. (First CTA Case) On 7 May 1968, CIR assessed BOAC for deficiency income taxes covering the years 1959 to 1963. BOAC protested. After subsequent investigation, a new assessment was issued for the years 1959 to 1967 amounting to P858+k which BOAC paid under protest. On 7 October 1970, BOAC filed a claim for refund of the said amount but was denied by the CIR. But before said denial, BOAC had already filed a petition for review with the CTA , assailing the assessment and praying for the refund of the amount paid. (Second CTA Case) On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years

1968/1969 to 1970-1971 in the aggregate amount of P549+k, and compromise penalties for violation of Section 46 (requiring the filing of corporation returns) penalized under Section 74 of the NIRC. BOAC requested that the assessment be set aside but was denied. BOAC filed the second case. The Tax Court reversing the CIR. It held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA position was that income from transportation is income from services so that the place where services are rendered determines the source. The CIR filed a petition for certiorari. ISSUES: 1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable. YES 2. Whether the revenue sales by BOAC in the Philippines constitute income from Philippine sources. YES HELD: 1)Under Section 20 of the 1977 Tax Code: The term 'resident foreign corporation' applies to a foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein. The term 'non-resident foreign corporation' applies to a foreign corporation not engaged in trade or business within the Philippines and not having any office or place of business therein. BOAC is a resident foreign corporation. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of
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commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. 2 "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. BOAC maintained a general sales agent in the Philippines. That general sales agent was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement. Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent. It is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines. 2) The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.

A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticketholder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth. Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, does not mention income from the sale of tickets for international transportation. However, that does not render it less an income from sources within the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. The absence of flight operations to and from the Philippines is not determinative of the source of income or the situs of income taxation. BOAC was an off-line international airline at the time of the case. The test of taxability is the "source"; and the source of an income is that activity . . . which produced the income. The passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a business activity regularly pursued within the Philippines. Even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. BOAC was ordered to pay by the Supreme Court. Note: International carriers are now taxed as follows: international carriers shall pay a tax of 2-1/2 per cent on their gross Philippine billings. (Sec. 24[b] [2], Tax Code). Gross Philippine billings' includes gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. . . ." The foregoing provision ensures that international airlines are taxed on their income from
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Philippine sources. The 2-1/2% tax on gross Philippine billings is an income tax. As distinguished from common carriers tax, The common carrier's tax, it is an excise tax, being a tax on the activity of transporting, conveying or removing passengers and cargo from one place to another. It purports to tax the business of transportation and the same can be levied by the State only when the acts, privileges or businesses are done or performed within the jurisdiction of the Philippines. 2. TAXABLE INCOME FROM SOURCES WITHIN THE PHILIPPINES COMMISSIONER V. CTA AND SMITH KLINE & FRENCH OVERSEAS 127 SCRA 9 This case is about the refund of a 1971 income tax amounting to P324+k. Smith Kline and French Overseas Company, a multinational firm domiciled in Philadelphia, Pennsylvania, is licensed to do business in the Philippines. It is engaged in the importation, manufacture and sale of pharmaceuticals, drugs and chemicals. In its 1971 original ITR, Smith Kline declared a net taxable income of P1.4+M and paid P511+k as tax due. Among the deductions claimed from gross income was P501+k as its share of the head office overhead expenses. However, in its amended return filed on March 1, 1973, there was an overpayment of P324+k arising from underdeduction of home office overhead. It made a formal claim for the refund of the alleged overpayment. In October, 1972, Smith Kline received from its international independent auditors an authenticated certification to the effect that the Philippine share in the unallocated overhead expenses of the main office for the year ended December 31, 1971 was actually P1.4+M.On April 2, 1974, without awaiting the action of the Commissioner of Internal Revenue on its claim, Smith Kline filed a petition for review with the CTA. The CTA ordered the CIR to refund the overpayment or grant a tax credit to Smith Kline. The Commissioner appealed to the SC.

HELD: The governing law is found in section 37 of the old NIRC which reads: Xxx (b) Net income from sources in the Philippines. From the items of gross income specified in subsection (a) of this section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the Philippines. Revenue Regulations No. 2 of the Department of Finance contains the following provisions on the deductions to be made to determine the net income from Philippine sources: SEC. 160. Apportionment of deductions. From the items specified in section 37(a), as being derived specifically from sources within the Philippines there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses or deductions which can not definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. The ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross income. "Example: A non-resident alien individual whose taxable year is the calendar year, derived gross income from all sources for 1939 of P180,000, including therein: Interest on bonds of a domestic corporation P9,000 Dividends on stock of a domestic corporation 4,000 Royalty for the use of patents within the Philippines 12,000 Gain from sale of real property located within the Philippines 11,000 Total P36,000 ========
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that is, one-fifth of the total gross income was from sources within the Philippines. The remainder of the gross income was from sources without the Philippines, determined under section 37(c). The expenses of the taxpayer for the year amounted to P78k.. Of these expenses the amount of P8k is properly allocated to income from sources within the Philippines and the amount of P40k is properly allocated to income from sources without the Philippines. The remainder of the expense, P30k cannot be definitely allocated to any class of income. A ratable part thereof, based upon the relation of gross income from sources within the Philippines to the total gross income, shall be deducted in computing net income from sources within the Philippines. Thus, there are deducted from the P36k of gross income from sources within the Philippines expenses amounting to P14k [representing P8k properly apportioned to the income from sources within the Philippines and P6k a ratable part (1/5) of the expenses which could not be allocated to any item or class of gross income]. The remainder, P22k, is the net income from sources within the Philippines. Thus, it is manifest that where an expense is clearly related to the production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment. 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 Philippines, fall under a different category however. These are items which cannot be definitely allocated or identified with the operations of the Philippine branch. For 1971, the parent company of Smith Kline spent $1,077,739. Under section 37(b) of the Revenue Code and section 160 of the regulations, Smith Kline can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational corporation. The weight of evidence bolsters Smith Klines position that the amount of P1.4+M represents the correct ratable share, the same

having been computed pursuant to section 37(b) and section 160. Therefore, it is entitled to a refund. INCOME FROM CONSTRUCTIVE TRADING WITH MULTINATIONALS REVENUE AUDIT MEMORANDUM ORDER NO. 1-86 Subject: Procedure for tax audit of Philippine branches of foreign corporations To: All internal revenue officers and others concerned. 1. Background 1.1 Some branches of foreign corporations engage in business in the Philippines by soliciting orders from local importers. These branches are called liaison offices or branches. Sales made from such solicitations are not reported to these branches as their own sale purportedly because the branch office merely relays to its head office abroad purchase orders from local importers and it is purportedly its head office that actually consummates the sale. At the end of the taxable period, the branch office simply reports for income tax purposes its purported share of the income generated from sales but the allocation of this purported share is left entirely at the discretion of the head office. The revenue service is completely at the mercy of multi-national companies. 1.2 Some branches engage in business in the Philippines by soliciting orders from local importers and relay this information to its head office abroad. The head office in turn solicits prospective exporters for compensation. At the end of the taxable period, the head office allocates a certain portion of the compensation to its branch in the Philippines. The branch in turn reports its purported share for income tax purposes but does not pay the commercial brokers tax thereon purportedly because the compensation was received from its head office and purportedly because the branch cannot be legally considered a commercial broker in relation to its head
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office since the branch and its head office possesses only a single legal personality (Philipp Brothers Oceanic, Inc. v. CIR, CTA Case No. 3140, March 8, 1984). Again, in this second situation, allocation of the compensation is left as the discretion of the head office the revenue service also left at the mercy of these multi-national companies. 2. Legal Consequences 2.1 The foregoing scope of activities of these branch offices is considered under R.A. 5455 as business acts. Doing business shall include soliciting orders, purchases, service contracts, opening offices, whether called liaison offices or branches any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization. (Sec 1(1), RA 5455). 2.2 These branch offices, like any other businesses, are required by law to account for their business operations in accordance with generally accepted accounting practices (NIRC). Thus a branch office although not possessing a separate and distinct juridical personality is, however, considered under generally accepted accounting practices as a distinct character, a separate business unit and should be supplied by the home office with cash and merchandise and other such assets as may be needed (Advance Accounting by Simons and Korrenbrock, 4th ed., p. 202). Generally accepted accounting practices also dictate that income and expenses of the branch shall be segregated from those of the home office in order to clearly reflect their respective operating results (ibid). 2.3 The doctrine of corporate fiction is not absolute the veil of corporate fiction may be legally pierced should it be used to subvert just application of laws.

Where the corporate form of organization is adopted or a corporate entity is asserted in an endeavor to evade a statute or to modify its intent, courts will disregard the corporation or its entity. This has been applied to violations of tax laws (Fletcher, 170-171, Commentaries and Jurisprudence on the Commercial Laws of the Philippines by Agbayani, Vol. 3, 1970 ed., p.21). Where the corporation is a dummy, is unreal or a sham and serves no business purposes and is intended only as a blind, the corporate form may be ignored for the law cannot countenance a form that is bald and a mischivious fiction. (Id. page 20). To allow a taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the same is to sanction a circumvention of our tax laws. (Id.) Corporate fiction may be inquired upon where there is inadequacy of capital, confusion of affairs and direct intervention in management causing inequitable results (Ballantine, 314, Rorhlick, 417-422). 3. Branch Operation and Consequences 3.1 The Philippine branch solicits purchase orders from local buyers, relays the information to its home office abroad, and the home office purportedly directly makes the sale. In this type of operation,: (i) Sales purportedly consummated abroad by the home office shall be treated as sales constructively consummated in the Philippines and made by the branch office, hence, income therefrom shall be considered income from sources within the Philippines; (ii) the branch shall record and report the gross selling price of commodities sold thru its home office; and (iii) report for income tax purposes its net income therefrom. (iv) since under this situation the import taxes,
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duties and charges have already been paid by the local buyers, the same shall not anymore be chargeable against the branch. Under this paragraph, these transactions are treated sales constructively consummated by the branch office in accordance with the generally accepted accounting practices required under section 38 of the Tax Code since the branch solicitations are actually trading acts. Accordingly, the home office is obligated to supply its branch with merchandise in pursuing its trading business in the Philippines. Hence, sales purportedly made directly by its home office shall be considered no more than merely constructive supplying of the merchandise to its branch which eventually constructively sells the same to Philippine buyers. 3.2 The branch solicits purchase orders from local buyers, relays the information to its home office, the home office solicits prospective sellers abroad and eventually receives compensation for services rendered. In this second type of operation: (i) the branch shall be considered a commercial broker or indentor; (ii) its share from compensation as allocated by its home office shall be subject to commercial broker gross receipts tax; (iii) the branch shall provide itself with corresponding fixed tax as a commercial broker; and (iv) pay income tax on its share of compensation. Under this paragraph, the branch office shall be considered a commercial broker since its activities are well within the ambit of the term broker. Brokers are those who are engaged for others in the negotiation of contracts relative to property with custody of which they have no concern. They act as negotiators in bringing other persons together to bargain; generally, they ought not to sell in their own names, have no implied authority to receive payment, are not entrusted with the physical possession of the principals goods when engaged to buy and sell, and have no special property therein or lien thereon. (Philipi Brothers, Id.)

4. Audit procedure xxx REVENUE REGULATIONS NO. 16-86 Subject: Amendment to Section 160 of Income Tax Regulations (RR-2) regarding the basis of determining ratable part of overseas overhead expenses apportioned under section 37(b) of the NIRC. Pursuant to Sections 4 and 277 of the NIRC, the first paragraph of Section 160 of RR-2, otherwise known as the Income Tax Regulations, is hereby amended as follows: Section 160. (a) Apportionment of deductions. From the items specified in Section37(a) as being derived specifically from sources within the Philippines, there shall be deducted the expenses, losses, and other deductions properly allocated thereto and a ratable part of any other expenses, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. The ratable part shall be based upon the following ratios consistently followed from year to year: 1. Gross income from sources within the Philippines to the total gross income. 2. Net sales in the Philippines to total net sales. 3. If any other method of allocation is adopted, a written permission from the CIR shall first be secured. (b) External Auditors Certificate The income tax return to be filed should be accompanied by a certification from an independent and reputable CPA containing the following information: 1. The home office deductions for the year involved have been examined in accordance with generally acceptable auditing standards and accordingly included such tests of accounting records and such other auditing procedures as were considered necessary in the circumstances.
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2. The deductions pro-rated to the Philippine Branch do not include (a) net losses of any operating unit or branch; (b) income tax payment; (c) capital expenditures; and (d) expenses directly chargeable to any branch. 3. The amount of allocable overhead expenses used in the prorata allocation to the Philippine branch is the same amount used in the pro-ration to all branches worldwide and the amount disallowed in other countries because of governmental requirement is not added back to the allocable amount. 4. should there be exception or qualification on the aboverequested certification, an explanation with supporting documents should be submitted. REVENUE AUDIT MEMORANDUM ORDER NO. 4-86 Subject: Audit Guidelines in the Allocation of Home Office Overhead Expenses Under Section 37(b) of the NIRC 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 RAMO 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 x x x 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 x x x. 1.2 These deductions are difficult to verify because substantial amounts thereof are incurred in the head 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 NIRC, 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 who from 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 arms 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 the 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)
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is the same amount of Home Office expense being allocated worldwide? AUDIT GUIDELINES ON DETERMINATION OF INCOME TAX OF BRANCHES OF
MULTINATIONALS
REVENUE AUDIT MEMORANDUM ORDER NO. 1-95 Subject: Audit guidelines and procedures on the proper determination of the income tax liability of Philippine branches and liaison offices, of Multi-National Enterprises (MNEs) engaged in soliciting orders, purchases, service contracts, trading, construction and other activities in the Philippines. II. Objectives This Order is issued to: a) amend and supersede RAMO No. 1-86 dated April 25, 1986 which provides for the procedures for tax audit of Philippine branches of foreign corporations. b) Address the issue on the proper determination of the income tax liability of Philippine branches and liaison offices of MNEs pursuant to Section 43 of the NIRC wherein the CIR is authorized to distribute, apportion or allocate gross income or deduction among organizations in order to clearly reflect the income of any such organization. Xxx III. Coverage a) This order shall apply only to Philippine branches and liaison offices of Japanese trading firms which are members of the Sogo Shosas and registered with the Japanese Chamber of Commerce and Industry (JCCI), and also all other foreign trading companies similarly situated as determined by the CIR. b) Furthermore, the contents of this Order will apply only to income tax liabilities of Philippine branches and liaison offices

of MNEs and will not affect the withholding, including branch profit remittance, and business tax obligations of the same Philippine branches and liaison offices of MNEs which shall be subject to the provisions of the NIRC. IV. Guidelines 1. The Philippine income tax due from soliciting orders, purchases, service contracts, trading, construction and other activities of the Philippine branches and liaison offices of MNEs will be ascertained using the following formula: For solicitation and trading activities: {(Worldwide Operating Sales to the Philippines attribution to 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 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
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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 not 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 the 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 or onshore income from construction projects or onshore income from construction projects including the cost of locally purchased materials and equipment, if any. (h) Net income on all other activities shall consist of income such as management consultancy services and other undertakings that Philippine 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.

V. Procedures 1. Request documents containing information of the nature of the business transactions of the taxpayer as follows: a) the structure of the Philippine branch or liaison office, the Home Office, other branches or more than 50% owned or controlled subsidiaries located outside the Philippines dealing with the local branch; b) the ownership, relationship, extent of control, directors and officers of the Philippine branch or liaison office or Home Office; c) the business activity of the MNE and how it relates to the activity of the local branch or liaison office and other branches or more than 50% owned or controlled subsidiaries dealing with the local company. 3. GROSS INCOME FROM SOURCES WITHOUT THE PHILIPPINES [SUPRA] 4. INCOME FROM SOURCES PARTLY WITHIN OR WITHOUT THE PHILIPPINES [SUPRA] 5. SITUS OF SALE OF STOCKS OF DOMESTIC CORPORATION [SUPRA] 6. DEFINITION OF ROYALTIES YHILAMLIFE CA-GR SP NO. 31283, APRIL 25, 1995 (INCLUDES SERVICES AS TO INVESTMENT, TRAINING AND EDUCATION ACCOUNTING) It is not the presence of any property from which one derives rentals and royalties that is controlling, but rather it includes royalties for the supply of scientific, technical, industrial, or commercial knowledge or information.
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7. COMMISSIONER V. MARUBENI CORP., (372 SCRA 576), EFFECT OF TURN KEY PROJECTS CIR V. MARUBENI CORP. Marubeni Corp is a foreign corp. organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and construction business. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila. In November 1985, CIR issued a letter of authority to examine the books of accounts of Marubeni. It was found that that Marubeni has undeclared income from 2 contracts completed in 1984, the NDC contract and the Philphos contract. In March 1, 1986, BIR examiners recommended an assessment for deficiency income, branch profit remittance, contractors and commercial brokers taxes. Marubeni questioned such assessment. The CIR found that the NDC and the Philphos contracts were made on a turn-key basis and the gross income from the 2 projects amounted to P967+k. Each contract was for a piece of work and since the projects called for the construction and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine sources, hence, subject to Internal Revenue Taxes. Marubeni filed 2 petitions in the CTA one questioning the deficiency income, branch profit remittance, contractors tax assessments and the other questioning the deficiency contractors and commercial brokers taxes. On August 2, 1986, E.O. No. 41, declaring a one-time amnesty covering unpaid income taxes for the years 1981 to 1985 was issued. Marubeni availed of such amnesty and complied with the prescribed requirements therein. On November 17, 1986, the scope and coverage of the amnesty was expanded to include estate, donors and business taxes. After 10 years from the filing of the case, the CTA rendered a decision stating that Marubeni had properly availed of the amnesty

and the case is deemed cancelled. The CIR challenged the CTA decision in the CA. The CA dismissed the petition. ISSUE: Whether or not Marubeni lawfully availed of the amnesty HELD: There are 3 types of taxes involved herein income tax, branch profit remittance tax and contractors tax. The CIR contends that Marubeni cannot avail of the amnesty granted because it falls on the exceptions in Sec 4(b) of EO 41 which states that those with income tax cases already filed in Court as of the effectivity of the law cannot avail of the amnesty. As for the income tax and deficiency branch profit remittance tax assessment, Marubeni properly availed of the amnesty because the case was not yet already filed in court when the law took effect. However, as for the contractors tax, since it is a business tax, its amnesty program only became effective when EO 41 was amended by EO 64. the general rule is that amendatory acts operate prospectively. It may not be given a retroactive effect unless it is so expressly provided expressly or by necessary implication and no vested right or obligations of contract are thereby impaired. Therefore, when the amnesty for business taxes took effect, the case of Marubeni was already filed in Court. It is therefore disqualified to avail of the said amnesty. It is Marubenis argument that it is not liable for the deficiency contractors tax because the income from the projects came from the Offshore Portion of the contracts. The 2 contracts were divided into 2 parts the Onshore and the Offshore Portion. All materials and equipment in the contract under the Offshore Portion were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes. Under the Philippine Onshore Portion, Marubeni does not deny its liability for the contractors tax on the income from the 2 projects. It is with regard to the gross receipt from the Foreign Offshore Portion of the two contracts that the liabilities involved in the assessments subject of this case arose. CIR argues that since the two agreements are Turn-Key (A job or a contract in which the contractor agrees to
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complete the work of the building and installation to the point of readiness for operation or occupancy), they call for the supply of both materials and services to the client, they are contracts for a piece of work and are indivisible. The situs of the 2 projects is in the Philippines, and the materials provided and services rendered were all done and completed within the territorial jurisdiction of the Philippines. Accordingly, respondents entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from the Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractors tax. An independent contractor is a person whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. The word contractor refers to a person who, in the pursuit of an independent business, undertakes to do a specific job or a piece of work for other persons using his own means and methods without submitting himself to control as to the petty details. A contractors tax is a tax imposed upon the privilege of engaging in business. It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges, or business are done or performed within the jurisdiction of said authority. It cannot be imposed on an occupation or privilege outside the taxing district. It is undisputed that Marubeni is an independent contractor but it argues that the work therein were not all performed in the Philippines because some of them were completed in Japan in accordance with the provisions of the contracts. The service of design engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination of the two projects involved 2 taxing jurisdictions. These acts occurred in 2 countries Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and

supplies were completely designed and engineered in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under the Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractors tax. CIRs petition is denied. B. ACCOUNTING PERIODS AND METHODS NIRC - CHAPTER VIII ACCOUNTING PERIODS AND METHODS OF ACCOUNTING SEC. 43. General Rule. The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year. SEC. 44. Period in which Items of Gross Income Included. The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not
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otherwise properly includible in respect of such period or a prior period. SEC. 45. Period for which Deductions and Credits Taken. The deductions provided for in this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred', dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed as deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period. SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section 47. SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months. "(A) Returns for Short Period Resulting from Change of Accounting Period. If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.

"(B) Income Computed on Basis of Short Period. Where a separate final or adjustment return is made under Subsection (A) on account of a change in the accounting period, and in all other cases where a separate final or adjustment return is required or permitted by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final or adjustment return is made. SEC. 48. Accounting for Long-term Contracts. Income from longterm contracts shall be reported for tax purposes in the manner as provided in this Section. As used herein, the term 'long-term contracts' means building, installation or construction contracts covering a period in excess of one (1) year. Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion. The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return. SEC. 49. Installment Basis. "(A) Sales of Dealers in Personal Property. Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross
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profit realized or to be realized when payment is completed, bears to the total contract price. "(B) Sales of Realty and Casual Sales of Personality. In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent (25%) of the selling price, the income may, under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this Section. As used in this Section, the term 'initial payments' means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. "(C) Sales of Real Property Considered as Capital Asset by Individuals. An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. "(D) Change from Accrual to Installment Basis. If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded. SEC. 50. Allocation of Income and Deductions. In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or

business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business. RR-2 Sec 166 General Rule The method of accounting regularly employed by the taxpayer in keeping his books, if such method clearly reflects his income is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. If the taxpayer does not regularly employ a method of accounting which reflects his income, the computation shall be made in such manner as in the opinion of the Commissioner of Internal Revenue clearly reflects it. (See section 137 of these regulations for computation of net income, and section 38 for bases of computation. For the use of inventories, see sections 144 to 151 of these regulations.) Sec 167 Methods of accounting It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. Any approved standard method of accounting which reflects taxpayers income may be adopted. Among the essential are the following: (1) In all cases in which the production, purchase, or sale of merchandise of any kind is an income-producing factor, inventories of the merchandise in hand (including finished goods, work in process, raw materials, and supplies) should be taken at the beginning and end of the year and used in computing the net income of the year in accordance with sections 144 to 151 of these regulations. (2) Expenditures made during the year should be properly classified as between capital an income; that is to say, expenditures for items of plant, equipment, etc. which have a
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useful life extending substantially beyond they year should be charged to capital account and not to expense account; and (3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion, or obsolescence, any expenditure 9other than ordinary repairs) _____ restore the property or prolong its useful life should be added to the property account or charged against the appropriate reserve and not to current expenses. Sec 168 Changes in accounting methods The true income, computed under the law, shall in all cases be entered in the return. If for any reason the basis of reporting income subject to tax is changed, the taxpayer shall attach to is return a separate statement setting forth for the taxable year and for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the result of such change. A taxpayer who changes the method or recounting employed in keeping his book shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner of Internal Revenue. For the purpose of this section, a change in the method of accounting employed in keeping books means any change in the accounting treatment of items of income or deduction, such as a change from cash receipts and disbursement methods to the accrued method, or vice versa; a change involving the basis of valuation employed in the computation of inventories (see sections 144 to 151 of these regulations); a change from the cash to accrual method to the long-term contract method, or vice versa; a change in the long-term contract method from the percentage of computation basis to the completed contract basis, or vice versa (see section 44 of these regulations); or a change involving the adoption of, or a change in the use of, any other specialized basis of computing net income such as the crop basis. Application for permission to change the method accounting employed and the basis upon which the return is made shall be filed within 90 days after the beginning of the taxable year to be covered by the return. The application shall be

accompanied by a statement specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change. Permission to change the method of accounting will not be granted unless the taxpayer and the Commissioner of Internal Revenue agree to the terms and conditions under which the change will be effected. Sec 169 Accounting Period Income tax returns, whether for individual of for corporations, associations, or partnerships, are required to be made and their income computed for each calendar year ending on December 31st of every year. However, corporations, associations or partnerships may with the approval of the Commissioner of Internal Revenue ___ secured, file their returns and compute their income on the basis of a fiscal year which means an accounting period of twelve months ending on the last day of any month other than December. But in no instance shall individual taxpayers be authorized to establish fiscal year as basis for filing their returns and computing their income. (For authority to file on fiscal year basis see section 172 of these regulations). Sec 170 When included in gross income Except as otherwise provided in section 39 in the case of the death of the taxpayer, gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included as of a different period in accordance with the approved method of accounting followed by him. If a taxpayer has died there shall also be included in computing for the taxable period in which he died amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period, regardless of the fact that the decedent may have kept his books and made his returns on the basis of cash receipts and disbursements. (For income not reduced to possession but considered as constructively received and for examples of constructive receipt, see sections 52 and 53 of these regulations. For the treatment of income long term contracts, see section 44 of these regulations.)
Sec 171 Paid or incurred or paid or accrued (a) The terms paid or incurred and paid or accrued will be construed according to the method of accounting upon the basis of which the net income is computed by the taxpayer. The deductions and credits must be taken for the taxable year, in which paid or accrued or paid or incurred, unless in order clearly to reflect the income such deductions or credits should be taken as of a different period. If a taxpayer desires to claim a deduction or a credit as of a period other than the period in which it was paid or accrued or paid or incurred, he shall attach to his return a statement setting forth his request for consideration of the case by the Commissioner of Internal Revenue together with a complete statement of the facts upon which he relies. However, in his income tax return he shall take the deduction or credit only for the taxable period in which it was actually paid or incurred, or paid or accrued, as the case may be. Upon the audit of the return, the Commissioner of Internal Revenue will decide whether the case is within the exception provided by law, and the taxpayer will be advised as to the period for which the deduction or credit is properly allowable. (b) The provision of paragraph (a) of this section in general are not applicable with respect to the taxable period during which the taxpayer dies. In such case there shall also be allowed as deductions and credits for such taxable period amounts accrued and credits for such taxable period, amounts accrued up to the date of his death if not otherwise allowable with respect to such period or a prior period, regardless of the fact that the decedent was required to keep his books and make his returns on the basis of cash receipts and disbursements. Sec 172 Change of accounting period. If a corporation, including a duly registered general partnership, desires to change its accounting period from the fiscal year to calendar year or from calendar year to fiscal year, or from one fiscal to another, it shall at any time not less than thirty days prior to the date fixed in section 46 (b) of the Code for the filing of its return on the basis of its original accounting period submit a written application to the Commissioner of
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Internal Revenue designating the proposed date for the closing of its new taxable year, together with a statement of the date on which the books of account were opened and closed each year for the past three years, the date on which the taxable year began and ended as shown on the returns filed for the past three years, and the reasons why the change in accounting period is desired. Sec 173 Returns for periods of less than twelve months No returns can be made for a period of more than twelve months. A separate return for the fractional part of a year is therefore required whenever there is a change, with the approval of the Commissioner of Internal Revenue, in the basis of computing net income from one taxable year to another taxable year. The periods to be covered by such separate returns in the several cases stated in section 42 (a). The requirements with respect to the filing of a separate return and the payment of tax for a part of a year are the same as for the filing of a separate return and the payment of tax for a part of a year are the same as for the filing of a return and the payment of tax for a full taxable year closing at the same time. Sec 174 Sale of personal property on installment plan. Dealers in personal property ordinarily sell either for cash or on the personal credit of the purchaser or on the installment plan. Dealers who sell on the installment plan usually adopt one of four ways of protecting themselves in case of default (a) By an agreement that title is to remain in the vendor until the purchaser has completely performed his part of the transaction (b) By a form of contract in which title is conveyed to the purchaser immediately, but subject to a lien for the unpaid portion of the selling price; (c) By a present transfer of title to the purchaser, who at the time executes a reconveyance in the form of chattel mortgage to the vendor; or (d) By conveyance to a trustee pending performance of the contract and subject to its provisions.
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The general purpose and effect being the same in all these cases, the same rule is uniformly applicable. The general rule prescribed is that a person who regularly sells or otherwise disposes of personal property on an installment plan, whether or not title remains in the vendor until the property is fully paid for, may return as income therefrom in any taxable year that proportion of the installment payments actually received in the year which the total of gross profit (that is, sales less cost of goods sold) realized or to be realized when the property is paid for, bears to the total contract price. Thus income of a dealer in personal property on the installment plan may be ascertained by taking as income that proportion of the total payments received in the taxable year from the installment sales (such payments being allocated to the year against the sales of which they apply) which the total or gross profit realized or to be realized on the total installment sales made during each year bears to the total contract price of all such sales made during that respective year. No payments received in the taxable year shall be excluded in computing the amount of income to be returned on the ground that they were received under a sale the total profit from which was returned as income during a taxable year or years prior to the change by the taxpayer to the installment basis of returning income deductible items are not to be allocated to the years in which the profits from the sales of a particular year are to be returned as income, but must be deducted for the taxable year in which the items are paid or incurred or paid or accrued as provided by section 40 and 84 (q) of the Code. A dealer who desires to compute his income on the installment basis shall maintain books of account in such a manner as to enable accurate computation to be made on such basis in accordance with the provisions of this section. The income from a casual sale or other casual disposition of personal property (other than property of a kind which should properly be included in inventory) may be reported on

the installment basis only if (1) the sale price exceeds P1,000 and (2) the prior payments do not exceed 25 per cent of the selling price. If for any reason the purchaser defaults in any of his payments, and the vendor returning income on the installment basis repossesses the property sold whether title thereto had been retained by the vendor or transferred to the purchaser, gain or loss for the year in which the repossession occurs is to be computed upon any installment obligations of the purchaser which are satisfied or discharged upon the repossession or are applied by the vendor to the purchase or bid price of the property. Such gain or loss is to be measured by the difference between the fair market value of the property reposed and the basis in the hands of the vendor of the obligations of the purchaser which are so satisfied, discharged, or applied, with proper adjustment for any other amounts realized or costs incurred in connection with the repossession. The basis in the hands of the vendor of the obligations of the purchaser satisfied, discharged or applied upon the repossession of the property shall be the excess of the face value of such obligations over an amount equal to the income which would be returnable were the obligations paid in full. No deduction for a bad debt shall in any case be taken on account of any portion of the obligations of the purchaser which are treated by the vendor as not having been satisfied, discharged or applied upon the repossession, unless it is clearly shown that after the property was repossessed the purchaser remained liable for such portion; and in no event shall the amount of the deduction exceed the basis in the hands of the vendor of the portion of the obligations with respect to which the purchaser remained liable after the repossession. If the property repossessed is bid in by the vendor at a lawful public auction or judicial sale, the fair market value of the property shall be presumed to be the purchase or bid price thereof in the absence of clear and convincing proof to the contrary. Then property repossessed
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shall be carried on the books of the vendor at its fair market value at the time of the repossession. If the vendor chooses as a matter of consistent practice to return the income from installment sales on the straight accrual or cash receipts and disbursement basis, such a course is permissible. Sec 175 Sale of real property involving deferred payments. Under section 43 deferred payment sales of real property include (a) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the selling price has been paid, and (b) sales in which there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments. Such sales either under (a) or (b), fall into two classes when considered with respect to the terms of sale, as follows: (1) Sales of property on the installment plan, that is, sales in which the payments received in cash or property other than evidence of indebtedness of the purchaser during the taxable year in which the sale made do not exceed 25 per cent of the selling price; (2) Deferred payment sales not on installment plan, that is sales in which the payments received in cash or property other than evidence of indebtedness of the purchaser during the taxable year in which the sale is made exceed 25 per cent of the selling price; In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser, shall be included as part of the selling price but the amount of the mortgage, to the extent it does not exceed the basis to the vendor of the property sold, shall not be considered as part of the initial payments or of the total contract price, as those terms are used in section 43 of the Code, in sections 174 and 176 of this regulations, and in this section. The term initial payments does not include amounts received by the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price which are due and payable in subsequent years. Commissions and other selling expenses
Tax Law Review Atty. Salvador 200
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paid or accrued by the vendor and not to the deducted or taken into account in determining the amount of the initial payments, the total contract price, or the selling price. The term initial payments contemplates at least one other payment in addition to the initial payment. If the entire purchase price is to be paid in a lump sum in a later year, there being no payment during the year, the income may not be returned on the installment basis. Income may not be returned on the installment basis where no payment in cash or property, other than evidence of indebtedness of the purchaser, is received during the first year, the purchaser having promised to make two or more payments in later years. Sec 176 Sale of real property on installment plan. In transactions included in class (1) in the preceding section the vendor may return as income from such transactions in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the property is paid for bears to the contract price. If the purchaser defaults in any of his payments, and the vendor returning income on the installment basis reacquires the property sold whether title thereto had been retained by the vendor or transferred to the purchaser, gain or loss for the year in which the reacquisition occurs is to be computed upon any installment obligations of the purchaser which are satisfied or discharged upon the reacquisition or are applied by the vendor to the purchase or bid price of the property. Such gain or loss is to be measured by the difference between the fair market value of the property acquired (including the fair market value of any fixed improvements placed on the property by the purchaser) and the basis in the hands of the vendor of the obligations of the purchaser which are so satisfied, discharged, or applied, with proper adjustment for any other amounts realized or costs incurred in connection with the reacquisition. The basis in the hands of the vendor of the obligations of the purchaser satisfied, discharged or
applied upon the reacquisition of the property will be excess of the face value of such obligations over an amount equal to the income which would be returnable were the obligations paid in full. No deduction for a bad debt shall in any case be taken on account of any portion of the obligations of the purchaser which are treated by the vendor as not having been satisfied, discharged or applied upon the reacquisition of the property, unless it is clearly shown that after the property was reacquired the purchaser remained liable for such portion; and in no event shall the amount of the deduction exceed the basis in the hands of the vendor of the portion of the obligations with respect to which the purchaser remained liable after the acquisition. If the property reacquired is bid in by the vendor at a foreclosure sale, the fair market value of the property shall be presumed to be the purchase or bid price thereof in the absence of clear and convincing proof to the contrary. If the property reacquired is subsequently sold, the basis for determining gain or loss is the fair market value of the property at the date of the reacquisition including the fair market value of any fixed improvements placed on the property by the purchaser). If the vendor chooses as a matter of consistent practice to turn the income from installment sales on the straight accrual or cash receipts and disbursement basis, such a course is permissible, and the sales will be treated as deferred-payment sales not on the installment plan. Sec 177 Deferred payment sale of real property not on installment plan. In transactions included in class (2) in section 175 of these regulations, the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash. If the vendor has retained title to the property and the purchaser defaults in any of his payments, and the vendor repossesses the property, the difference between (1) the entire amount of the payments actually received on the contract and retained by the vendor

plus the fair market value at the time of repossession of fixed improvements placed on the property by the purchaser and (2) the sum of the profits previously returned as income in connection therewith and an amount representing what would have been a proper adjustment for exhaustion, wear and tear, obsolescence amortization and depletion of the property during the period the property was in the hands of the purchaser had the sale not been made will constitute gain or loss, as the case may be, to the vendor for the year in which the property is repossessed, and the basis of the property in the hands of the vendor will be the original basis at the time of the sale plus the fair market value at the time of repossession, of fixed improvements placed on the property by the purchaser. If the vendor has previously transferred title to the purchaser, and the purchaser defaults in any of his payments and the vendor reacquired the property, such reacquisition shall be regarded as a transfer by the vendor, in exchange for the property for such of the purchasers obligations as are applied by the vendor to the purchaser or bid price of the property. Such an exchange will be regarded as having resulted in the realization by the vendor of gain or loss, as the case may be for the year of the reacquisition, measured by the difference between the fair market value of the property including improvements placed by the purchaser on the property, and the amounts of the obligations of the purchaser which were applied by the vendor to the purchase or bid price of the property. The fair market value of the property reacquired shall be presumed to be the amount for which it is bid in by the vendor in the absence of a clear and convincing proof to the contrary. If the property reacquired is subsequently sold the basis for determining the gain or loss is the fair market value of the property at the date of reacquisition including the fair market value of the fixed improvements placed on the property by the purchaser. Sec 178 Sale of real estate in lots. Where a tract of land is purchased with a view to dividing it into lots or parcels of ground to be sold as such, the entire fair market value as of March 1, 1913, or the cost, if acquired subsequently to that date shall be equitably apportioned to the several lots or parcels and made a matter of record
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on the books of the taxpayer, to the end that any gain derived from the sale of any such lots or parcels may be returned as income for the year in which the sale was made. This rule contemplates that there will be a measure of gain or loss for every lot or parcel sold, and not that the capital invested in the entire tract shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel will be treated as a separate transaction and shall be dealt with accordingly. Sec 178-A In all cases where a taxpayer sells during the year real or personal property on the installment basis, there should be attached to the income tax return a statement of each sale made during the year containing the following information: (a) Name of the buyer (b) Address of the buyer (c) Date of sale (d) Selling price (e) Payments received during the year corresponding to such sale (As amended by Revenue Regulations No. 8-65 dated June 1, 1965). Sec 179 Determination of the taxable net income of a controlled taxpayer. (a) Definitions. When used in this section(1) The term organization include any organization of any kind, whether it be a sole proprietorship, a partnership, a trust in an estate, or a corporation or an association, irrespective of the place where organized, where operated, or where its trade or business is conducted, and regardless of whether domestic or foreign, whether exempt or taxable, or whether affiliated or not. (2) The terms trade or business include any trade or business activity of any kind, regardless of whether or where organized, whether owned individually or otherwise, and regardless of the place where carried on. (3) The term controlled includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or
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exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise. A presumption of control arises if income or deductions have been arbitrarily shifted. (4) The term controlled taxpayer means any one of the two or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests. (5) The terms group and group of controlled taxpayers mean the organizations, trades or businesses owned or controlled by the same interests. (6) The term true net income means in the case of a controlled taxpayer, the net income (or, as the case may be, any item or element affecting net income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, in the particular contract, transaction; arrangement, or other act) dealt with the other member or members of the group at arms length. It does not mean the income, the deductions, or the item or element of either, resulting to the controlled taxpayer by reason of the particular contract, transaction, agreement, the controlled taxpayer, or the interests controlling it, chose to make (even though such contract, transaction, or arrangement be legally binding upon the parties thereto). (b) Scope and Purpose. The purpose of section 44 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining according to the standard of an uncontrolled taxpayer, the true net income from the property and business of a controlled taxpayer. The interests controlling a group of controlled taxpayers are assumed to have complete power to cause each controlled taxpayer so to conduct its affairs that its transactions and accounting records truly reflect the net income from the property and business of each of the controlled taxpayers. If, however, this has not been done, and the taxable net incomes are thereby understated, the statute contemplates that the Commissioner of Internal Revenue shall intervene, and, by making such distributions, apportionments, or
allocations as he may deem necessary of gross income or deductions, or of any item or element affecting net income, between or among the controlled taxpayers constituting the group, shall determine the true net income of each controlled taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply its provisions at will, nor does it grant any right to compel the Commissioner of Internal Revenue to apply such provisions. (c) Application Transaction between the controlled taxpayer and another will be subjected to special scrutiny to ascertain whether the common control is being used to reduce, avoid, or escape taxes. In determining the true net income of a controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce or avoid tax by shifting or distorting income by deductions. The authority to determine true net income extends to any case in which either by inadvertence or design the taxable net income in whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arms length with another controlled taxpayer. RR-2 Sec 51 When income is to be reported.- Gains, profits and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on judgment therefore in a later year, income is realized in that year, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because
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of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were charged off. Sec 52 Income constructively received. Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be qualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date the mere crediting on the books of the corporation does not constitute receipt. Sec 53 Examples of constructive receipt. When interest coupons have matured and are payable, but have not been cashed, such interest payment, though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in which paid. The distributive share of the profits of a partner in a general partnership duly registered is regarded as received by him, although not distributed. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require so many days notice in advance of cashing depositors checks, is income to the depositor when credited.
An amount credited to shareholders of a building and loan association, when such credit passes without restriction to the shareholder, has a taxable status as income for the year of the credit. Where the amount of such accumulations has not become available to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is income for the year of the maturity of the share. i. General Rule [Supra] ii. Accounting Period [Supra] iii. Accounting Method cash (actual or constructive) or accrual Hybrid Method Consolidated Mines, Inc. v. CTA L-18844, Aug 19, 1974 The Company, a domestic corporation engaged in mining, had filed its income tax returns for 1951, 1952, 1953 and 1956. In 1957 BIR examiners investigated the income tax returns filed by the Company because on August 10, 1954, its auditor, claimed the refund of the sum of P107+k representing alleged overpayments of income taxes for the year 1951. After the investigation the examiners reported that (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company profits of Benguet Consolidated Mines as operator of the Company's mines, although for income tax purposes the Company had reported income and expenses on the accrual basis; (2) depletion and depreciation expenses had been overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated; and that (B) for the year 1956 (1) the Company had
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overstated its claim for depletion; and (2) certain claims for miscellaneous expenses were not duly supported by evidence. As a result, the CIR sent the Company a demand letter requiring it to pay deficiency income taxes for the years 1951 to 1954, and for 1956. Deficiency income tax assessment notices for said years were also sent to the Company. The company requested a reconsideration of the assessment, but was the CIR denied. The Company appealed to the CTA, which ordered the Company to pay the amounts of P107+k, P134+k and P71+k as deficiency income taxes for the years 1953, 1954 and 1956, respectively. CTA nullified the assessments for the years 1951 and 1952 on the ground that they were issued beyond the five-year period prescribed by Section 331 of the NIRC. The Company appealed and the CTA reduced the deficiency income tax liabilities. The CTA subscribed to the theory of the Company that Benguet Consolidated Mining Company, hereafter referred to as Benguet, had no right to share in "Accounts Receivable," hence one-half thereof may not be accrued as an expense of the Company for a given year. The Company and the CIR to the SC. The Company questions the rate of mine depletion adopted by the CTA and the disallowance of depreciation charges and certain miscellaneous expenses. The CIR, on the other hand, questions what he characterizes as the "hybrid" or "mixed" method of accounting utilized by the Company, and approved by the CTA, in treating the share of Benguet in the net profits from the operation of the mines in connection with its income tax returns. With respect to methods of accounting, the Tax Code states: "Sec. 38. General Rules. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer but if no such method of accounting has been so employed or if the method employed does not clearly reflect the income the computation shall be made in accordance with such
methods as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income . . . "Sec. 39. Period in which items of gross income included. The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the methods of accounting permitted under section 38, any such amounts are to be properly accounted for as of a different period . . . "Sec. 40. Period for which deductions and credits taken. The deductions provided for in this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred' dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions should be taken as of a different period . . ." It is said that accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. The U.S. Internal Revenue Code allows each taxpayer to adopt the accounting method most suitable to his business, and requires only that taxable income generally be based on the method of accounting regularly employed in keeping the taxpayer's books, provided that the method clearly reflects income. The Company used the accrual method of accounting in computing its income. One of its expenses is the amount paid to Benguet as mine operator, which amount is computed as 50% of "net income." The Company deducts as an expense 50% of cash receipts minus disbursements, but does not deduct at the end of each calendar year what the Commissioner alleges is "50% of the 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.

ISSUE: Whether or not the accounting system used by the Company justifies such a treatment of this item; and if not, whether said method used by the Company, and characterized by the Commissioner as a "hybrid method," may be allowed under the aforequoted provisions of our tax code. HELD: The Company has certain mining claims located in Masinloc, Zambales. Because it wanted to relieve itself of the work and expense necessary for developing the claims, the Company, on July 9, 1934, entered into an agreement with Benguet, a domestic anonymous partnership engaged in the production and marketing of chromite, whereby the latter undertook to "explore, develop, mine, concentrate and market" the pay ore in said mining claims. There is a 90%(Benguet) 10% (Consolidated) sharing of profits and Benguet was being reimbursed the expenses disbursed during the period it was trying to put the mines on a profit-producing basis. By 1953 Benguet had completely recouped said advances, because they were then dividing the profits share and share alike. It is of the CIRs view that there were years when the Company had been overstating its income (1951 and 1952) and there were years when it had been understating its income (1953 and 1954). The Commissioner is not interested in the taxes for 1951 and 1952 (which had prescribed anyway) when the Company had overstated its income, but in those for 1953 and 1954, in each of which years the amount of the "Accounts Receivable" was less than that of the previous year, and the Company, therefore, appears to have deducted, as expense, compensation to Benguet bigger (than what the Commissioner claims is due) by one-half of the difference between the year's "Accounts Receivable" and the previous year's "Accounts Receivable," thus apparently understating its income to that extent. According to the agreement between the Company and Benguet the net profits "shall be computed by deducting from gross income all operating expenses and all expenses of any nature whatsoever." Periodically, Benguet was to furnish the Company with the statement of accounts for a given month "as soon as practicable after the close"
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of that month. The Company had ten days from receipt of the statement to register its objections thereto. Thereafter, the statement was considered binding on the Company. And all payments due the Company "with respect to the expeneditures made and ore settlements received during the calendar month shall be payable on or before the twentieth of each month." The agreement does not say that Benguet was to share in "Accounts Receivable." But may this be implied from the terms of the agreement? The statement of accounts and the payment that Benguet must make are both with respect to "expenditures made and ore settlements received." "Expenditures" are payments of money. This is the meaning intended by the parties, considering the provision that Benguet agreed to "provide such funds from its own resources, etc."; and that "such expenditures from its own resources" were to be reimbursed first as provided in the agreement. "Settlement" does not necessarily mean payment or satisfaction, though it may mean that; it frequently means adjustment or arrangement. The term "settlement" may be used in the sense of "payment," or it may be used in the sense of "adjustment" or "ascertainment," or it may be used in the sense of "adjustment" or "ascertainment of a balance between contending parties," depending upon the circumstances under which, and the connection in which, use of the term is made. In the term "ore settlements received," the word "settlement" was not used in the concept of "adjustment," "arrangement" or "ascertainment of a balance between contending parties," since all these are "made," not "received." "Payment," then, is the more appropriate equivalent of, and interchangeable with, the term "settlement." Hence, "ore settlements received" means "ore payments received," which excludes "Accounts Receivable." Thus, both par. VIII and par. XIV refer to "payment," either received or paid by Benguet. According to the agreement, the 50-50 sharing should be on "net profits;" and "net profits" shall be computed "by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of the agreement." The term "gross profit" was not defined. In the accrual method of accounting "gross income" would include both "cash
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receipts" and "Accounts Receivable." But the term "gross income" does not carry a definite and inflexible meaning under all circumstances, and should be defined in such a way as to ascertain the sense in which the parties have used it in contracting. According to par. VIII the "division of net profits shall be based on the receipts and expenditures." The term "expenditures" we have already analyzed. As used, "receipts" means "money received." The same par. VIII uses the term "expenditures, advances and disbursements." "Disbursements" means "payment," while the word "advances" when used in a contract ordinarily means money furnished with an expectation that it shall be returned. 16 It is thus clear from par. VIII that in the computation of "net profits" (to be divided on the 90%10% sharing arrangement) only "cash payments" received and "cash disbursements" made by Benguet were to be considered. On the presumption that the parties were consistent in the use of the term, the same meaning must be given to "net profits" as used in par. X, and "gross income," accordingly, must be equated with "cash receipts." The language used by the parties show their intention to compute Benguet's 50% share on the excess of actual receipts over disbursements, without considering "Accounts Receivable" and "Accounts Payable" as factors in the computation. Benguet then did not have a right to share in "Accounts Receivable," and, correspondingly, the Company did not have the liability to pay Benguet any part of that item. And a deduction cannot be accrued until an actual liability is incurred, even if payment has not been made. Here we have to distinguish between (1) the method of accounting used by the Company in determining its net income for tax purposes; and (2) the method of computation agreed upon between the Company and Benguet in determining the amount of compensation that was to be paid by the former to the latter. The parties, being free to do so, had contracted that in the method of computing compensation the basis were "cash receipts" and "cash
payments." Once determined in accordance with the stipulated bases and procedure, then the amount due Benguet for each month accrued at the end of that month, whether the Company had made payment or not (see par. XIV of the agreement). To make the Company deduct as an expense one-half of the "Accounts Receivable" would, in effect, be equivalent to giving Benguet a right which it did not have under the contract, and to substitute for the parties' choice a mode of computation of compensation not contemplated by them. Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct in not accruing said one-half as a deduction. The Company was not using a hybrid method of accounting, but was consistent in its use of the accrual method of accounting. In resume, the SC finds: (1) that the Company was not using a "hybrid" method of accounting in the preparation of its income tax returns, but was consistent in its use of the accrual method of accounting; PERCENTAGE OF COMPLETION METHOD NIRC Sec 48 (Supra) RR-2, Sec 44 Long term contracts. Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term long-term contracts mean building, installation or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases:
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(a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificate of architects, or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the CIR may permit or require an amended return. (b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of the completion. When a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income, he will not be required to change either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him, should accompany his return. iv. Change of accounting period [Supra] v. Installment Basis
gross profit x installment paid = reportable income contract price vi. Allocation of income and deductions YUTIVO AND SONS HARDWARE CO. V. CIR (1 SCRA 160) Yutivo Sons Hardware Co. is a domestic corporation, organized under the laws of the Philippines, with principal office at 404 Dasmarias St., Manila. Incorporated in 1916, it was engaged, prior to the last world war, in the importation and sale of hardware supplies and equipment. After the liberation, it resumed its business and until June of 1946 bought a number of cars and trucks from General Motors Overseas Corporation, an American corporation licensed to do business in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the public. On June 13, 1946, the Southern Motors, Inc. was organized to engaged in the business of selling cars, trucks and spare parts. Its shares were subscribed in 5 equal proportions by the descendants of the founders of Yutivo. When GM withdrew from the Philippines in the middle of 1947, the cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao. GM appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since
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such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to the public. Yutivo was investigated by the BIR and was assessed P1.8+M as deficiency sales tax plus surcharge covering the period from July 1, 1947 to December 31, 1949, claiming that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the subsidiary of the latter. Yutivo disputed the assessment and thereafter a reinvestigation was made. The CIR redetermined that the aforementioned tax assessment was lawfully due the government and in addition assessed deficiency sales tax due from petitioner for the four quarters of 1950; the CIRs last demand was in the total sum of P2.2+M. The second assessment was contested by Yutivo before the CTA, alleging that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo; (2) that assuming the separate personality of SM may be disregarded, the sales tax already paid by Yutivo should first he deducted from the selling price of SM in computing the sales tax due on each vehicle; and (3) that the surcharge has been erroneously imposed by respondent. The CTA ruled in favor of CIR and ruled that the creation of SM is for Yutivo to evade taxes, as it is owned by and controlled by Yutivo and is a mere subsidiary, branch, adjunct conduit, instrumentality or alter ego of the latter. ISSUE: Whether or not SM has a personality separate and distinct from Yutivo HELD: YES. It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. However, "when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime," the
law will regard the corporation as an association of persons, or in the case of two corporations merge them into one. When the corporation is the "mere alter ego or business conduit of a person, it may be disregarded." However, SM was not organized purposely as a tax evasion device. Moreover, it runs counter to the fact that there was no tax to evade. The intention to minimize taxes, when used in the context of fraud, must be proved to exist by clear and convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation. This is because fraud is never lightly to be presumed. The SC however agree that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated SM merely as its department or adjunct. For one thing, the accounting system maintained by Yutivo shows that it maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo. The SC also found meritorious the contention that the Tax Court erred in computing the alleged deficiency sales tax on the selling price of SM without previously deducting therefrom the sales tax due thereon. The sales tax provisions (secs. 184-186, Tax Code) impose a tax on original sales measured by "gross selling price" or "gross value in money." These terms, as interpreted by the respondent Collector, do not include the amount of the sales tax, if invoiced separately. Thus General Circular No. 431 of the Bureau of Internal Revenue dated July 29, 1939, which implements sections 184-186 of the Tax Code provides:
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". . . 'Gross selling price' or 'gross value in money' of the articles sold, bartered, exchanged, or transferred as the term is used in the aforecited sections (sections 184, 185 and 186) of the National Internal Revenue Code, is the total amount of money or its equivalent which the purchaser pays to the vendor to receive or get the goods. However, if a manufacturer producer, or importer, in fixing the gross selling price of an article sold by him has included an amount intended to cover the sales tax in the gross selling price of the articles, the sales tax shall be based on the gross selling price less the amount intended to cover the tax, if the same is billed to the purchaser as a separate item. General Circular No. 440 of the same Bureau reads: "Amount intended to cover the tax must be billed as a separate item so as not to pay a tax on the tax. - On sales made after the third quarter of 1939, the amount intended to cover the sales tax must be billed to the purchaser as separate items in the invoices in order that the deduction thereof from the gross selling price may be allowed in the computation of the merchants' percentage tax on the sales. Unless billed to the purchaser as a separate item in the invoice, the amount intended to cover the sales tax shall be considered as part of the gross selling price of the articles sold, and deductions thereof will not be allowed." (Cited in Dalupan, Nat. Int. Rev. Code, Annoted, Vol. II, pp. 52-53.) Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did not form part of the "gross selling price" as the measure of the tax. Since Yutivo has previously billed the sales tax separately in its sales invoices to SM. General Circulars Nos. 431 and 440 should be deemed to have been complied with. Note: Sorry, I really cant find the allocation of income and deductions part this is the closest thing
vii Net worth Method PEREZ V. CTA (103 PHIL 1167) L-10507, MAY 30, 1958 Appeal by certiorari to review the decision of the Court of Tax Appeals in case B.T.A. 189, wherein petitioner was ordered to pay the sum of P41,547.77 as deficiency income taxes and surcharges corresponding to the years 1947, 1948, 1949 and 1950. This amount was arrived at on the basis of petitioner's increase in net worth. The three-year prescriptive period under section 51 (d) of the National Internal Revenue Code constitutes a limitation to the right of the government to enforce the collection of income taxes by summary proceedings of distraint and, levy, though it can proceed to recover the taxes due by instituting the corresponding civil action. The Collector concedes that the summary distraint and levy to collect the deficiency income taxes assessed against appellant for 1947, 1948 and 1949 was invalid. Nevertheless, the appeal of the taxpayer vested jurisdiction on the Court of Tax Appeals to review and determine his tax liability for the aforesaid period. On the application of the net worth method of determining taxable income, used by the collector and upheld by the court below, it must he explained that the method is based upon the general theory that money and other assets in excess of liabilities of a taxpayer (after an accurate and proper adjustment of non-deductible items) not accounted for by his income tax returns, leads to the inference that part of his income has not been reported. The authority to use this method in determining income is rooted in or stems from section 41 of the Internal Revenue Code of 1939 of the United States. No cogent reason is shown for deviating from this practice in the Philippines. In fact section 38 of the National Internal Revenue Code authorizes the application of the Net Worth Method in this jurisdiction. The decision appealed from, requiring appellant to pay the sum of P41,547.77, is affirmed, with the sole modification that the Collector's

resort to summary distraint to enforce the taxpayer's liability for 1947, 1948 and 1949 is declared improper and void. COLLECTOR OF INTERNAL REVENUE V. REYES L-11534, NOVEMBER 25, 1958 Appeal from the decision of the Court of Tax Appeals, ordering respondent-appelIant to pay the aggregate amount of P210,759.20, representing deficiency income tax and 50% surcharge corresponding to the taxable years 1946, 1947, 1948, and 1950. Note: Sorry again but for some reason, this is the only thing written in the decision C. ESTATES AND TRUSTS
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SEC. 60. Imposition of Tax. (A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust, including: (1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. (B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profitsharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. (C) Computation and Payment. (1) In General. - The tax shall be computed upon the taxable income of the estate or trust and shall be paid by the fiduciary, except as

provided in Section 63 (relating to revocable trusts) and Section 64 (relating to income for the benefit of the grantor). (2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax provided in this Section computed on such consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the trust administered by him bears to the consolidated income of the several trusts. SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that: (A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable year. (B) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary.
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(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries. SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax provided for in this Title, there shall be allowed an exemption of Twenty thousand pesos (P20,000) from the income of the estate or trust. SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested (1) in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor. SEC. 64. Income for Benefit of Grantor.(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or (2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor, or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor. (B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the

disposition of the part of the income in question. SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators, receivers, conservators and all persons or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the income of the person, trust or estate for whom or which they act, and be subject to all the provisions of this Title, which apply to individuals in case such person, estate or trust has a gross income of Twenty thousand pesos (P20,000) or over during the taxable year. Such fiduciary or person filing the return for him or it, shall take oath that he has sufficient knowledge of the affairs of such person, trust or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and correct, and be subject to all the provisions of this Title which apply to individuals: Provided, That a return made by or for one or two or more joint fiduciaries filed in the province where such fiduciaries reside; under such rules and regulations as the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this Section. SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees, executors, administrators and other fiduciaries are indemnified against the claims or demands of every beneficiary for all payments of taxes which they shall be required to make under the provisions of this Title, and they shall have credit for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or other fiduciaries. Sec. 207-213, RR-2 Sec. 207. Estates and Trusts. "Fiduciary" is a term which applies to all persons or corporations that occupy positions of peculiar confidence toward others, such as trustees, executors, or administrators; and a fiduciary, for income tax purposes, is any person or corporation that holds in trust an estate of another persons or persons. In order that fiduciary relationship may exist, it is necessary that a legal trust be created.
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In general, the income of a trust for the taxable year which is to be distributed to the beneficiaries must be returned by an will be taxed to the respective beneficiaries, but the income of a trust which is to be accumulated or held for future distribution, whether consisting of ordinary income or gain from the sale of assets included in the corpus of the trust, must be returned by and will be taxed to the trustee. Three exceptions to this general rule are found in the law: (1) in the case of revocable trusts (sec. 59); (2) in the case of a trust the income of which, in whole or in part, may be held or distributed for the benefit of the grantor (sec. 60); and (3) in the case of a trust administered in a foreign country (sec. 57c). in the first case, the income from such part of the trust estate title to which to which may be revested in the grantor should be included ion the grantor's return. In the second case, part of the income of the trust, which may be held or distributed for the benefit of the grantor, should be included in the grantor's return. In the third case, the trustee is not entitled to the deduction mentioned in subsections (a) and (b) of section 57 and the net income of the trust undiminished by any amounts distributed, paid or credited to beneficiaries will be taxed to the trustees; however, the income included in the return of the trustees is not to be included in computing the income of the beneficiaries. Sec, 208. Consolidation of incomes of two or more trusts. Section 56 (b) (2) expressly requires the consolidation of the income of two or more trusts where the creator of the trust in each instance is the same person and the beneficiary in each instance is the same. The tax due on the consolidated income sill be collected from the trustees in proportion to the net income of the respective trusts. Sec. 209. Estates and trusts taxed to fiduciary. In the case of a decedent's estate the settlement of which is the object of testamentary or intestate proceedings, the fiduciary, executor, or administrator is required to file an annual return for the estate up to the final settlement thereof. In the same manner, the fiduciary is required to file a yearly return covering the income of a trust, whether

created by will or deed, for accumulation of income, whether for unascertained persons or persons with contingent interests or otherwise. In both cases the income of the estate or trust is taxed to the fiduciary. Where under the terms of a will or deed, the trustee may, in his discretion, distribute the income or accumulate it, the income is taxed to the trustee, irrespective of the exercise of his discretion. The imposition of the tax is not affected by the fact that an ultimate beneficiary may be a person exempt from tax. Sec. 210. Estates and trusts taxed to beneficiaries. In the case of (a) a trust the income of which is to be distributed annually or regularly; (b) an estate of a decedent the settlement of which is not the object of judicial testamentary or intestate proceedings; and (c) properties held under ownership or tenancy in common, the income is taxable directly to the beneficiary or beneficiaries. Each beneficiary must include in his return his distributive share of the net income of the trust, estate, or co-ownership. In the case of trusts which are in whole or in part subject to revocation by the grantor, or which are for the benefit of the grantor, the income of the trust is to be included in computing the net income of the grantor. Sec. 211. Decedent's estate administration. The "period of administration or settlement of the estate" is the period required by the executor or administrator to perform the ordinary duties pertaining to administration, in particular, the collection of assets and the payment of debts and legacies. Estates during the period of administration have but one beneficiary and that beneficiary is the estate. No taxable income is realized from the passage of property to the executor or administrator on the death of the decedent, even though it may have appreciated in value since the decedent acquired it. In the event of delivery of property in kind to a legatee or distributee, no income is realized. Where, however, prior to the settlement of the estate, the executor or administrator sells property of a decedent's estate for more than the appraised value placed upon it at the death of the decedent, the excess is income, taxable to the estate. Where
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property is sold after the settlement of the estate by the devisee, legatee or heir at a price greater than the appraised value placed upon it at the time he inherited the property from the decedent, he is taxable individually on any profit derived. An allowance paid a widow or heir out of the corpus of the estate is not deductible from gross income. Sec. 212. Liability for tax on estate or trusts. Liability for payment of the tax attaches to the person of an executor or administrator up to and after the discharge, where prior to distribution and discharge he had notice of his tax obligations or failed to exercise due diligence in determining whether or not such obligations existed. Liability for the tax also follows the estate itself, and when the estate has been distributed, the heirs, devisees, legatees, and distributors may be requires to discharge the amount of the tax due and unpaid, to the extent of and in proportion to any share received. The same consideration apply to other trusts. Where the tax has been paid on the net income of an estate or trust by the fiduciary, the net income on which the tax is paid is free from tax when distributed to the beneficiaries. Sec. 213. Exemption allowed to estate or trusts. An estate or trust is allowed a personal exemption of P 1,800 (P3,000 under BP 135). Each beneficiary is entitled to but one personal exemption no matter from how many trusts he may receive income. 1. GENERAL RULE BENEFICIARY TAXABILITY: FIDUCIARY
ON
OR
The following rules apply in computing and paying the income tax of an estate or trust: (a) The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual. Special deduction is allowed

to an estate or trust for any amount of income paid, credited or to be distributed to the beneficiaries. (b) The exemption of an estate or trust is P20,000 (c) The income tax rates for individual taxpayers apply (d) The ITR shall be filed by the executor or administrator or fiduciary if the gross income is P20,000 or more (e) Where two or more trusts are created by the same grantor, and the beneficiary in each instance is the same person, the trustees should each make a separate return for each trust, but the CIR shall cause the income tax to be computed on the consolidated taxable income of the several trusts, allowing one exemption only of P20,000. The income tax computed on the consolidated taxable income shall be allocated between the several trusts in proportion to their respective taxable incomes. There shall be an income tax still due from each of the several trusts. The tax imposed shall apply to the income of estates or of any kind of property held in trust, including (a) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of a will or trust (b) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian for an infant which is to be held or distributed as the court may direct (c) Income received by estates of deceased persons during the period of administration or settlement of the estate (d) Income which, in the discretion of the fiduciary, may either be distributed to the beneficiaries or accumulated (e) Exceptions: The income taxis not imposed on employees' trust which forms part of a pension,
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stock bonus or profit sharing plan of an employer for the benefit of some or all of his employees (a) if contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan; and (b) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for part of the corpus or income to (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of the employees. Any amount, however, actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. 2. PERSONAL EXEMPTION ALLOWED:
There shall be allowed an exemption of P20,000 from the income of the estate or trust. 3. DECEDENT'S ESTATE ADMINISTRATION; REVOCABLE TRUSTS
The tax is imposed on the net income of the estate or trust computed in the same manner and on the same basis as in the case of an individual, except that (a) There shall be allowed as a deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the

beneficiaries, and the amount of the income collected by the guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiaries whether distributed to them or not. (b) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in case of income which, in the discretion of the fiduciary, may either be distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir or beneficiary. (c) These deductions do not apply to trusts administered in a foreign country, but the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries. Revocable trustsWhere at any time the power to revest in the grantor title to any part of the corpus of the trust is vested (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall not be included as taxable income on the part of the trust; it shall be included in computi9ng the taxable income of the grantor. 4. INCOME FOR BENEFIT OF GRANTOR
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The rules on revocable trust shall also apply to trust income for the benefit of the grantor. Thus, where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor; or (2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of the premiums upon policies of insurance on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor. The term "in the discretion of the grantor" means that of the grantor alone or in conjunctions with any person not having a substantial adverse interest in the disposition of the part of the income in question

PART 8 D. RETURNS AND PAYMENT OF TAX 1. INDIVIDUAL RETURN (SEC. 51, SEC. 56) a. WHO ARE REQUIRED TO FILE
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Except where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, RDO, Collection Agent or duly authorized treasurer of the city or municipality in which such person has his (a) legal residence or (b) principal place of business in the Philippines. If there be no legal residence or place of business in the Philippines, (c) with the office of the Commissioner. d. (a) (b) WHEN TO FILE
The following individuals are required to file an income tax return: (a) Citizen residing in the Philippines (b) Citizen residing outside the Philippines, on his income from sources within the Philippines (c) Resident alien, on income derived from sources within the Philippines (d) Nonresident alien engaged in trade or business or in the exercise of profession in the Philippines b. THOSE NOT REQUIRED TO FILE
(a) Individual whose gross income does not exceed his total personal and additional exemptions for dependents (but citizens and any alien individual engaged in business or practice of profession within the Philippines shall file an ITR regardless of the amount of gross income) (b) Individual with respect to pure compensation income, from sources within the Philippines, the income tax on which has been correctly withheld (but an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an ITR. An individual whose pure compensation income derived from sources within the Philippines exceeds P 60,000 shall also file an ITR) (c) Individual whose sole income has been subjected to final withholding tax (d) Individual exempt from income tax c. WHERE TO FILE
On or before April 15 of the succeeding year For individuals subject to CGT - from the sale or exchange of shares of stock not traded thru a local stock exchange, within 30 days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year - from the sale or disposition of real property, within 30 days following each sale or other disposition e. WHEN TO PAY
The income tax shall be paid at the time the return is filed. For the individual, if the amount of the tax on the annual return before tax credits exceeds P2,000, the tax may be paid in two equal installments. The first installment shall be paid at the time the return is filed. The second installment shall be paid on or before July 15. f. CAPITAL GAINS ON SHARES OF STOCKS AND REAL ESTATE
The total amount of tax imposed and prescribed shall be paid on the date the return prescribed therefor is filed by the person liable thereto; Provided, That I fthe seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under

existing special laws, no such payments shall be required; Provided further That in case of failure to qualify for exemption under such special laws and IRR, the tax due on the gains realized from the original transaction shall immediately become due and payable, and subject to the penalties prescribed under provisions of the NIRC, and Provided finally, That if the seller, having paid the tax, submits such proof of intent within 6 months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption. In case the taxpayer elects and is qualified to report the gain by installments, the tax due from each installment payment shall be paid within 30 days from the receipt of such payments. g. QUARTERLY DECLARATION OF INCOME TAX (SEC. 74)
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Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316), on or before January 31 of the succeeding calendar year, or if the employment is terminated before the close of such calendar year, on the day on which the last payment of compensation is made. Failure to furnish the same shall be a ground for the mandatory audit of payors income tax liabilities (including withholding tax) upon verified complaint of the payee. xxx xxx xxx The Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316) shall contain a certification to the effect that the employers filing of BIR Form No. 1604-CF shall be considered as a substituted filing of the employees income tax return to the extent that the amount of compensation and tax withheld appearing in BIR Form No. 1604-CF as filed with BIR is consistent with the corresponding amounts indicated in BIR Form No. 2316. It shall be signed by both the employee and employer attesting to the fact that the information stated therein has been verified and is true and correct to the best of their knowledge. However, the withholding agents/employers are required to retain copies of the duly signed BIR Form No. 2316 for a period of three (3) years as required under the National Internal Revenue Code. The employee who is qualified for substituted filing of income tax return under these regulations, shall no longer be required to file income tax return (BIR Form No. 1700) since BIR Form No. 1604-CF shall be considered a substituted return filed by the employer. BIR Form No. 2316, duly certified by both employee and employer, shall serve the same purpose as if a BIR Form No. 1700 had been filed, such as proof of financial capacity for purposes of loan, credit card, or other applications, or for the purpose of availing tax credit in the employees home country and for other purposes with various government agencies. This may also be used for purposes of securing travel tax exemption, when necessary. However, information referring to the certification, appearing at the bottom of BIR Form No. 2316, shall not be signed by both the employer and the employee if the latter is not qualified for substituted filing. In which case, BIR
The amount of estimated income (i.e. the amount which the individual declared as income tax in his final adjusted and annual ITR for the preceding taxable year minus the sum of the credits allowed under this Title against said tax) with respect to which a declaration is required (from an individual who is receiving self-employment income) shall be paid in 4 installments. The 1st installment shall be paid at the time of the declaration; the 2nd and 3rd shall be paid on August 15 and November 15 of the current year. The 4th shall be paid on or before April 15 of the following calendar year when the final adjusted ITR is due to be filed. h. RR 3-2002 AS AMENDED BY RR 19-2002 (OCT. 11, 2002)
Section 2.83.1. Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316). In general, every employer or other person who is required to deduct and withhold the tax on compensation including fringe benefits given to rank and file employees, shall furnish every employee from whose compensation taxes have been withheld the

Form No. 2316 furnished by the employer to the employee shall be attached to the employees Income Tax Return (BIR Form No. 1700) to be filed on or before April 15 of the following year. For the implementation of these Regulations, BIR Form No. 2316 herein referred to shall be BIR Form No. 2316 version October 2002 or any later version. Thus, the old version cannot be used for this purpose although may be used for those taxpayers still required to file BIR Form No. 1700. i. RR 16-2002 (OCT. 11, 2002) MODES OF PAYMENT OF TAXES THROUGH BANKS
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stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission. (D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. - Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days after each transactions and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year. SEC. 53. Extension of Time to File Returns. - The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in case of corporations), subject to the provisions of Section 56 of this Code. SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation. (A) Payment of Tax. (1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file
2.
CORPORATE REGULAR RETURNS
SECS. 52-53, 56, NIRC SEC. 52. Corporation Returns. (A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer. (B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code. (C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital

the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due. (2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. (3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required : Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption. "In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment shall be paid within (30) days from the receipt of such payments. No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly
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authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid. (B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner. As used in this Chapter, in respect of a tax imposed by this Title, the term 'deficiency' means: (1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon this return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited returned or otherwise repaid in respect of such tax. The ITR of a corporation should be filed by the president, vice president, or other principal officer, and shall be sworn to by the treasurer or assistant treasurer. It should be filed by (a) corporations not exempt from income tax and (b) corporations which, by Sec. 30 of BIRC, is exempt from income tax, but which has not shown proof of exemption. The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns, subject to the provisions of Sec. 56 on payment and assessment of income tax for individuals and corporations.
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a.
QUARTERLY INCOME TAX (SEC. 75)
period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. c. WHEN TO FILE
SEC. 75. - Declaration of Quarterly Corporate Income Tax. Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year. b. FINAL ADJUSTMENT RETURN (SEC. 76)
(B)Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be. d. WHERE TO FILE (SEC. 77)
SEC. 76. - Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A)Pay the balance of tax still due; or (B)Carry-over the excess credit; or (C)Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carryover and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable
SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. (A)Place of Filing. -Except as the Commissioner other wise permits, the quarterly income tax declaration required in Section 75 and the final adjustment return required I Section 76 shall be filed with the authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept. e. WHEN TO PAY
(C)Time of Payment of the Income Tax. - The income tax due on the corporate quarterly returns and the final adjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at the time the declaration or return is filed in a manner prescribed by the Commissioner.

f. CAPITAL GAINS ON SHARES OF STOCK Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange under Secs. 24(C), 25(A)(3), 27(E)(2), 28(A)(8)(c), 28(B)(5)(c) shall file a return within 30 days after each transaction and a final consolidated return of all transactions during the taxable year on or before the 15th day of the 4th month following the close of the taxable year. g. RETURN OF CORPORATIONS CONTEMPLATING DISSOLUTION/REORGANIZATION
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from the beginning of the year up to the date of such dissolution or retirement and pay the corresponding income tax due thereon upon demand by the CIR. In addition to the ITR required to be filed, they shall also submit within the same period the following: (a) Copy of the resolution authorizing such dissolution (b) Balance sheet at the date of dissolution or retirement and a profit and loss statement covering the period from the beginning of the taxable year to the date of dissolution or retirement (c) In the case of a corporation, the names and addresses of the shareholders and the number and par value of the shares held by each; and in the case of a partnership, joint account or association, the name of the partners or members and the capital contributed by each (d) The value and a description of the assets received in liquidation by each shareholder (e) The name and address of each individual or corporation, other than shareholders, if any, receiving assets at the time of dissolution together with a description and the value of the assets received by such individuals or corporations; and the consideration, if any, paid by each of them for the assets received. ii. BPI V. COMMISSIONER OF INTERNAL REVENUE (CA-GR SP. NO. 38304, APR. 14, 2000)
Every corporation shall, within 30 days after the adoption by the corporation of a resolution or plan for its dissolution; or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the SEC; or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the Commissioner, shall by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance of the SEC of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the BIR, which certificate shall be submitted to the SEC. Sec. 244, RR No. 2 Return of corporations contemplating dissolution or retiring from business All corporations, partnership, joint accounts and associations, contemplating dissolution or retiring from business without formal dissolution shall, within 30 days after the approval of such resolution authorizing their resolution, and within the same period after their retirement from business, file their ITR covering the profit earned or business done by them i.
SEC. 46. Corporation Returns. (A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter X of this Title. The return
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shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer. [Now Section 52 (a)] Chapter X of Title II refers to Quarterly Corporate Income Tax Payments. The Final Adjustment Return refers to the Final Adjustment Income Tax Return, consistent with RR No. 2. II. WITHOLDING TAX A. FINAL WITHOLDING TAX 1. WITHHOLDING OF TAX AT SOURCE. SEC. 57 (NIRC). (A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code. (B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%)
thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. (C) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or provisions by which the obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the Philippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the Philippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the Philippines. 2. WITHOLDING CREDITABLE TAX RR 2-98 Sec. 2.57 (B) Creditable Witholding Tax Under the creditable withholding system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended, to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax and compensation income are creditable in nature. Sec. 2. 57.2 Income payment subject to creditable withholding tax and rates prescribed thereon

1. On the gross professional fees, talent fess for services rendered by individuals (engaged in the practice of professions or callings; professional entertainers but not limited to actors, actresses, singers and emcees; professional athletes including basketball players; all directors involved in movies, stage, radio; insurance agents and adjusters; management and technical consultants; bookkeeping agents; recipients of talent fees; fees of directors who are not employees of the company) The amounts subject to withholding under this paragraph shall include not only fees, but also per diems, allowances and any other form of income payments. In the case of professional entertainers, athletes, and all recipient of talent fees, the amount subject to withholding tax shall also include amounts paid to them in consideration for the use of their names or pictures in print, broadcast, or other media or other public appearances, for purposes of advertisement or sales promotion (10%) 2. Professional fees, talent fees, etc. for services of taxable juridical persons On the gross professional, promotional and talents fees, or any other form of remuneration enumerated in the preceding subparagraph for the services of taxable juridical persons Five percent (5%). 3. Rentals On gross rental for the continued use or possession of real property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity Five percent (5%). 4. Cinematographic film rentals and other payments On gross payments to resident individuals and corporate cinematographic film owners, lessors or distributors Five percent (5%). 5. Income payments to certain contractors On gross payments to the following contractors, whether individual or corporate One percent (1%). (a) General engineering contractors Those whose principal contracting business in connection with fixed works requiring specialized engineering knowledge and skill including the following divisions or subjects:
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(Reclamation works; Railroads; Highways, streets and roads; Tunnels; Airports and airways; Waste reduction plants; Bridges, overpasses, underpasses and other similar works; Pipelines and other systems for the transmission of petroleum and other liquid or gaseous substances; Land leveling; Excavating; Trenching; Paving; and Surfacing work.) (b) General Building contractors Those whose principal contracting business is in connection with any structure built, for the support, shelter and enclosure of persons, animals, chattels, or movable property of any kind, requiring in its construction the use of more than two unrelated building trades or crafts, or to do or superintend the whole or any part thereto. Such structure includes sewers and sewerage disposal plants and systems, parks, playgrounds, and other recreational works, refineries, chemical plants and similar industrial plants requiring specialized engineering knowledge and skills, powerhouse, power plants and other utility plants and installation, mines and metallurgical plants, cement and concrete works in connection with the abovementioned fixed works. (c) Specialty Contractors Those whose operations pertain to the performance of construction work requiring special skill and whose principal contracting business involves the use of specialized building trades or crafts. (d) Other contractors (Filling, demolition and salvage work contractors and operators of mine drilling apparatus; Operators of dockyards; Persons engaged in the installation of water system, and gas or electric light, heat or power; Operators of stevedoring, warehousing or forwarding establishments; Transportation contractors which include common carriers for the carriage of goods and merchandise of whatever kind by land, air or water, where the gross payments by the payor to the same payee amounts to at least two thousand pesos (P2,000) per month, regardless of the number of shipments during the month; Printers, bookbinders, lithographers and publishers except those principally engaged in the publication or printing of any newspaper, magazine, review or bulletin which
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appears at regular intervals, with fixed prices for subscription and sale; Messengerial, janitorial, private detective and/or security agencies, credit and/or collection agencies and other business agencies; Advertising agencies, exclusive of gross payments to media; Independent producers of television, radio and stage performances or shows; Independent producers of "jingles"; Labor recruiting agencies; Persons engaged in the installation of elevators, central air conditioning units, computer machines and other equipment and machineries and the maintenance services thereon; Persons engaged in the sale of computer services; Persons engaged in landscaping services; Persons engaged in the collection and disposal of garbage; TV and radio station operators on sale of TV and radio airtime; and TV and radio blocktimers on sale of TV and radio commercial spots.) 6. Income distribution to the beneficiaries. On income distributed to the beneficiaries of estates and trust as determined under Sec. 60 of the Code, except such income subject to final withholding tax and tax exempt income Fifteen percent (15%); 7. Income payments to certain brokers and agents. On gross commissions of customs, insurance, real estate and commercial brokers and fees of agents of professional entertainers Five percent (5%); 8. Income payments to partners of general professional partnerships. Income payments made periodically or at the end of the taxable year by a general professional partnership to the partners, such as drawings, advances, sharings, allowances, stipends, etc. Ten percent (10%); 9. Professional fees paid to medical practitioners. Any amount collected for and paid to medical practitioners by hospitals and clinics or paid by patients to the medical practitioners through the hospital or clinic Ten percent (10%); 10. Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer
of . Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5 of these regulations Exempt With a selling price of five hundred thousand pesos (P500,000.00) or less 1.5% With a selling price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00) 3.0% With selling price of more than two million pesos (P2,000,000.00) 5.0% A seller/transferor must show proof of registration with HLURB or HUDCC to be considered as habitually engaged in the real estate business. Real property, other than capital asset, by an individual, estate, trust, trust fund or pension fund or by a corporation who is not habitually engaged in the real estate business Seven and one-half percent (7.5%). Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the property received in exchange, as determined in the Income Tax Regulations shall be used. Where the consideration or part thereof is payable on installment, no withholding of tax is required to be made on the periodic installment payments where the buyer is an individual not engaged in trade or business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on the last installment or installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and withheld by the buyer on every installment. 11. Additional income payments to government personnel from importers, shipping and airline companies, or their agents. On gross additional payments by importers, shipping and airline companies, or their agents to government personnel for overtime services as authorized by law Fifteen percent (15%); For this purpose, the importers, shipping and airline companies or their agents, shall be the withholding agents of the Government; 12. Certain income payments made by credit card companies. On the gross amounts paid by any credit card company in the Philippines to any business entity, whether a natural or juridical person, representing the sales of goods/services made by the aforesaid business entity to cardholders One half percent (1/2%); 13. Income payments made by the top five thousand (5,000) corporations. Income payments made by any of the top five thousand (5,000) corporations, as determined by the Commissioner, to their local supplier of goods One percent (1%); (a) The term "goods" pertains to tangible personal property. It does not include intangible personal property as well as real property. (b) The term "local suppliers of goods" pertains to a supplier from whom any of the top five thousand (5,000) corporations, as determined by the Commissioner, regularly makes its purchases of goods. As a general rule, this term does not include a casual purchase of goods, that is, purchases made from non-regular suppliers and oftentimes involving single purchases. However, a single purchase which involves one hundred thousand pesos (P100,000.00) or more shall be subject to a withholding tax. (c) A corporation shall not be considered a withholding agent for purposes of this Section, unless such corporation has been determined and duly notified in writing by the Commissioner that it has been selected as one of the top five thousand (5,000) corporations.
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(d) The withholding agent shall submit on a semestral basis a list of its regular suppliers of goods to the Revenue District Office (RDO) having jurisdiction over the withholding agent's principal place of business on or before July 31 and January 31 of each year. 14. Income payments by government. Income payments, except any single purchase which is P10,000 and below, which are made by a government office, national or local, including government-owned or controlled corporations, on their purchases of goods from local suppliers One percent (1%); A government-owned or controlled corporation which is listed as one of the top five thousand (5,000) corporations shall withhold the tax in its capacity as a government-owned or controlled corporation rather than as one of the top five thousand (5,000) corporations RR 12-98 This merely amends Section 2.57.2 of RR 2-98 (in order to streamline and make more efficient the collection of the creditable withholding tax on income payments to medical practitioners) The old rule had no procedure laid down for these medical practitioners, the new procedure is now as follows: 1. It shall be the DUTY and RESPONSIBILITY of the hospital/clinic to collect from any patient admitted by such hospital/clinic, the professional fee of the attending medical practitioner and to withhold the tax herein prescribed (10%) 2. It is the intent of this RR that the hospital/clinic shall, at all times, collect the professional fee for and in behalf of the medical practitioner and to withhold there from the tax herein prescribed. 3. All these rules apply also to rendering of medical services by medical practitioners through a duly registered professional partnership, however, the rate if 5%. A. IN GENERAL it shall be presumed that the hospital/clinic has collected the professional fee of the said medical

practitioner and shall, accordingly, be liable for the withholding of the tax vis--vis each and every patient admitted into the hospital or clinic under the care of the said medical practitioner. B. EXCEPTION the withholding tax does NOT apply whenever there is proof that no professional fee has in fact been charged and paid by his patient, PROVIDED, this fact is in a sworn declaration jointly executed by the medical practitioner, the patient or his duly authorized rep., and the administrator of the hospital/clinic. This sworn declaration shall form part of the records of the hospital/clinic and made readily available to any authorized CIR officer for tax audit purposes, PROVIDED further, the administrator should inform the Revenue District Office having jurisdiction over such hospital/clinic about any medical practitioner who fails or refuses to execute the sworn statement within 10 days from such event.
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business within the Philippines, based on the gross amount thereof and at the rates prescribed therefor: xxx xxx xxx (4) Gross income from all sources within the Philippines derived by non-resident cinematographic film owners, lessors or distributors Twenty Five percent (25%). For purposes of these regulations, the term 'cinematographic film' includes motion picture films, films, tapes, discs and other such similar or related products. (5) Gross income derived from contracts by subcontractors from service contractors engaged in 'petroleum operations' as defined under P.D. 87 (also known as the 'Oil Exploration and Development Act') in the Philippines Eight percent (8%) of its gross income derived from such contracts in lieu of any and all taxes, national and local, as imposed under P.D. 1354. xxx xxx xxx (D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies and Those Employed by Offshore Banking Units and Petroleum Service Contractors and Subcontractors. A finalwithholding tax equivalent to fifteen percent (15%) shall be withheld by the withholding agent from the gross income received by every alien individual occupying managerial and technical positions in regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration, and other emoluments, such as honoraria and allowances, except income which is subject to the fringe benefits tax, from such regional or area headquarters and regional operating headquarters. The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by multinational companies, regardless of whether or not there is an alien executive occupying the same position, provided, that such Filipinos shall have the option to be taxed at either 15% of gross income or at the regular tax rate on their taxable income in accordance with the Tax Code of 1997. In case of the latter, the withholding tax rates
RR 2-98 and RR 12 -98 were amended by the following:

RR 6-2001 SECTION 2. Income Payments Subject to Final Withholding Tax. Section 2.57.1 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "SECTION 2.57.1. Income Payments Subject to Final Withholding Tax. The following forms of income shall be subject to final withholding tax at the rates herein specified: (A) Income payments to a citizen or to a resident alien individual xxx xxx xxx (7) Gross income derived from contracts by subcontractors from service contractors engaged in 'petroleum operations' as defined under P.D. 87 (also known as the 'Oil Exploration and Development Act') in the Philippines Eight percent (8%) of its gross income derived from such contracts in lieu of any and all taxes, national and local, as imposed under P.D. 1354 (B) Income Payment to Non-resident Aliens Engaged in Trade or Business in the Philippines. The following forms of income derived from sources within the Philippines shall be subject to final withholding tax in the hands of a non-resident alien individual engaged in trade or

under Sections 2.78 and 2.79 of Revenue Regulations No. 2-98 shall apply. The term "multinational company" means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia Pacific Region and other foreign markets. (E) Income Derived by Alien Individuals Employed by Offshore Banking Units. A final withholding tax equivalent to fifteen percent (15%) shall be withheld by the withholding agent from the gross income of alien individuals occupying managerial and technical positions in offshore banking units established in the Philippines, as salaries, wages, annuities, compensation, remuneration, and other emoluments, such as honoraria and allowances received from such offshore banking units. The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by offshore banking units, regardless of whether or not there is an alien executive occupying the same position. (F) Income of Aliens Employed by Foreign Petroleum Service Contractors and Subcontractors. A final withholding tax equivalent to fifteen percent (15%) shall be withheld from the gross income of an alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor who is engaged in petroleum operations in the Philippines. His gross income includes salaries, wages, annuities, compensation, remuneration, and other emoluments, such as honoraria and allowances received from such contractor or subcontractor. The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by foreign petroleum service contractors and subcontractors, regardless of whether or not there is an alien executive occupying the same position. (G) Income Payment to a Domestic Corporation. The following items of income shall be subject to a final withholding tax in the hands of a domestic corporation, based on the gross amount thereof and at the rate of tax prescribed therefor:
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xxx xxx xxx (6) Gross income derived from contracts by subcontractors from service contractors engaged in 'petroleum operations' as defined under P.D. 87 (also known as the 'Oil Exploration and Development Act') in the Philippines Eight percent (8%) of its gross income derived from such contracts in lieu of any and all taxes, national and local, as imposed under P.D. 1354 (H) Income Payment to a Resident Foreign Corporation. The following forms of income shall be subject to a final withholding tax in the hands of a resident foreign corporation, based on the gross amount thereof and at the rate of tax prescribed therefor: xxx xxx xxx (6) Gross income derived from contracts by subcontractors from service contractors engaged in 'petroleum operations' as defined under P.D. 87 (also known as the 'Oil Exploration and Development Act') in the Philippines Eight percent (8%) of its gross income derived from such contracts in lieu of any and all taxes, national and local, as imposed under P.D. 1354 SECTION 4. Time for Filing of Withholding Tax and the Payment of Taxes Due Thereon. The time for filing of the various tax returns as indicated below and the payment of the taxes due thereon shall be revised in accordance with the appropriate amendments to the existing regulations, as presented below. (1) Sections 2.58(A)(2) and 2.81 of Revenue Regulations No. 2-98, as amended, are hereby further amended to read as follows: "SECTION 2.58 RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE. (A) Monthly return and payment of taxes xxx xxx xxx (2) WHEN TO FILE (a) For both large and non-large taxpayers, the withholding tax return, whether creditable or final (including final withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements) shall be filed and payments should be made,

within ten (10) days after the end of each month, except for taxes withheld for the month of December of each year, which shall be filed on or before January 15 of the following year. (b) With respect, however, to taxpayers, whether large or non-large, who availed of the electronic filing and payment (EFPS), the deadline for electronically filing the applicable withholding tax returns and paying the taxes due thereon via the EFPS shall be five (5) days later than the deadlines set above." "SECTION 2.81. FILING OF RETURN AND PAYMENT OF INCOME TAX WITHHELD ON COMPENSATION (FORM NO. 1601). Every person required to deduct and withhold the tax on compensation, including large taxpayers as determined by the Commissioner, shall make a return and pay such tax on or before the 10th day of the month following the month in which withholding was made to any authorized agent bank within the Revenue District Office (RDO) or in places where there are no agent banks, to the Revenue District Officer of the City or Municipality where the withholding agent/employer's legal residence or place of business or office is located; provided, however, that taxes withheld from the last compensation (December) for the calendar year shall be paid not later than January 15 of the succeeding year; Provided, however, that with respect to taxpayers, whether large or non-large, who availed of the EFPS, the deadline for electronically filing the aforesaid withholding tax return and paying the tax due thereon via the EFPS shall be five (5) days later than the deadlines set above. RR 12-2001 SECTION 2. Final Withholding Tax on Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. Sec. 2.57.1(D) of Revenue Regulations No. 2-98 (RR 2-98), as amended, is hereby further amended to read as follows "(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. xxx xxx xxx
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The same tax treatment is applicable to Filipinos employed and occupying the same positions as those aliens employed by regional or area headquarters and regional operating headquarters of multinational companies, regardless of whether or not there is an alien executive occupying the same position. Provided, that such Filipinos shall have the option to be taxed at either 15% of gross income or at the regular tax rate on their taxable income in accordance with the Tax Code of 1997 if the employer (Regional Operating Headquarters/Regional or Area Headquarters) is governed by Book III of E. O. 226 as amended by R.A. 8756. In case the Filipino opted to be taxed at the regular tax rate under Section 24 of the Tax Code of 1997, the provisions of Section 2.79 (A) to (D) of Revenue Regulations No. 2-98.
SECTION 4. Time of Withholding. Section 2.57.4 of RR 2-98, is hereby amended to read as follows: "Sec. 2.57.4. Time of withholding. The obligation of the payor to deduct and withhold the tax under Section 2.57 of these Regulations arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor's books, whichever comes first. The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable. Provided, however, that where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor's books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes.
RR 14-2002 SECTION 2. Income payments subject to creditable withholding tax and rates prescribed thereon. Section 2.57.2 of Revenue Regulations No. 2-98, as amended, is hereby further amended to read as follows: "Sec. 2.57.2. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each

class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (C) Rentals (1) Real properties. On gross rental for the continued use or possession of real property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity Five percent (5%); (2) Personal properties. On gross rental or lease in excess of Ten Thousand Pesos (P10,000.00) per payment for the continued use or possession of personal property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity which include, but not limited to the following: land transport equipment, water transport equipment, air transport equipment, industrial equipment, commercial equipment, scientific equipment, agricultural machinery and equipment, construction/civil engineering machinery and equipment, telecommunication equipment, office furniture/machines/equipment, main frame computer and all other computer machines/equipment, materials handling equipment and auxiliary equipment Five percent (5%); However, the Ten Thousand Pesos (P10,000.00) threshold shall not apply when the accumulated gross rental or lease paid by the lessee to the same lessor exceeds or is reasonably expected to exceed P10,000.00 within the year. In which case, the lessee shall withhold the five percent (5%) withholding tax on the entire amount. (3) Poles, satellites and transmission facilities. On gross rentals or lease for the use of poles, satellites and/or transponder and transmission facilities which include but not limited to the following: switchboards, land lines/aerial cables, underground cables and submarine cables Five percent (5%); (4) Billboards. On gross rentals or lease of spaces used in posting advertisements in the form of billboards and/or structures similar thereto, posted in public places such as, but not limited to, buildings, vehicles, amusement places, malls, street posts, etc. Five percent (5%) (D) . . .
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(E) Income payments to certain contractors. On gross payments to the following contractors, whether individual or corporate Two percent (2%) xxx xxx xxx (4) Other contractors xxx xxx xxx (m) Persons engaged in the sale of computer services, computer programmers, software/program developer/designer, internet service providers, web page designing, computer data processing, conversion or base services and other computer related activities; xxx xxx xxx (F) . . . (G) Income payments to certain brokers and agents. On gross commissions of customs, insurance, stock, real estate, immigration and commercial brokers, and fees of agents of professional entertainers. Ten percent (10%) (H) . . . (I) Professional fees paid to medical practitioners. Any amount collected for and paid to medical practitioners (includes doctors of medicine, doctors of veterinary science and dentists) by hospitals and clinics or paid directly to the medical practitioners by patients who were 'admitted and confined' to such Hospitals or Clinics. Ten percent (10%) a) It shall be the duty and responsibility of the Hospital or Clinic to remit taxes withheld from the following: xxx xxx xxx b) Exception The withholding tax herein prescribed shall 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, and the patient or his duly authorized representative, in case the patient is a minor or otherwise incapacitated. This sworn declaration, to be executed in the form presented in Annex "A" of these Regulations, shall form part of the records of the hospital or clinic and shall constitute as part of its records and shall be made readily available to any duly authorized
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Revenue Officer for tax audit purpose. Provided, further, that the said administrator of the hospital or clinic shall inform the Revenue District Office having jurisdiction over such hospital or clinic about any medical practitioner who fails or refuses to execute the sworn statement herein prescribed, within ten (10) days from the occurrence of such event. c) Hospitals and Clinics shall submit the names and addresses of medical practitioners in the following classifications, every 15th day after the end of each calendar quarter, to the Collection Division of the Revenue Region for non-large taxpayers and at the Large Taxpayers Document Processing and Quality Assurance Division (LTDP&QAD) in the National Office or Large Taxpayers District Office (LTDO) in the Region for large taxpayers, where such hospital or clinic is registered, using the prescribed format. xxx xxx xxx d) For this purpose, the term 'medical practitioners' includes, medical technologists, allied health workers (e.g., occupational therapists, physical therapists, speech therapists, nurses etc.) and other medical practitioners who are not under an employer-employee relationship with the hospital or clinic. e) Hospitals and clinics shall be responsible for the accurate computation of professional fees paid directly to hospitals and clinics and timely remittance of 10% expanded withholding tax. The list of all income recipients-payees in this Subsection shall be included in the Alphalist of Payees Subject to Expanded Withholding Tax attached to BIR Form No. 1604-E (Annual Information Return of Creditable Income Taxes Withheld (Expanded)/Income Payments Exempt from Withholding Tax). xxx xxx xxx (N) Income payments by government. Income payments, except any casual or single purchase of P10,000.00 and below, which are made by a government office, national or local including barangays, or their attached agencies or bodies, and government-owned or
controlled corporations, on their purchases of goods from local suppliers Two percent (2%); A government-owned or controlled corporation shall withhold the tax in its capacity as a government-owned or controlled corporation rather than as a corporation stated in Subsection (M) hereof. (O) Commissions of independent and exclusive distributors, medical/technical and sales representatives, and marketing agents of multi-level marketing companies. On gross commissions paid by multi-level marketing companies to independent and exclusive distributors, medical/technical and sales representatives, and marketing agents and sub-agents on their sale of goods or services by way of direct selling or similar arrangements. Ten percent (10%); 'Multi-level marketing' is a system of direct selling in which consumer products are sold by individuals where consumer products and services are supplied by an established multi-level marketing company who encourages the distributor to build and manage his own sales force by recruiting, motivating, and training others to sell the product or service. A percentage on the sales of the distributor's sales force would be his compensation in addition to his personal sales. 'Multi-level marketing companies' means any entity that is engaged in the sale of its products or services through individual that directly sell such products or services to the consumers. (P) Tolling fees paid to refineries. On the gross processing/tolling fees paid to refineries for the conversion of molasses to its byproducts and raw sugar to refined sugar Five percent (5%) (Q) Payments made by pre-need companies to funeral parlors. On gross payments made by pre-need companies to funeral parlors for funeral services rendered. One percent (1%) (R) Payments made to embalmers. On gross payments made to embalmers for embalming services rendered to funeral companies. One percent (1%) For purposes of these regulations, all income payments paid to subagents or their equivalent, whether paid directly or indirectly by the

agent or the owner of the goods, shall be subject to withholding tax in the same manner as that of the agent." SECTION 3. Persons required to deduct and withhold. Section 2.57.3 of Revenue Regulations No. 2-98 is hereby amended to read as follows: "Sec. 2.57.3. Persons required to deduct and withhold. The following persons are hereby constituted as withholding agents for purposes of the creditable tax required to be withheld on income payments enumerated in Section 2.57.2: (A) In general, any juridical person, whether or not engaged in trade or business; (B) An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents; (C) All government offices including government-owned or controlled corporations, as well as provincial, city and municipal governments and barangays." SECTION 4. Exemption from Withholding. Section 2.57.5 of Revenue Regulations No. 2-98 is hereby amended to read as follows: "Sec. 2.57.5. Exemption from Withholding. The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: (A) National government agencies and its instrumentalities including provincial, city, municipal governments and barangays except government-owned and controlled corporations. (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: (1) . . . (2) Corporations duly registered with the Board of Investments, Philippine Export Processing Zones and Subic Bay Metropolitan Authority enjoying exemption from income tax pursuant to E.O. 226, as amended, R.A. 7916, the Omnibus Investment Code of 1997 and R.A. 7227, as amended, respectively;
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(3) . . . (4) General professional partnerships (5) Joint ventures or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal & other energy operations pursuant to an operating or consortium agreement under a service contract with the government. FILSYN v. CA FACTS: this involves 2 consolidated cases---in both cases 2 corps received demand letters from the CIR demanding payment of deficiency withholding tax. The two corporations say that the liability to withhold and pay income tax withheld at source from certain payments due to a foreign corporation is at the time of accrual and not at the time of the actual payment or remittance thereof (that for the 2 corporations, it is to be paid to the government when it is due, not when it was actually paid to them [a later due date, parang ganon]). But the CIR and CTA say otherwise: that the liability of a taxpayer to withhold and pay the income tax withheld at source from certain payments due to a non-resident foreign corp attaches at the time of accrual payment or remittance thereof and the withholding agent/corp is obliged to remit the tax to the govt since it already and properly belongs to the govt. ISSUE: whether withholding tax due on payments to foreign corporations accrue on the date of actual remittance or earlier, when the amount is paid to the corporation?
HELD: when it was first paid to the corporation, especially in the case at bar where the corporation has already written-off the amounts as business expense in its books (it already took advantage of the benefit allowing for deductionstherefore, you cannot now claim that the withholding tax is due later (when you actually remit it) when you have already used its benefits

*the corp which is to withhold is considered both the agent of the taxpayer (when he files the papers) and of the government (when he actually withholds) *the law sets no condition for the liability of the corp/govt agent to attach when the corp doesnt withhold what hes supposed to withhold, reason is to compel the withholding agent to withhold under all circumstances!! So he is no ordinary agent of the govt, his duty is utmost! RR 30-2003 REVENUE REGULATIONS NO. 30-2003 issued on December 15, 2003 amends further pertinent provisions of RR Nos. 2-98 and 8-98, as amended, providing for withholding as a mode of remitting final Capital Gains Tax on the sale of real property classified as capital assets by non-resident aliens, increasing the withholding tax rates on certain income payments, inclusion of non-food products in the coverage of expanded withholding tax, providing sanctions to payees who refuse the withholding of tax on their income/receipts, and for other purposes. Capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales based on the gross selling price or fair market value, whichever is higher, shall be subject to a 6% final withholding tax in the hands of a non-resident alien individual engaged or not engaged in trade or business within the Philippines. In case of sale on installment of real property classified as capital asset, the procedures on the sale of real property classified as ordinary asset shall apply with the exception that the withholding tax on the former shall be final whereas that on the latter shall be creditable.
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In case of dispositions of real property classified as capital asset by individuals to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations, the tax to be imposed shall be determined either under Sec. 24(A) of the Tax Code, for the normal rate of income tax for individual citizens or residents, or under Sec. 24(D)(1) of the Tax Code, for the final tax on the presumed capital gains from sale of property at 6% at the option of the taxpayer-seller. The following income payments are subject to creditable withholding tax at the rates specified: a) Income payments made by the government to its local/resident supplier of goods and local resident supplier of services other than those covered by other rates of withholding tax 1% - supplier of goods 2% - supplier of services b)Income payments made to suppliers of agricultural products 1% (except for income payments made to casual agricultural suppliers where the annual gross purchases therefrom do not exceed P 20,000) c) Income payments to general engineering contractors, general building contractors, specialty contractors and other contractors 2% on gross payments d) Professional fees, talent fees, etc. paid for services rendered by individuals, taxable juridical persons and medical practitioners,

including income payments to partners of general professional partnerships 15% if the gross income/income payments for the current year exceeds P 720,000 10% if the gross income/income payments for the current year is P 720,000 and below In order to determine the applicable tax rate (10% or 15%) to be applied/withheld by the withholding agent, every individual professional/talent/ corporate directors shall periodically disclose his gross income for the current year to the BIR by submitting a notarized sworn declaration (3 copies). The disclosure should be filed on June 30 of each year or within 15 days after the end of the month the professional/talent/directors income reaches P 720,000, whichever comes earlier. In case his total gross income is less than P 720,000 as of June 30, he/she shall submit a second disclosure within 15 days after the end of the month that his/her gross income for the current year to date reaches P 720,000. The payee professional/talent/director shall furnish each payor a copy of the BIR duly stamped received sworn declaration not later than five (5) days from the date of receipt by the BIR. In case of failure to submit the June 30 annual declaration/disclosure to the BIR, and to furnish the payor/s a copy thereof, the payor shall withhold the tax at the rate of 15%. The aforesaid requirements shall likewise apply to taxable juridical persons (sworn declaration shall be executed by the president/managing partner of the corporation/company), partners of general professional partnerships and medical practitioners.
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Agents, employees or any person purchasing goods or services/paying for and in behalf of the aforesaid withholding agents shall withhold in their behalf, provided that the official receipts of payment/sales invoice shall be issued in the name of the person whom the former represents and the corresponding certificate of taxes withheld (BIR Form No. 2307) shall immediately be issued upon withholding of the tax. All income payments required to be subjected to withholding tax shall be subject to the corresponding withholding tax rate to be withheld by the person having control over the payment and who, at the same time, claims the expenses. Income payments made through brokers or agents or other person authorized to collect/receive payments for and on behalf of the payee, whether for consideration or otherwise, shall likewise be subject to the corresponding withholding tax rates to be withheld by the payor/person having control over the payment with the corresponding issuance of certificate of taxes withheld in the name of the payee whom the agent represents. The obligation to withhold is imposed upon the buyer-payor of income although the burden of tax is really upon the seller-income earner. Hence, unjustifiable refusal of the latter to be subjected to withholding shall be a ground for the mandatory audit of his income tax liabilities (including withholding tax) upon verified complaint of the buyer-payor. Accrued income earned prior to January 1, 2004 (the effectivity date of this Revenue Regulations) shall be based on the prevailing withholding tax rate at the time of accrual and must be withheld and remitted at the time the income accrues.
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RR 3-2004 REVENUE REGULATIONS NO. 3-2004 issued on March 12, 2004 suspends until further notice the implementation of the Withholding Tax provision on income payments made to suppliers of agricultural products. All withholding made on income payments in relation to Section 2.57.2(S) of RR No. 2-98, as amended, prior to the effectivity of this Regulations shall be reported and remitted by the withholding agent to the Bureau on or before the 10th of the following month for which the amount was withheld. The deadline for electronic filing shall be in accordance with the rules and regulations governing the Electronic Filing and Payment System (EFPS). In order for the said payments to be deductible against the withholdings agents income, the amount required under the said section of RR No. 2-98, as amended, must have been properly withheld, reported and remitted.
Philippines, or any of its political subdivisions, agencies or instrumentalities, with Salary Grades (SGs) 1 to 3 are exempted from the requirement of withholding tax on compensation. The said 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. Said individuals are also not qualified for substituted filing and, therefore, still required to file BIR Form NO. 1700 in accordance with existing Regulations. The compensation income where no Income Taxes were withheld shall be allowed as a deduction from an employers gross income when the required employees withholding statement (BIR Form No. 2316) have been issued to subject employees. Provided, further, that the alphabetical list of the subject employees shall be submitted under schedule 7.2 of BIR Form No. 1604-CF. Every person who makes payment or expects to make payment of compensation in an amount exceeding the statutory minimum wage or P 60,000.00 a year (P 5,000.00 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 10 days after becoming an employer. RR 4-2006
RR 1-2006 REVENUE REGULATIONS NO. 1-2006 issued on January 5, 2006 amends Sections 2.78.1(B), 2.79(A) and (F), 2.83.4(C) and 2.83.5 of Revenue Regulations (RR) No. 2-98, as amended, with respect to the withholding of Income Tax on compensation income received by minimum wage earners. The compensation income of individuals that do not exceed the statutory minimum wage or P 5,000.00 per month (P 60,000.00 a year), whichever is higher and of employees of the government of the
REVENUE REGULATIONS NO. 4-2006 issued on February 21, 2006 implements the tax privileges provisions of Republic Act (RA) No. 9257, otherwise known as the Expanded Senior Citizens Act of 2003 and prescribes the guidelines for the availment thereof. These Regulations are promulgated to prescribe the guidelines for the availment of the Income Tax exemption privilege granted to senior citizens, the tax benefit granted to benefactors taking care of senior citizens, the tax privilege granted to establishments giving discount on their sale of goods and services to senior citizens, as well as the tax privilege of those employing senior citizens. Senior citizens shall be entitled to the following tax benefits and privileges: a. Exemption from the payment of individual income tax provided that their annual taxable income does not exceed the poverty level as determined by the National Economic and Development Authority (NEDA) for the corresponding taxable year; b. 20% discount from all establishments relative to the utilization of services in hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the death of senior citizens; c. 20% discount on admission fees charged by theaters, cinema houses and concert halls, circuses, carnivals, and other similar places of culture, leisure and amusement for the exclusive use or enjoyment of senior citizens; d. 20% discount on medical and dental services, professional fees of attending doctors and diagnostic and laboratory fees such as, but not limited to, x-rays, computerized tomography scans and blood tests in all private hospitals and medical facilities, in accordance with the and
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regulations to be issued by the Department of Health (DOH) in coordination with the Philippine Health Insurance Corporation (PHILHEALTH); e. 20% discount in fare for domestic air and sea travel for the exclusive use or enjoyment of senior citizens; and f. 20% discount in public railways, skyways and bus fare for the exclusive use and enjoyment of senior citizens. A senior citizen must comply with the following requirements before he can be exempted from the payment of individual income tax: a. A senior citizen must first be qualified as such by the Commissioner of Internal Revenue or his duly authorized representative (i.e. the Revenue District Officer (RDO) having jurisdiction over the place where the senior citizen resides) by submitting a certified true copy of his Senior Citizen Identification Card (OSCA ID) issued by the Office for Senior Citizens Affairs (OSCA) of the city or municipality where he resides; b. He must file an Annual Information Return indicating that his annual taxable income does not exceed the poverty level as determined by the NEDA through the National Statistical Coordinating Board (NSCB), through a formal written document sent to the Commissioner of Internal Revenue for this year and every year thereafter; and c. If qualified, his name shall be recorded by the RDO in his master list of tax exempt senior citizens for that particular year, which the RDO is mandatorily required to keep. However, a senior citizen who is a compensation income earner deriving from only one employer an annual taxable income exceeding

the poverty level or the amount determined by the NEDA through the NSCB on a particular year, but whose income had been subjected to the withholding tax on compensation, shall, although not exempt from Income Tax, be entitled to the substituted filing of Income Tax return under Revenue Regulations No. 2-98, as amended. A senior citizen, however, shall be subject to the following Income Taxes: a. Individual Income Tax if it exceeds the poverty level as may be determined by the NEDA, thru the NSCB, for a certain taxable year; b. 20% final withholding tax on interest income from any currency bank deposit, yield and other monetary benefit from deposit substitutes, trust fund and similar arrangements; royalties (except on books, as well as other literary works and musical compositions, which shall be imposed a final withholding tax of 10%); prizes (except prizes amounting to P 10,000.00 or less which shall be subject to Income Tax and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); c. 7 % final withholding tax on interest income from a depository bank under the expanded foreign currency deposit system; d. If the senior citizen will pre-terminate his 5-year long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) before the 5th year, he shall be subject to the final withholding tax imposed on the entire income based on the remaining maturity thereof, viz: Four years to less than five years 5% Three years to less than four years 12%; and Less than three years 20%
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e. 10% final withholding tax on cash and/or property dividends actually or constructively received from a domestic corporation or from a joint stock company, insurance or mutual fund company and a regional operating headquarters of a multinational company, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or a co-venturer; f. Capital gains tax from sales of shares of stock not traded in the stock exchange; and g. 6% final withholding tax on presumed capital gains from sale of real property, classified as capital asset, except capital gains presumed to have been realized from the sale or disposition of principal residence. A senior citizen shall also be subject to the following internal revenue taxes imposed under the Tax Code: a. Value-Added Tax (VAT) or other percentage taxes, as the case may be. If he is self employed or engaged in business or practice of profession, and his gross annual sales and/or receipts exceeds P 1,500,000.00 or such amount to which this may be adjusted, he shall be subject to VAT. Otherwise, he shall be subject to the 3% percentage tax; b. Donors Tax; c. Estate Tax; d. Excise Tax on certain goods; and

e. Documentary Stamp Tax. A benefactor of a senior citizen shall be considered as head of family and shall be allowed to avail himself/herself of that status subject to the following conditions: a. The senior citizen, whose annual taxable income does not exceed the poverty level as determined by the NEDA for the corresponding taxable year, must be living with and dependent upon his benefactor for his chief support; b. It shall be the duty of the benefactor of a senior citizen to register the senior citizen as his dependent and himself/herself as benefactor in the RDO having jurisdiction over the place where he/she and the senior citizen reside. In that case, he/she will be granted the exclusive right to claim the senior citizen as dependent for Income Tax purposes; c. The benefactor shall be entitled only to the basic personal exemption equivalent to P 25,000.00 or as allowed under the Tax Code for head of family; d. If required to file an Income Tax return, the benefactor shall state therein the name, birthday and OSCA ID number of the dependent senior citizens. The benefactor of a senior citizen shall not, however, be entitled to claim the additional exemption of P 8,000.00 per dependent (not exceeding 4) allowable only to a married individual or head of family with qualified dependent child/children. Establishments granting sales discounts to senior citizens on the sale of goods and/or services are entitled to deduct the said discount from gross income subject to the following conditions:
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a. Only that portion of the gross sales exclusively used, consumed or enjoyed by the senior citizen shall be eligible for the deductible sales discount; b. The gross selling price and the sales discount must be separately indicated in the official receipt or sales invoice issued by the establishment for the sale of goods or services to the senior citizen; c. Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price can be deducted from the gross income, net of VAT, if applicable, for Income Tax purposes, and from gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax purposes; d. The discount can only be allowed as deduction from gross income for the same taxable year that the discount is granted; e. The business establishment giving sales discounts to qualified senior citizens is required to keep separate and accurate record of sales, which shall include the name of the senior citizen, Taxpayer Identification Number, OSCA ID, gross sales/receipts, sales discount granted, dates of transactions and invoice number for every sale transaction to senior citizen; f. Only the business establishments stated in the Regulations which granted sales discount to senior citizens on their sale of goods and/or services may claim the said discount granted as deduction from gross income. 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 citizens provided that the following conditions are met:

a. The employment shall have to continue for a period of at least 6 months; b. The annual taxable income of the senior citizen does not exceed the poverty level as may be determined by the NEDA through the NSCB. For this purpose, the senior citizen shall submit to his employer a sworn certification that his annual taxable income does not exceed the poverty level.
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not more than the statutory minimum wage in the nonagricultural sector where he/she is assigned." SEC. 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby further amended to read as follows: "SEC. 24. Income Tax Rates. "(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. "(1) x x x: "x x x; and "(c) On the taxable income defined in Section 31 of this code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. "(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates established in the following schedule: "Not over P10,000 ........ 5% P500+10% of the excess over P10,000 P2,500+15% of the excess over P30,000 P8,500+20% of the excess over P70,000
RA 9504 SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby further amended by adding the following definition after Subsection (FF) to read as follows: "SEC. 22. Definitions. - when used in this Title: "(A) x x x. "x x x "(FF) x x x. "(GG) the term 'statutory minimum wage' earner shall refer to rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE) "(HH) the term 'minimum wage earner' shall refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of
"Over P10,000 but not over ........ P30,000 "Over P30,000 but not over ........ P70,000 "Over P70,000 but not over ........ P140,000

"Over P140,000 but not over ........ P250,000 "Over P250,000 but not over ........ P500,000 "Over P5000,000 ........ P22,500+25% of excess over P140,000 P50,000+30% of excess over P250,000 P125,000+32% of excess over P500,000 the the the "x x x.
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income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B), (C); and 28(A)(1), there shall be allowed the following deductions from the gross income: "(A) Expenses. -
"For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, that if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. "Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. "x x x." SEC. 3. Section 34(L) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby amended to read as follows: "SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M)hereof, in computing taxable
"(L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
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"(M) x x x." "x x x."
Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. "For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. "x x x." SEC. 5. Section 51 (A)(2) of Republic Act No, 8424, as amended, otherwise known as the National Internal revenue Code of 1997, is hereby further amended to read as follows: "SEC. 51. Individual Return. "(A) Requirements. "(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return: "(a) x x x;
SEC. 4. Section 35(A) and (B) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby amended to read as follows: "SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. "(A) In General. - For purposes of determining the tax provided in Section 24(A) of this title, there shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50,000) for each individual taxpayer. "In the case of married individual where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. "(B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of Twenty-five thousand pesos (25,000) for each dependent not exceeding four (4). "The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. "In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children:
"x x x. "(2) The following individuals shall not be required to file an income tax return:

"(a) x x x; "(b) An individual with respect to pure compensation income, as defined in Section 32(A)(1), derived from such sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return; "(c) x x x; and "(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. "x x x." SEC 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby further amended to read as follows: "Section 79. Income Tax Collected at Source. "(A) Requirement of Withholding. - Except in the case of a minimum wage earner as defined in Section 22(HH) of this code, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: "x x x."
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3. RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE. SEC. 58 (NIRC) (A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers. The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government. (B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not late than the twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year.
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(C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the income payments. The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection. (D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of Section 56. All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent. (E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules
and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section 40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. 4. TAX DEEMED PAID ON DIVIDENDS (CIR VS. PROCTOR AND GAMBLE ) 5. WITHOLDING AGENT CAN FILE CLAIM FOR REFUND (CIR VS. PROCTOR AND GAMBLE ) CIR vs. PROCTOR AND GAMBLE Here it was said the PG-Phils has no bearing to pay the taxes on the dividends of PG to be paid to PG-USA, because they are different corporations. In the reversed version, PG-Phils has capacity to pay because when they remit the money to USA, and USA pays here, it is the same when they themselves pay for it. Anent that is the issue above, is whether PG-Phils is a taxpayer who can withhold tax? Yes, since the corp/withholding agent is directly and independently liable for the correct amount of the tax
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that should be withheld from the dividend remittances. Ergo, a person liable for tax has been held to be a person subject to tax Now as to the withholding issue under the syllabus: TAX DEEMED PAID ON Dividends--- the parent corp PG-USA is deemed to have paid a portion of the phil corp income tax although the tax was actually paid by its phils subsidiary, pg-phils, Not PG-USA. This deemed paid concept merely reflects economic reality, since the phil corp income tax was in fact paid and deducted from revenues earned in the phils, THUS REDUCING THE AMOUNT REMITTABLE as dividends to PG-USA. In other words, US tax law treats the phil corp income tax as if it came out of the pocket of PG-USA as a part of the economic cost of carrying on business in the phils through its medium, PG-phils. What is, under US LAW, DEEMED PAID by PG-USA are not phantom taxes but instead phil corp income taxes actually paid here by PG-phils, which are very real indeed. Now, re the deemed paid tax credit: there is no statutory provision nor RR issued by the secretary of finance requiring the ACTUAL grant of the deemed paid tax credit by the US internal revenue service to PG-usa BEFORE the preferential 15% dividend rate becomes applicable (as opposed to the 35% rate). The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed
paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate. It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines. The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&GPhil. and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed. It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA. These tax credits
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are allowed because of the US congressional desire to avoid or reduce double taxation of the same income stream. 6. WITHOLDING TAX DIVISION MARUBENI CORP VS. CIR FACTS: marubeni is a foreign corp, it has equity investments in AG&P, and so AG&P declared dividends to marubeni and so was taxed on it. Because they asked for a ruling from the BIR on whether or not the dividends marubeni received from AG&P are effectively connected with its conduct or business in the phils as to be considered branch profits subject to 15% profit remittance tax (sec24bNIRC). So the CIR replied: that the dividends received by marubeni are NOT income arising from the business activity in which marubeni is engaged, therefore not branch profits subject to the 15% profit remittance tax because only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the phils; and effectively connected means it is not necessary that the income be derived from the actual operation of taxpayers trade or business; it is sufficient that the income arises from the business activity in which the corporation is engaged. So since its not subject to the tax, it asked for a refund. Which of course the CIR denied saying although its not subject to the 15%, it is subject to 25% by virtue to a tax treaty between Japan and the phils. And since 25% less 10% withholding = 15%, Na credit naoffset! CTA affirmed this. Appeal to SC. ISSUE: is marubeni a resident or non-resident foreign corp?
AG&P, on the principal agent theory. SOLGEN says otherwise: that theory does not apply here. SC says marubeni is NOT resident foreign corp because marubenis independent investment is attributable only to the head office. It was marubenis own investment, where it got its profits which was remitted by AG&P. BUT even if that is the case, the CIR & CA were wrong in setting off the tax ratesit goes against basic rules in taxation. 7. WITHOLDING TAX ROYALTIES CIR vs. CA, Johnson The Supreme Court interpreted the phrase "paid under similar circumstances" under the most-favored-nation clause of the RP-US tax treaty as referring to the payment of taxes and not royalties. The Court did not allow the application of the lower rate of 10% under the RP-Germany tax treaty for royalties paid to US residents because the RP-US tax treaty contains no "matching credit" provision similar to that found in Article 24 of the RP-Germany tax treaty. On the other hand, the RP-China tax treaty does not contain a "matching credit" provision similar to that found in the RP-Germany tax treaty. Thus, the tax on royalty payments to residents of US and China can be considered paid under similar circumstances. Rev. Memo Cir 46-2002 With the effectivity of the RP-China tax treaty on January 1, 2002, it is necessary to clarify the implication of its Article 12(2)(b) insofar as it provides that the tax charged shall not exceed ten per cent (10%) of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial,
HELD: A resident foreign corp is one that is engaged in trade or business in the phils. Marubeni says they are one and the same as

commercial, or scientific experience, in relation to Article 13(2)(b)(iii), also known as the "most-favored-nation" clause, of the RP-US tax treaty. Article 13 of the RP-US tax treaty provides as follows: "Article 13 - ROYALTIES "1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. "2. However, the tax imposed by that other Contracting State shall not exceed a) In the case of the United States, 15 percent of the gross amount of the royalties, and b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties, (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. 3. The Term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term 'royalties' also Includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof. "xxx xxx xxx" Article 13(2)(b)(iii) of the RP-US tax treaty speaks of the "lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State." This is known as the "most-favored-nation" clause of the RP-US tax treaty. The purpose of the "most-favored-nation" clause is to grant to the
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other Contracting State a tax treatment that is no less favorable than that which is granted to the "most favored" among other countries. Therefore, the tax treatment of royalty payments to a US entity must be taken in relation to other tax treaties what provide for a lower rate of tax on the same type of income. In this regard, Article 12 of the RP-China tax treaty provides as follows: "Article 12 - ROYALTIES "1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: a) 15 per cent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, or b) 10 per cent of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. DCIEac For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competes authorities. "3. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematography films, or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.

"xxx xxx xxx" In the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son., Inc. and Court of Appeals (G.R. No. 127105, June 25, 1999), the Supreme Court interpreted the phrase "paid under similar circumstances" under the most-favored-nation clause of the RP-US tax treaty as referring to the payment of taxes and not royalties. The Court did not allow the application of the lower rate of 10% under the RP-Germany tax treaty for royalties paid to US residents because the RP-US tax treaty contains no "matching credit" provision similar to that found in Article 24 of the RP-Germany tax treaty. On the other hand, the RP-China tax treaty does not contain a "matching credit" provision similar to that found in the RP-Germany tax treaty. Thus, the tax on royalty payments to residents of US and China can be considered paid under similar circumstances. Article 23 of the RP-US tax treaty reads: "Article 23 - RELIEF FROM DOUBLE TAXATION "Double taxation of income shall be avoided in the following manner: "1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law or the taxable year . . ." On the other hand, Article 23 of the RP-China tax treaty provides, viz:
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"Article 23 - METHODS FOR THE ELIMINATION OF DOUBLE TAXATION "1. In China, double taxation shall be eliminated as follows: Where a resident of China derives income from the Philippines the amount of tax on that income payable in the Philippines in accordance with the provisions of this Agreement, may be credited against the Chinese tax imposed on that resident. The amount of the credit, however, shall not exceed the amount of the Chinese tax on that income computed in accordance with the taxation laws and regulations of China. "xxx xxx xxx" Article 23 of the RP-US tax treaty and Article 23 of the RP-China tax treaty, though differently worded, plainly reveal a similarity in the provisions on relief from or avoidance of double taxation to their respective residents. Thus, the tax on royalty payments to residents of US and China are paid under similar circumstances, i.e., the amount of royalty income tax paid or accrued to the Philippines under the respective tax treaties is available as tax credit against the income tax payable in their respective countries. US residents may, therefore, invoke the preferential tax rate of 10% on royalties, accruing beginning January 1, 2002, arising in the Philippines "from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, . . ., or for information concerning industrial, commercial or scientific experience" under the RP-China tax treaty, pursuant to the "most-favored-nation" clause of the RP-US tax treaty. It bears stressing, however, that there are two important requirements that should be complied with before the 10% rate of withholding tax on royalties remitted to a resident of US and China may be availed of, to wit: 1. It is necessary that there be an agreement or a contract whereby the royalties paid to the US must originate from the use of, or the right to use any patent, trade mark, design or model, plan, secret formula or process, or from the use, or the right to use, industrial, commercial or scientific experience; and

2. For as long as the contract or agreement is subject to approval under Philippine law, the same must be duly approved by the Philippine competent authorities. All internal revenue officers, employees and others concerned are enjoined to give this Circular the widest publicity possible. F. WITHOLDING ON WAGES SEC 78-81 (NIRC) SEC. 78. Definitions. - As used in this Chapter: (A) Wages. - The term 'wages' means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid: (1) For agricultural labor paid entirely in products of the farm where the labor is performed, or (2) For domestic service in a private home, or (3) For casual labor not in the course of the employer's trade or business, or (4) For services by a citizen or resident of the Philippines for a foreign government or an international organization. If the remuneration paid by an employer to an employee for services performed during one-half (1/2) or more of any payroll period of not more than thirty-one (31) consecutive days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by an employer to an employee for services performed during more than one -half (1/2) of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be deemed to be wages. (B) Payroll Period. - The term 'payroll period' means a period for which payment of wages is ordinarily made to the employee by his employer, and the term "miscellaneous payroll period" means a payroll
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period other than, a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period. (C) Employee. - The term 'employee' refers to any individual who is the recipient of wages and includes an officer, employee or elected official of the Government of the Philippines or any political subdivision, agency or instrumentality thereof. The term "employee" also includes an officer of a corporation. (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 purpose of Subsection (A) means the person having control of the payment of such wages; and (2) In the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership or foreign corporation not engaged in trade or business within the Philippines, the term "employer" (except for the purpose of Subsection (A) means such person. SEC. 79. Income Tax Collected at Source.(A) Requirement of Withholding. - Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no withholding of a tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month, whichever is higher. (B) Tax Paid by Recipient. - If the employer, in violation of the provisions of this Chapter, fails to deduct and withhold the tax as required under this Chapter, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer; but this Subsection shall in no case relieve the employer from liability for any penalty or

addition to the tax otherwise applicable in respect of such failure to deduct and withhold. (C) Refunds or Credits. (1) Employer. - When there has been an overpayment of tax under this Section, refund or credit shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld hereunder by the employer. (2) Employees. -The amount deducted and withheld under this Chapter during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 24(A) of this Title. Refunds and credits in cases of excessive withholding shall be granted under rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within three (3) months from the fifteenth (15th) day of April. Refunds or credits made after such time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the three-month period to the date the refund of credit is made. Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of countersignature by the Chairman, Commission on Audit or the latter's duly authorized representative as an exception to the requirement prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of Executive Order No. 292, otherwise known as the Administrative Code of 1987. (D) Personal Exemptions. (1) In General. - Unless otherwise provided by this Chapter, the personal and additional exemptions applicable under this Chapter shall be determined in accordance with the main provisions of this Title. (2) Exemption Certificate. (a) When to File. - On or before the date of commencement of employment with an employer, the
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employee shall furnish the employer with a signed withholding exemption certificate relating to the personal and additional exemptions to which he is entitled. (b) Change of Status. - In case of change of status of an employee as a result of which he would be entitled to a lesser or greater amount of exemption, the employee shall, within ten (10) days from such change, file with the employer a new withholding exemption certificate reflecting the change. (c) Use of Certificates. - The certificates filed hereunder shall be used by the employer in the determination of the amount of taxes to be withheld. (d) Failure to Furnish Certificate. - Where an employee, in violation of this Chapter, either fails or refuses to file a withholding exemption certificate, the employer shall withhold the taxes prescribed under the schedule for zero exemption of the withholding tax table determined pursuant to Subsection (A) hereof. (E) Withholding on Basis of Average Wages. - The Commissioner may, under rules and regulations promulgated by the Secretary of Finance, authorize employers to: (1) estimate the wages which will be paid to an employee in any quarter of the calendar year; (2) determine the amount to be deducted and withheld upon each payment of wages to such employee during such quarter as if the appropriate average of the wages so estimated constituted the actual wages paid; and (3) deduct and withhold upon any payment of wages to such employee during ;such quarter such amount as may be required to be deducted and withheld during such quarter without regard to this Subsection. (F) Husband and Wife. - When a husband and wife each are recipients of wages, whether from the same or from different

employers, taxes to be withheld shall be determined on the following bases: (1) The husband shall be deemed the head of the family and proper claimant of the additional exemption in respect to any dependent children, unless he explicitly waives his right in favor of his wife in the withholding exemption certificate. (2) Taxes shall be withheld from the wages of the wife in accordance with the schedule for zero exemption of the withholding tax table prescribed in Subsection (D)(2)(d) hereof. (G) Nonresident Aliens. - Wages paid to nonresident alien individuals engaged in trade or business in the Philippines shall be subject to the provisions of this Chapter. (H) Year-End Adjustment. - On or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of the succeeding year. SEC. 80. Liability for Tax. (A) Employer. - The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld under this Chapter. If the employer fails to withhold and remit the correct amount of tax as required to be withheld under the provision of this Chapter, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable in respect to such failure to withhold and remit. (B) Employee. - Where an employee fails or refuses to file the withholding exemption certificate or willfully supplies false or inaccurate information thereunder, the tax otherwise required to be withheld by the employer shall be collected from him including penalties or additions to the tax from the due date of remittance until
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the date of payment. On the other hand, excess taxes withheld made by the employer due to: (1) failure or refusal to file the withholding exemption certificate; or (2) false and inaccurate information shall not be refunded to the employee but shall be forfeited in favor of the Government. SEC. 81. Filing of Return and Payment of Taxes Withheld. Except as the Commissioner otherwise permits, taxes deducted and withheld by the employer on wages of employees shall be covered by a return and paid to an authorized agent bank; Collection Agent, or the duly authorized Treasurer of the city or municipality where the employer has his legal residence or principal place of business, or in case the employer is a corporation, where the principal office is located. The return shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter: Provided, however, That the Commissioner may, with the approval of the Secretary of Finance, require the employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where such requirement is deemed necessary to protect the interest of the Government. The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the same are paid to the said collecting officers. RR 2-98 SECTION 2.78. Withholding Tax on Compensation. The withholding of tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent.

SECTION 2.78.1. Withholding of Income Tax on Compensation Income. (A) Compensation Income Defined. In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually. Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them. (1) Compensation paid in kind. Compensation may be paid in money or in some medium other than money, as for example, stocks, bonds or other forms of property. If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as compensation subject to withholding. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair market value of the remuneration received. If a corporation transfers to its employees its own stock as remuneration for services rendered by the employee, the amount of such remuneration is the fair market value of the stock at the time the services were rendered.
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(2) Living quarters or meals. If a person receives a salary as remuneration for services rendered, and in addition thereto, living quarters or meals are provided, the value to such person of the quarters and meals so furnished shall be added to the remuneration paid for the purpose of determining the amount of compensation subject to withholding. However, if living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as part of compensation income. (3) Facilities and privileges of a relatively small value. Ordinarily, facilities and privileges (such as entertainment, medical services, or so called "courtesy" discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as compensation subject to withholding if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Commissioner. (4) Tips and gratuities. Tips or gratuities paid directly to an employee by a customer of the employer which are not accounted for by the employee to the employer are considered as taxable income but not subject to withholding. (5) Pensions, retirement and separation pay. Pensions, retirement and separation pay constitute compensation subject to withholding, except those provided under Subsection B of this section. (6) Fixed or variable transportation, representation and other allowances (a) IN GENERAL, fixed or variable transportation, representation and other allowances which are received by a public officer or employee or officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding. (b) Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bonafide

ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied: (i) It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or profession; and (ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/ advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirement of substantiation and to withholding. (7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which are paid notwithstanding his absence from work, constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which were paid to the employee during the year are not subject to income tax and to the withholding tax. (8) Deductions made by employer from compensation of employee. Any amount which is required by law to be deducted by the employer from the compensation of an employee including the withheld tax is considered as part of the employee's compensation and is deemed to be paid to the employee as compensation at the time the deduction is made. (9) Remuneration for services as employee of a nonresident alien individual or foreign entity. The term "compensation" includes remuneration for services performed by an employee of a nonresident alien individual, foreign partnership or foreign corporation, whether or not such alien individual or foreign entity is engaged in trade or
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business within the Philippines. Any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation which is not engaged in trade or business within the Philippines is subject to all provisions of law and regulations applicable to an employer. (10) Compensation for services performed outside the Philippines. Remuneration for services performed outside the Philippines by a resident citizen for a domestic or a resident foreign corporation or partnership, or for a non-resident corporation or partnership, or for a non-resident individual not engaged in trade or business in the Philippines shall be treated as compensation which is subject to tax. A non-resident citizen as defined in these regulations is taxable only on income derived from sources within the Philippines. In general, the situs of the income whether within or without the Philippines, is determined by the place where the service is rendered. (B) Exemptions from withholding tax on compensation. The following income payments are exempted from the requirement of withholding tax on compensation: (1) Remunerations received as an incident of employment, as follows: (a) Retirement benefits received under Republic Act under 7641 and those received by officials and employees of private firms, whether individual or corporate, under a reasonable private benefit plan maintained by the employer which meet the following requirements: (i) The plan must be reasonable; (ii) The benefit plan must be approved by the Bureau; (iii) The retiring official or employee must have been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and (iv) The retiring official or employee should not have previously availed of the privilege under the retirement benefit plan of the same or another employer. (b) Any amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, such as retrenchment, redundancy, or cessation of business.

The phrase "for any cause beyond the control of the said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The separation was not of his own making. Whether or not the separation is beyond the control of the official or employee, being essentially a question of fact, shall be determined on the basis of prevailing facts and circumstances. It shall be duly established by the employer by competent evidence which should be attached to the monthly return for the period in which the amount paid due to the involuntary separation was made. Amounts received by reason of involuntary separation remain exempt from income tax even if the official or the employee, at the time of separation, had rendered less than ten (10) years of service and/or is below fifty (50) years of age. Any payment made by an employer to an employee on account of dismissal, constitutes compensation regardless of whether the employer is legally bound by contract, statute, or otherwise, to make such payment. (c) Social security benefits, retirement gratuities, pensions and other similar benefits received by residents or non-resident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions private or public; (d) Payments of benefits due or to become due to any person residing in the Philippines under the law of the United States administered by the United States Veterans Administration; (e) Payments of benefits made under the Social Security System Act of 1954 as amended; and (f) Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received by government officials and employees. (2) Remuneration paid for agricultural labor (a) Remuneration for services which constitute agricultural labor and paid entirely in products of the farm where the labor is performed is not subject to withholding. In general, however, the term, "agricultural labor" does not include services performed in connection with forestry, lumbering or landscaping.
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(b) Remuneration paid entirely in products of the farm where the labor is performed by an employee of any person in connection with any of the following activities is excepted as remuneration for agricultural labor: (i) The cultivation of soil; (ii) The raising, shearing, feeding, caring for, training, or management of livestock, bees, poultry, or wildlife; or (iii) The raising or harvesting of any other agricultural or horticultural commodity. The term "farm" as used in this subsection includes, but is not limited to stock, dairy, poultry, fruits and truck farms, plantations, ranches, nurseries ranges, orchards, and such greenhouse and other similar structures as are used primarily for the raising of agricultural or horticultural commodities. (c) The remuneration paid entirely in products of the farm where labor is performed for the following services in the employ of the owner or tenant or other operator of one or more farms is not considered as remuneration for agricultural labor, provided the major part of such services is performed on a farm: (i) Services performed in connection with the operation, management, conservation, improvement, or maintenance of any such farms or its tools or equipments; or (ii) Services performed in salvaging timber, or clearing land brush and other debris left by a hurricane or typhoon. The services described in (i) above may include for example, services performed by carpenters, painters, mechanics, farm supervisors, irrigation engineers, bookkeepers, and other skilled or semi-skilled workers, which contribute in any way to the conduct of the farm or farms, as such, operated by the person employing them, as distinguished from any other enterprise in which such person may be engaged. Since the services described in this paragraph must be performed in the employ of the owner or tenant or other operator of the farm, the exception does not extend to remuneration paid for services performed by employees of a commercial painting concern, for example, which contracts with a farmer to renovate his farm properties.

(d) Remuneration paid entirely in products of the farm where labor is performed by an employee in the employ of any person in connection with any of the following operations is not considered as remuneration for agricultural labor without regard to the place where such services are performed: (i) The making of copra, stripping of abaca, etc.; (ii) The hatching of poultry; (ii) The raising of fish; (iv) The operation or maintenance of ditches, canals, reservoirs, or waterways used exclusively for supplying or storing water for farming purposes; and (v) The production or harvesting of crude gum from a living tree or the processing of such crude gum into gum spirits or turpentine and gum resin, provided such processing is carried on by the original producer of such crude gum. (e) Remuneration paid entirely in products of the farm where labor is performed by an employee in the employ of a farmer or a farmer's cooperative, organization or group in the handling, planting, drying, packing, packaging, processing, freezing, grading, storing or delivering to storage or to market or to carrier for transportation to market, of any agricultural or horticultural commodity, produced by such farmer or farmer-members of such organization or group, is excepted as remuneration for agricultural labor. Services performed by employees of such farmer or farmer's organization or group in handling, planting, drying, packaging, processing, freezing, grading, storing, or delivering to storage or to market or to carrier for transportation to market of commodities produced by persons other than such farmer or members of such farmer's organization or group are not performed "as an incident to ordinary farming operation". All payments made in cash or other forms other than products of the farm where labor is performed, for services constituting agricultural labor as explained above, are not within the exception. (3) Remuneration for domestic services. Remuneration paid for services of a household nature performed by an employee in or about the private home of the person by whom he is employed is not subject to withholding. However, the services of household personnel
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furnished to an employee (except rank and file employees) by an employer shall be subject to the fringe benefits tax pursuant to Sec. 33 of the Code, as amended. A private home is the fixed place of abode of an individual or family. If the home is utilized primarily for the purpose of supplying board or lodging to the public as a business enterprise, it ceases to be a private home and remuneration paid for services performed therein is not exempted. In general, services of a household nature in or about a private home include services rendered by cooks, maids, butlers, valets, laundresses, gardeners, chauffeurs of automobiles for family use. The remuneration paid for the services above enumerated which are performed in or about rooming or lodging houses, boarding houses, clubs, hotels, hospitals or commercial offices or establishments is considered as compensation; Remuneration paid for services performed as a private secretary, even if they are performed in the employer's home is considered as compensation; (4) Remuneration for casual labor not in the course of an employer's trade or business. The term "casual labor" includes labor which is occasional, incidental or regular. The expression "not in the course of the employer's trade or business" includes labor that does not promote or advance the trade or business of the employer. Thus, any remuneration paid for labor which is occasional, incidental or irregular, and does not promote or advance the employer's trade or business, is not considered as compensation. Any remuneration paid for casual labor, that is, labor which is occasional, incidental or irregular, but which is rendered in the course of the employer's trade or business, is considered as compensation. Any remuneration paid for casual labor performed for a corporation is considered as compensation; (5) Compensation for services by a citizen or resident of the Philippines for a foreign government or an international organization. Remuneration paid for services performed as an employee of a foreign government or an international organization is exempted. The exemption includes not only remuneration paid for services performed

by ambassadors, ministers and other diplomatic officers and employees but also remuneration paid for services performed as consular or other officer or employee of a foreign government or as a non-diplomatic representative of such government. (6) Damages. Actual, moral, exemplary and nominal damages received by an employee or his heirs pursuant to a final judgment or compromise agreement arising out of or related to an employeremployee relationship. (7) Life Insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, provided however, that interest payments agreed under the policy for the amounts which are held by the insured under such an agreement shall be included in the gross income. (8) Amount received by the insured as a return of premium. The amount received by the insured, as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (9) Compensation for injuries or sickness. Amounts received through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness. (10) Income exempt under treaty. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. (11) Thirteenth (13th ) month pay and other benefits. (a) Thirteenth (13th) month pay equivalent to the mandatory one (1) month basic salary of officials and employees of the government, (whether national or local), including government-owned or controlled corporations, and or private offices received after the twelfth (12th) month pay; and (b) Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices.
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The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. (12) GSIS, SSS, Medicare and other contributions. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual employees. SECTION 2.78.2. Payroll Period. The term "payroll period" means the period of services for which a payment of compensation is ordinarily made to an employee by his employer. It is immaterial that the compensation is not always paid at regular intervals. For the purpose of determining the tax, an employee can have but one payroll period with respect to the compensation paid by any one employer. Thus, if an employee is paid a regular compensation for the weekly payroll and in addition thereto is paid supplemental compensation (for example taxable bonuses) determined with respect to a different period, the payroll period is the weekly payroll period. SECTION 2.78.3. Employee. The term "employee" is an individual performing services under an employer-employee relationship. The term covers all employees, including officers and employees, whether elected or appointed, of the Government of the Philippines, or any political subdivision thereof or any agency or instrumentality. In general, the relationship of the employer and employee exists when the person for whom services were performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which the result is accomplished. An employee is subject to the will and control of the employer not only as to what shall be done, but how it shall be done. In this connection, it is not necessary that the employer actually directs or controls the manner in which the services are performed. It is sufficient that he has the right to do so.

The right to dismiss an employee is also an important factor indicating that the person possessing that right is an employer. Other factors or characteristics of an employer, which may not be necessarily present in every case, are furnishing the tools and furnishing of a place to work, to the individual who performs the services. In general, an individual is not considered an employee if he is subject to the control or direction of another merely on to the result to be accomplished by the work, and not on to the means and methods for accomplishing the result. In general, individuals who follow an independent trade, business, or profession, in which the offer their services to the public, are not employees. The measurement, method or designation of compensation is also immaterial if the relationship of employer and employee in fact exists. No distinction is made between classes or grades of employees. Thus superintendents, managers, and others belonging to similar levels are employees. An officer of a corporation is an employee of the corporation. An individual, performing services for a corporation, both as an officer and director, is an employee subject to withholding on compensation, including director's fees. SECTION 2.78.4. Employer. The term employer means any person for whom an individual performs or performed any service, of whatever nature, under an employer-employee relationship. It is not necessary that the services be continuing at the time the wages are paid in order that the status of employer may exist. Thus for purposes of withholding, a person for whom an individual has performed past services and from whom he is still receiving compensation is an "employee". (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
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whom the services were performed has no control over the payment of such compensation, the trust is deemed to be the "employer". (B) Person paying compensation on behalf of a nonresident. The term "employer" also means any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation, who is not engaged in trade or business within the Philippines. It is the responsibility of the employer to withhold, pay, or refund the tax and furnish the statements required under these Regulations. The term "employer" as defined in (A) and (B) above is intended to determine who is the withholding agent. As a matter of business administration, certain mechanical details of the withholding process may be handled by representatives of the employer. Thus, in the case of a corporate employer with branch offices, the branch manager or other representative may actually, as a matter of internal administration, withhold the tax or prepare the statements required under the law. Nevertheless, the legal responsibility for withholding, paying and returning the tax and furnishing such statements rests with the corporate employer. An employer may be an individual, a corporation, a partnership, a trust, an estate, a joint-stock company, an association, or a syndicate, group, pool, joint venture, or other unincorporated organization, group or entity. A trust or estate, rather than the fiduciary acting for or on behalf of the trust or estate, is generally the employer. The term "employer" embraces not only an individual and an organization engaged in trade or business, but it also includes an organization exempt from income tax, such as charitable and religious organizations, clubs, social organizations and societes, as well as the Government of the Philippines, including its agencies, instrumentalities, and political subdivisions. (C) Compensation paid on behalf of two or more employers. If a payment of compensation is made to an employee by an employer through an agent, fiduciary, or other person who has the control, receipt, custody, or disposal of, or pays the compensation payable by another employer to such employee, the amount of tax required to be withheld on each compensation payment made through such agent,

fiduciary, or person shall, whether the compensation is paid separately on behalf of each employer or paid in lump-sum on behalf of all such employers, be determined based on the aggregate amount of such compensation payment or payments in the same manner as if such aggregate amount had been paid by one employer. Hence, the tax shall be determined based on the aggregate amount of the compensation paid. In any such case, each employer shall be liable for the return and payment of a pro-rata portion of the tax so determined in accordance with the ratio of the amount contributed by each employer relative to the aggregate of such compensation. A fiduciary, agent, or other person acting for two or more employers may be authorized to withhold the tax under these regulations with respect to the wages of the employees of such employers. Such fiduciary, agent, or other person may also be authorized to make and file returns of the tax withheld at source on such compensation and to furnish the receipts required under these Regulations. Application for the authorization to perform such act should be addressed to the Commissioner or his duly authorized representative. If such authority is granted by the Commissioner, all provisions of the law (including penalties) and regulations prescribed in pursuance of the law applicable in respect of an employer for whom such fiduciary, agent or other person acts shall remain subject to all provisions of law (including penalties) and regulations prescribed in pursuance of the law applicable in respect of employers. G. WITHOLDING TAX BY GOVERNMENT (RR 2-98) SECTION 2.57.3. Persons Required to Deduct and Withhold. The following persons are hereby constituted as withholding agents for purposes of the creditable tax required to be withheld on income payments enumerated in Section 2.57.2: (A) In general, any juridical person, whether or not engaged in trade or business; (B) An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or
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transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents; (C) All government offices including government-owned or controlled corporations, as well as provincial, city and municipal governments. SECTION 2.57.5. Exemption from Withholding. The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: (A) National government and its instrumentalities, including provincial, city or municipal governments; (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: (1) Sales of real property by a corporation which is registered with and certified by the Housing and Land Use Regulatory Board (HLURB) or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed one hundred eighty thousand pesos (P180,000) in Metro Manila and other highly urbanized areas and one hundred fifty thousand pesos (P150,000) in other areas or such adjusted amount of selling price for socialized housing as may later be determined and adopted by the HLURB, as provided under Republic Act No. 7279 and its implementing regulations; (2) Corporations registered with the Board of Investments and enjoying exemption from the income tax provided by Republic Act No. 7916 and the Omnibus Investment Code of 1987; (3) Corporations which are exempt from the income tax under Sec. 30 of the NIRC, to wit: the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR); However, the income payments arising from any activity which is conducted for profit or income derived from real or personal property shall be subject to a withholding tax as prescribed in these regulations.

H. E-COMMERCE TAXATION REVENUE MEMORANDUM CIRCULAR NO. 44-2005 issued on September 8, 2005 provides guidelines for the taxation of payments for computer software. The Circular covers the tax treatment of payments involving the sale of computer hardware bundled with software, where the software is bundled in the Philippines. On the other hand, computer hardware bundled with software, where the software is bundled abroad will be dealt with in another revenue issuance. Payments made to a local copyright owner for a full or partial transfer of a copyright will be subject to Income Tax as follows: a. Transfer by a resident individual owner of copyright A resident individual owner of a copyright is subject to the graduated income tax rates (5% -32%).The amount paid in consideration of the copyright or portions transferred shall form part of the copyright owners gross income, from which his taxable income shall be computed. b. Transfer by a domestic corporation owner The amount paid in consideration of the copyright or portions thereof transferred shall form part of the copyright owners gross income, from which his taxable income, subject to 32% Income Tax, shall be computed. Payments made to a foreign copyright owner for a full or partial transfer of a copyright shall be subject to Income Tax as follows: a. Transfer by a non-resident alien individual A non-resident alien individual engaged in trade or business in the Philippines shall be taxed in the same manner as a resident individual owner of a copyright. b. Transfer by a foreign corporation The amount paid in consideration of the copyright or portions thereof transferred by a resident foreign corporation engaged in trade or business within the Philippines shall form part of the copyright owners gross income from which his taxable income, which is subject to 32% Income Tax, shall be computed.
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The amount paid in consideration of the copyright or portions transferred by a non-resident foreign corporation shall be subject to a final tax of 32%, based on the gross income. However, if the foreign owner of the copyright is a resident of a country, which has an existing tax treaty with the Philippines, royalties paid to such owner are subject to the reduced tax rates on royalties under the relevant tax treaty, provided the conditions prescribed therein are complied with by the owner. The payments made by a local subsidiary/reseller/distributor/retailer to a domestic corporation owner of a copyright or a reseller/distributor licensee of a copyright shall be subject to a final income tax of 20%, based on the gross amount of royalties, to be withheld by the local subsidiary/reseller/distributor/ retailer making the payments. Payments made by the local subsidiaries/resellers/distributors/retailers to a nonresident foreign licensor/owner of the software are royalties subject to 32% final income tax, based on the gross amount thereof, the full amount of which shall be withheld and collected by the subsidiary/reseller/distributor/retailer making the payments. However, if the foreign licensor/owner is a resident of a country which has an existing tax treaty with the Philippines, royalties paid to such licensor/owner are subject to the reduced tax rates on royalties under the relevant tax treaty, provided that the conditions prescribed therein are complied with by the licensor/owner. Payments made by the end-user to the local subsidiaries, resellers, distributors of resellers for the purchase of copyrighted articles are business income which is subject to 32% Income Tax, based on the net taxable income of a domestic corporation. When making payments to the local subsidiaries, resellers, distributors of resellers, the end-user shall withhold 2% Income Tax of the gross amount of the payments creditable against the taxable income of the local subsidiaries, reseller or distributors, provided that

the end-user is any of the following persons required to withhold such tax: (a) A juridical person, whether or not engaged in trade or business; (b) An individual, with respect to payments made in connection with his trade or business; or (c) A government office including a governmentowned or controlled corporation, a provincial, city, or municipal government. A local end-user may acquire license to use software directly from the foreign licensor/owner of the software. The payments made by the end-user are royalties subject to 32% Income Tax, based on the gross amount thereof, imposed on royalties derived by a nonresident foreign corporation, which amount shall be withheld and collected by the end-user making the payments. However, if the foreign licensor/owner is a resident of a country which has an existing tax treaty with the Philippines, royalties paid thereto are subject to the reduced tax rates on royalties under the relevant tax treaty, provided the condition prescribed therein are complied with by the licensor/owner. The following payments for software transactions shall be subject to the 10% Value-Added Tax (VAT): (a) Royalty payments for the use of a copyright over a software; (b) Payments made to resellers/distributors/retailers who are engaged in the trade or business of distributing or selling software; and (c) Payments for services rendered in the Philippines in connection with software purchased. The payor in control of the payment of VAT in the software transactions shall be responsible for the withholding of VAT on such fees on behalf of the non-resident payee, by filing a separate VAT return for and on behalf of such payee using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld).
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The duly filed BIR Form No. 1600 and proof of payment shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from the payor. In addition, the payor is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate upon the request of the non-resident payee, the first three (3) copies to be given to the payee and the fourth copy to be retained as payors file copy. I. RA 10021 Section 1. Title. - This Act shall be known as the "Exchange of Information on Tax Matters Act of 2009". Section 2. Declaration of Policy. - It is the declared policy of the State to promote and pursue a tax environment that contributes in sustaining a favorable international investment climate and instills confidence in the adequacy and capacity of the country's tax administration to comply with its commitments under existing international conventions or agreements on tax matters. Pursuant to this declared policy, the government shall comply with or commit to the internationally-agreed tax standards required for the exchange of tax information with its tax treaty partners to help combat international tax evasion and avoidance and to help address tax concerns that affect international trade and investment. The government shall likewise adopt measures and procedures to enhance cooperation with other countries in the efficient collection of taxes, consistent with the international understanding to ensure the payment of taxes due the respective taxing jurisdictions of the treaty partners. Section 3. Authority of the Commissioner of Internal Revenue to Inquire into Bank Deposit Accounts and Related Information Held by Financial Institutions. - Section 6(F) of Republic Act No. 8424, as amended, otherwise known as the National Revenue Code of 1997, as amended, is hereby further amended to read as follows: "SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. -

"xxx "(F) Authority of the Commissioner to Inquire into Bank Deposit Accounts and Other Related Information Held by Financial Institutions. Notwithstanding any contrary provision of Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, and other general and special laws, the Commissioner is hereby authorized to inquire into the bank deposits and other related information held by financial institutions of: "(1) A decedent to determine his gross estate. "(2) Any taxpayer who has filed an application for compromise of his tax liability under Sec. 204 (A)(2) reason of financial incapacity to pay his tax liability. "In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer. "(3) A specific taxpayer or taxpayers subject of a request for the supply of tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory or a party of: Provided, That the information obtained from the banks and other financial institutions may be used by the Bureau of Internal Revenue for tax assessment, verification, audit and enforcement purposes. "In case of request from a foreign tax authority for tax information held by banks and financial institutions, the exchange of information shall be done in a secure manner to ensure confidentiality thereof under such rules and regulations as may be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. "The Commissioner shall provide the tax information obtained from banks and financial institutions pursuant to a convention or agreement
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upon request of the foreign tax authority when such requesting foreign tax authority has provided the following information to demonstrate the foreseeable relevance of the information to the request: "(a) The identity of the person under examination or investigation; "(b) A statement of the information being sought including its nature and the form in which the said foreign tax authority prefers to receive the information from the Commissioner; "(c) The tax purpose for which the information is being sought; "(d) Grounds for believing that the information requested is held in the Philippines or is in the possession or control of a person within the jurisdiction of the Philippines; "(e) To the extent known, the name and address of any person believed to be in possession of the requested information; "(f) A Statement that the request is in conformity with the law and administrative practices of the said foreign tax authority, such that if the requested information was within the jurisdiction of the said foreign tax authority then it would be able to obtain the information under its law or in the normal course of administrative practice and that it is conformity with a convention or international agreement; and "(g) A statement that the requesting foreign tax authority has exhausted all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties. "The Commissioner shall forward the information as promptly as possible to the requesting foreign tax authority. To ensure a prompt response, the Commissioner shall confirm receipt of a request in writing to the requesting tax authority and shall notify the latter of deficiencies in the request, if any, within sixty (60) days from the receipt of the request. "If the Commissioner is unable to obtain and provide the information within ninety (90) days from the receipt of the request, due to obstacles encountered in furnishing the information or when the bank or financial institution refuses to furnish the information, he shall immediately inform the requesting tax authority of the same,
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explaining the nature of the obstacles encountered or the reasons of refusal." "The term 'foreign tax authority', as used herein, shall refer to the tax authority or tax administration of the requesting State under the tax treaty or convention to which the Philippines is a signatory or a party of." Section 4. Allowing a Foreign Tax Authority to Income Tax Returns of Taxpayers in the Philippines. - Section 71 of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue Code of 1997, is hereby amended to read as follows: "SEC. 71. Disposition of Income Tax Returns, Publication of Lists of Taxpayers and Filers. - After the assessment shall have been made, as provided in this Title, the returns, together with any corrections thereof which may have been made by the Commissioner, shall be filed in the Office of the Commissioner and shall constitute public records and be open to inspection as such upon the order of the President of the Philippines, under rules and regulations to be presented by the Secretary of Finance, upon recommendation of the Commissioner. "The Commissioner may, in each year, cause to be prepared and published in any newspaper the lists containing the names and addresses of persons who have filed income tax returns. "Income tax returns of specific taxpayers subject of a request for exchange of information by a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory or a party of, shall be open to inspection upon the order of the President if the Philippines under rules and regulations as may be prescribed by the Secretary of Finance, upon recommendation of the Commissioner." Section 5. Authority of the Commissioner of Internal Revenue to Supply Information to a Foreign Tax Authority Which is at his Disposal. - Section 270 of Republic Act No. 8424, as amended,
otherwise known as the National Internal Revenue of 1997, is hereby amended to read as follows: "SEC. 270. Unlawful Divulgence of Information. - Except as provided in Sections 6(F) and 71 of this Code and Section 26 of Republic Act No. 6388, any officer or employee of the Bureau of Internal Revenue who divulges to any person or makes known in any other manner than may be provided by law information regarding the business, income, or estate of any taxpayer, the secrets, operation, style or work, or apparatus of any manufacturer or producer, or confidential information regarding the business of any taxpayer, knowledge of which was acquired by him in the discharge of his official duties, shall, upon conviction for each act or omission, be punished by a fine of not less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000), or suffer imprisonment of not less than two (2) years but not more than five (5) years, or both. "Any officer or employee of the Bureau of Internal Revenue who divulges or makes known in any other manner to any person other than the requesting foreign tax authority information obtained from banks and financial institutions pursuant to Section 6(F), knowledge or information acquired by him in the discharge of his official duties, shall, upon conviction, be punished by a fine of not less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000), or suffer imprisonment of not less than two (2) years but not more than five (5) years, or both." Section 6. Willful Refusal to Supply Information. - Any officer, owner, agent, manager, director or officer-in -charge of any bank or financial institution within the purview of this Act who, being required in writing by the Commissioner, willfully, refuses to supply the required information shall be punished by a fine of not less than Fifty thousand pesos (50,000) but not more than One hundred thousand pesos (P100,000) , or suffer imprisonment of not less than two (2) years but not more than five (5) years, or both.
Section 7. Obligation to Maintain Confidentiality of Information Received. - Any information received by a foreign tax authority from the Bureau of Internal Revenue pursuant to an International convention or agreement on tax matters shall be treated by the authority as absolutely confidential in nature in the same manner as information obtained by the latter under its laws and shall be disclosed only to persons or authorities, including courts and administrative bodies, involves in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by such conventions of agreements. Section 8. Notice to Taxpayers. - A taxpayer shall be duly notified in writing by the Commissioner that a foreign tax authority is requesting for exchange of information held by financial institutions pursuant to a tax convention or agreement to which the Philippines is a signatory or a party of, under such rules and regulations as may be prescribed by the Secretary of Finance upon recommendations of the Commissioner. J. TAX TREATY (US-RP TAX TREATY) CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES AND THE GOVERNMENT OF THE UNITED STATES OF AMERICA WITH RESPECT TO TAXES ON INCOME Signed in Manila, October 1, 1976. The Government of the Republic of the Philippines and the Government of the United States of America, desiring to conclude a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, have agreed as follows: ARTICLE 1 TAXES COVERED (1) The taxes which are the subject of this Convention are: (a) In the case of the United States, the Federal income taxes imposed by the Internal Revenue Code (but not including the tax on improperly accumulated earnings or the personal holding company tax), and
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(b) In the case of the Philippines, the income tax imposed by Title II of the National Internal Revenue Code (but not including the tax on improperly accumulated earnings or the personal holding company tax). (2) This Convention shall also apply to taxes substantially similar to those covered by paragraph (1) which are imposed addition to, in place of, existing taxes after the date of signature of this Convention. (3) The competent authorities of the Contracting States shall notify each other of any amendments of the tax laws referred to in paragraph (1) or (2) and of the adoption of any taxes referred to in paragraph (2) by transmitting the texts of any amendments or new statutes at least once a year. (4) The competent authorities of the Contracting States shall notify each other of the publication by their respective Contracting States of any material concerning the application of this Convention, whether in the form of regulations, rulings, or judicial decisions by transmitting the texts of any such material at least once a year. ARTICLE 2 GENERAL DEFINITIONS (1) In this Convention, unless the context otherwise requires: (a) (i) The term "United States" means the United States of America; and (ii) When used in a geographical sense, the term "United States" means the states thereof and the District of Columbia. (b) (i) The term "Philippines" means the Republic of the Philippines; and (ii) When used in a geographical sense, the term "Philippines" means the territory comprising the Republic of the Philippines. (c) The term "Contracting State" means the United States or the Philippines, as the context requires. (d) The term "person" includes an individual, a partnership, a corporation, an estate, or a trust. (e) (i) The term "United States corporation" means a corporation (or any unincorporated entity treated as a corporation for United States tax purposes) which is created or organized in or under the laws of the United States or any state thereof for the District of Columbia; and

(ii) The term "Philippine corporation" means a corporation (or any unincorporated entity treated as a corporation for Philippine tax purposes) which is created or organized in the Philippines or under its laws. (f) The term "competent authority" means: (i) In the case of the United States, the Secretary of the Treasury or his delegate, and cd i (ii) In the case of the Philippines, the Secretary of Finance or his delegate. (g) The term "tax" means tax imposed by the United States or the Philippines, whichever is applicable, to which this Convention applies by virtue of Article 1 (taxes covered). (h) The term "international traffic" means any transport by a ship or aircraft operated by a resident of one of the Contracting States except where such transport is confined solely to places within a Contracting State. (2) Any other term used in this Convention and not defined in this Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of the Contracting State whose tax is being determined. Notwithstanding the preceding sentence, if the meaning of such a term under the laws of one of the Contracting States is different from the meaning of the term under the laws of the other Contracting State, or if the meaning of such term is not readily determinable under the laws of one of the Contracting States, the competent authorities of the Contracting States may, in order to, prevent double taxation or to further any other purpose of this Convention, establish a common meaning of the term for the purposes of this Convention. ARTICLE 3 FISCAL RESIDENCE (1) In this Convention: (a) The term "resident of the Philippines" means: (i) A Philippine corporation, and (ii) Any other person (except a corporation or any entity treated as a corporation for Philippine tax purposes) resident in the Philippines for purposes of Philippine tax, but in the case of a professional
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partnership, estate, or trust only to the extent that the income derived by such partnership, estate, or trust is subject to Philippine tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries. (b) The term "resident of the United States" means: (i) A United States corporation, and (ii) Any other person (except a corporation or any entity treated as a corporation for United States tax purposes) resident in the United States for purposes of United States tax, but in the case of a partnership, estate, or trust only to the extent that the income derived by such partnership, estate, or trust is subject to United States tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries. (2) Where by reason of the provisions of paragraph (1) an individual is a resident of both Contracting States: (a) He shall be deemed to be a resident of that Contracting State in which he maintains his permanent home. If he has a permanent home in both Contracting State or in neither of the Contracting States, he shall be deemed to be a resident of that Contracting State with which his personal and economic relations are closest (center of vital interests); (b) If the Contracting in which he has his center of interests cannot be determined, he shall be deemed to be a resident of that Contracting State in which he has a habitual abode; (c) If he has a habitual abode in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and (d) If he is a citizen of both Contracting States or of neither Contracting State, the competent authorities of the Contracting States shall settle the question by mutual agreement. ARTICLE 4 SOURCE OF INCOME For purposes of this Convention: (1) Dividends shall be treated as income from sources within a Contracting State only if (a) Paid by a corporation of that Contracting State, or

(b) Paid by a corporation of any State if, for the 3-year period ending with a close of such corporation's taxable year preceding the declaration of the dividends (or for such part of that period as such corporation has been in existence), at least 50 percent of such corporation's gross income from all sources was business profits attributable to a permanent establishment which such corporation had in that Contracting State; but only in an amount which bears the same ratio to such dividends as the amount of the business profits attributable to that permanent establishment bears to the corporation's gross income from all sources. If a dividend would be treated under this paragraph as income from sources within both Contracting States, it shall be deemed to be income from sources only within the Contracting State described in subparagraph (b), to the extent provided therein. (2) Interest shall be treated as income from sources within a Contracting State only if paid by such Contracting State, a political subdivision or local authority thereof, or by a resident of that Contracting State. Notwithstanding the preceding sentence, if such interest is paid on an indebtedness incurred in connection with a permanent establishment which bears such interest, then such interest shall be deemed to be from sources within the State (whether or not a Contracting State) in which the permanent establishment is situated. (3) Royalties for the use of, or the right to use, property or rights shall be treated as income from sources within a Contracting State only to the extent that such royalties are for the use of, or the right to use, such property or rights within that Contracting State. Notwithstanding the preceding sentence, if such royalty is paid with respect to a liability to pay the royalty that was incurred in connection with a permanent establishment which bears such royalty, then such royalty shall be deemed to be from sources within the State (whether or not a Contracting State) in which the permanent establishment is situated. (4) Income from real property (including royalties) described in Article 7 (income from Real Property) shall be treated as income from sources within a Contracting State only if such property is situated in the Contracting State.
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(5) Income received by an individual for his performance of labor or personal services, whether as an employee or in an independent capacity, shall be treated as income from sources within a Contracting State only to the extent that such services are performed in that Contracting State. However, income from personal services performed aboard ships or aircraft operated by a resident of one of the Contracting States in international traffic shall be treated as income from sources within that Contracting State if rendered by a member of the regular complement of the ship or aircraft. Notwithstanding the preceding provisions of this paragraph, remuneration described in Article 20 (Governmental Functions) and payments described in Article 19 ( Social Security Payments) paid from the public funds of a Contracting State or a political subdivision or local authority thereof shall be treated as income from sources within that Contracting State only. (6) Notwithstanding paragraphs (1) through (4), business profits which are attributable to a permanent establishment which the recipient, a resident of one of the Contracting States, has in the other Contracting State shall be treated as income from sources within that other Contracting State. (7) Gross revenue from the operation of ships or aircraft in international traffic shall be treated as income from sources within a Contracting State to the extent they are derived from outgoing traffic originating in that State. (8) The source of any item of income to which paragraphs (1) through (7) are not applicable shall be determined by each of the Contracting States in accordance with its own law. Notwithstanding the preceding sentence, if the source of any item of income under the laws of one Contracting State is different from the source of such item of income under the laws of the other Contracting State or if the source of such income is not readily determinable under the laws of one of the Contracting States, the competent authorities of the Contracting States may, in order to prevent double taxation or further any other purpose of this Convention, establish a common source of the item of income for the purposes of this Convention.

ARTICLE 5 PERMANENT ESTABLISHMENT (1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. (2) The term "fixed base of business" includes but is not limited to: (a) A seat of management; (b) A branch; (c) An office; (d) A store or other sales outlet; (e) A factory; (f) A workshop; (g) A warehouse (h) A mine, quarry, or other place of extraction of natural resource; cd (i) A building side or construction or assembly project or supervisory activities in connection therewith, provided such site, protect or activity continues for a period of more than 183 days; and (j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. (3) Notwithstanding paragraphs (1), (2) and (4), a permanent establishment shall be deemed not to include any one or more of the following: (a) The use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the resident; (b) The maintenance of a stock of goods or merchandise belonging to a resident solely for the purpose of storage, display, or occasional delivery; (c) The maintenance of a stock of goods or merchandise belonging to the resident solely for the purpose of processing by another person; (d) The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the resident;
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(e) The maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the resident; or (f) The furnishing of services, including the provision of equipment, in one of the Contracting States by a resident of the other Contracting State, including consultancy firms, in accordance with, or in the implementation of, an agreement between the Contracting States regarding technical cooperation. (4) A person acting in one of the Contracting States on behalf of a resident of the other Contracting State, other than an agent of an independent status to whom paragraph (5) applies, shall be deemed to give rise to a permanent establishment in the first-mentioned Contracting State if (a) Such person has, and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts in the name of that resident, unless the exercise of such authority is limited to the purchase of goods or merchandise for that resident; or (b) He has no such authority, but habitually maintains in the firstmentioned State a stock of goods or merchandise from which he regularly delivers goods and merchandise on behalf of the resident. (5) A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident carries on business in that other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that resident, he shall not be considered an agent of independent status within the meaning of this paragraph in the transactions between the agent and the resident were not made under arm's length conditions. (6) Except with respect to reinsurance, a resident of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it collects premiums in that other State, or insures risks situated therein, through an employee or representative situated

therein who is not an agent of independent status to whom paragraph (5) applies. (7) A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident sells at the termination of a trade fair or convention in such other Contracting State goods or merchandise which such resident displayed at such trade fair or convention. (8) The fact that a corporation of one of the Contracting States controls or is controlled by or is under common control with (a) A corporation of the other Contracting State; or (b) A corporation which carries on business in that other Contracting State (whether through a permanent establishment or otherwise) shall not be taken into account in determining whether the activities or fixed place of business of either corporation constitutes a permanent establishment of the other corporation. (9) The principles set forth in paragraphs (1) through (8) shall be applied in determining for purposes of this Convention whether there is a permanent establishment in a State other than one of the Contracting States or whether a person other than a resident of one of the Contracting States has a permanent establishment in one of the Contracting States. ARTICLE 6 GENERAL RULES OF TAXATION (1) A resident of one of the Contracting States may be taxed by the other Contracting State on any income from sources within that other Contracting State and only on such income, subject to any limitations set forth in this Convention. For this purpose, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. (2) The provisions of this Convention shall not be construed to restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded (a) By laws of one of the Contracting States in the determination of the tax imposed by that Contracting State, or (b) By any other agreement between the Contracting States.
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(3) Notwithstanding any provisions of this Convention except paragraph (4), a Contracting State may tax its residents (as determined under Article 3 Fiscal Residence) and its citizens as if this Convention had not come into effect. (4) The provisions of paragraph (3) shall not affect: (a) The benefits conferred by a Contracting State under Articles 19 (Social Security Payments), 23 (Relief from Double Taxation), 24 (Non-discrimination), and 25 (Mutual Agreement Procedure); and (b) The benefits conferred by a Contracting State under Articles 20 (Governmental Functions), 21 (Teachers), 22 (Students and Trainees), and 28 (Diplomatic and Consular Officers) upon individuals who are neither citizens of, nor have immigrant status in, that Contracting State. (5) The complement authorities of the two Contracting States may each prescribe regulations necessary to carry out the provisions of this Convention. ARTICLE 7 INCOME FROM REAL PROPERTY (1) Income from real property, including royalties and other payments in respect of the exploitation of natural resources and gains derived from the alienation of such property or of the right giving rise to such royalties or other payments, may be taxed by the Contracting State in which such real property or natural resources are situated. For purposes of this Convention, interest on indebtedness secured by real property or secured by a right giving rise to royalties or other payments in respect of the exploitation of natural resources shall not be regarded as income from real property. (2) Paragraph (1) shall apply to income derived from the usufruct, direct use, letting, or use in any other form of real property. ARTICLE 8 BUSINESS PROFITS (1) Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be

imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment. (2) Where a resident of one of the Contracting States has a permanent establishment in the other Contracting State, there shall in each Contracting State be attributed to the permanent establishment the business profits which would reasonably be expected to have been derived by it if it were an independent entity engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the resident of which it is a permanent establishment. (3) There may also be attributed to that permanent establishment the business profits derived from the sale of goods or merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those effected, through that permanent establishment if the sale or activities had been resorted to in order to avoid taxation. (4) In the determination of the business profits of a permanent establishment, there shall be allowed as deductions ordinary and necessary expenses which are reasonably allocable to such profits, including executive and general administrative expenses, whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere. However, no such deductions shall be allowed in respect of amounts paid or payable (other than reimbursement of actual expenses) by the permanent establishment to the head office of the resident of which it is a permanent establishment or any of its other offices, by way of (a) royalties, fees or other similar payments in return for the use of patents or other rights; (b) commission, for specific services performed or for management; and (c) interest on moneys lent to the permanent establishment except in the case of a banking institution. (5) No profits shall be attributed to a permanent establishment of a resident of one of the Contracting States in the other Contracting
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State merely by reason of the purchase of goods and merchandise by that permanent establishment for the account of the resident. (6) The term "business profits" means income derived from any trade or business whether carried on by an individual, corporation or any other person, or group of persons, including the rental of tangible personal (movable) property. (7) Where business profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this Article. ARTICLE 9 SHIPPING AND AIR TRANSPORT (1) Notwithstanding any other provision of this Convention, profits derived by a resident of one of the Contracting States from sources within the other Contracting State from the operation of ships in international traffic may be taxed by both Contracting States; however, the tax imposed by the other Contracting State may be as much as, but shall not exceed, the lesser of (a) one and one-half percent of the gross revenues derived from sources in that State; and (b) the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State. (2) Nothing in the Convention shall affect the right of a Contracting State to tax, in accordance with domestic laws, profits derived by a resident of the other Contracting State from sources within the firstmentioned Contracting State from the operation of aircraft in international traffic. (3) The provisions of paragraphs (1) and (2) shall also apply to profits derived from the participation in a pool, a joint business or in an international operating agency. ARTICLE 10 RELATED PERSONS (1) Where a person subject to the taxing jurisdiction of one of the Contracting States and any other person are related and where such related persons make arrangements or impose conditions between themselves which are different from those which would be made

between independent persons, any income, deductions, credits, or allowances which would, but for those arrangements or conditions, have been taken into account in computing the income (or loss) of, or the tax payable by, one of such persons may be taken into account in computing the amount of the income subject to tax and the taxes payable by such person. (2) Where a redetermination has been made by one Contracting State to the income of one of its residents in accordance with paragraph (1), then the other Contracting State shall, if it agrees with such redetermination and if necessary to prevent double taxation, make a corresponding adjustment to the income of a person in such other Contracting State related to such resident. In the event the other Contracting State disagrees with such determination, the two Contracting States shall endeavor to reach agreement in accordance with the mutual agreement procedure in paragraph (2) of Article 25 (Mutual Agreement Procedure). (3) For purposes of this Convention, a person is related to another person if either person owns or controls directly or indirectly the other, or if any third person or persons own or control directly or indirectly both. For this purpose, the term "control" includes any kind of control, whether or not legally enforceable, and however exercised or exercisable. ARTICLE 11 DIVIDENDS (1) Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. (2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed (a) 25 percent of the gross amount of the dividend; or (b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent
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of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. (3) Dividends paid by a corporation of one of the Contracting States to a person other than a citizen or resident of the other Contracting State may be taxed by the other Contracting State, but only if (a) Such dividends are treated as income from sources within that other Contracting State and, in the case of the Philippines, the additional tax described in paragraph (6) has not been paid with respect to the earnings distributed, or (b) The recipient of the dividends has a permanent establishment or fixed base in the other Contracting State and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. (4) Paragraph (2) shall not apply if the recipient of dividends derived from sources within one of the Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State through a permanent establishment situated therein or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment of fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. (5) The term "dividends" as used in this Convention means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the corporation making the distribution is a resident. (6) Nothing in this Convention except Article 9 (Shipping and Air Transport), shall be construed as preventing the Philippines from imposing on the earnings of a corporation (other than a Philippines corporation ) attributable to a permanent establishment in the Philippines, a tax in addition to the tax which would be chargeable on the earnings of a Philippine corporation, provided that any additional tax so imposed shall not exceed 20 percent of the amount of such

earnings which have not been subjected to such additional tax in previous taxable years. For the purpose of this provision, the term "earnings" means business profits attributable to a permanent establishment in the Philippines in a year and previous years after deducting therefrom all taxes, other than the additional tax referred to herein, imposed on such profits by the Philippines. ARTICLE 12 INTEREST (1) Interest by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. (2) Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15 percent of the gross amount of such interest. (3) Interest derived by a resident of one of the Contracting States from sources within the other Contracting State with respect to public issues of bonded indebtedness shall not be taxed by the other Contracting State at a rate in excess of 10 percent of the gross amount of such interest. (4) Notwithstanding paragraphs (1), (2), and (3), interest derived by (a) One of the Contracting States, or an instrumentality thereof (including the Central Bank of the Philippines, the Federal Reserve Banks of the United States, the Export-Import Bank of the United States, the Overseas Private Investment Corporation of the United States, and such other institutions of either Contracting State as the competent authorities of both Contracting States may determine by mutual agreement), or (b) A resident of one of the Contracting States with respect to debt obligations guaranteed or insured by that Contracting State or an instrumentality thereof, shall be exempt from tax by the other Contracting State. (5) Paragraphs (2), (3), and (4) shall not apply if the recipient of interest from sources within one of the Contracting States, being a resident of the other Contracting State, carries on business in the first-
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mentioned Contracting State through a permanent establishment situated therein or performs in all other State independent personal services from a fixed base situated therein and the debt claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. (6) Where an amount is paid to a related person and would be treated as interest but for the fact that it exceeds an amount which would have been paid to an unrelated person, the provisions of this Article shall apply only to so much of the amount as would have been paid to an unrelated person. In such a case, the excess amount may be taxed by each Contracting State according to its own law, including the provisions of this Convention where applicable. (7) The term "interest" as used in the Convention means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises including interest on deferred payment sales. ARTICLE 13 ROYALTIES (1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. (2) However, the tax imposed by that other Contracting State shall not exceed (a) In the case of the United States, 15 percent of the gross amount of the royalties, and (b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties,

(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. (3) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right of property, or for information concerning industrial, commercial or scientific experience. the term "royalties" also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof. (4) The provisions of paragraphs (1) and (2) shall not apply if the recipient of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. (5) Where an amount is paid to a related person and would be treated as a royalty but for the fact that it exceeds an amount which would have been paid to an unrelated person, the provisions of this Article shall apply only to so much of the amount as would have been paid to an unrelated person. In such a case, the excess amount may be taxed by each Contracting State according to its own law, including the provisions of this Convention where applicable. ARTICLE 14 CAPITAL GAINS
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(1) Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (movable) property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. However, gains derived by a resident of a Contracting State from the alienation of ships, aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. (2) Gains from the alienation of any property other than those mentioned in paragraph (1) or in 7 (Income From Real Property) shall be taxable only in the Contracting State of which the alienation is a resident. ARTICLE 15 INDEPENDENT PERSONAL SERVICES (1) Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity may be taxed by that Contracting State. Except as provided in paragraph (2), such income shall be exempt from tax by the other Contracting State. (2) Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity in the other Contracting State may be taxed by that other Contracting State, if: (a) He has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; (b) He is present in that other Contracting State for a period or periods aggregating 90 days or more in the taxable year; or
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(c) The gross remuneration derived in the taxable year from residents of that other Contracting State for the performance of such services in the other Contracting State exceeds 10,000 United States dollars or its equivalent in Philippine pesos or such higher amount as may be specified and agreed in letters exchanged between the competent authorities of the Contracting States. (3) The term "income" as used in paragraph (2) means net income. ARTICLE 16 DEPENDENT PERSONAL SERVICES (1) Except as provided in Article 20 (Governmental Functions), wages, salaries, and similar remuneration derived by an individual who is a resident of one of the Contracting States from labor or personal services performed as an employee, including income from services performed by an officer of a corporation, may be taxed by that Contracting State. Except as provided by paragraph (2) and (3) and in Articles 20 (Governmental Functions), 21 (Teachers), and 22 (Students and Trainees), such remuneration derived from source within the other Contracting State may also be taxed by that other Contracting State. (2) Remuneration described in paragraph (1) derived by an individual who is a resident of one of the Contracting States shall be exempt from tax by the other Contracting State if (a) He is present in that other Contracting State for a period or periods aggregating less than 90 days in the taxable year; (b) He is an employee of a resident of, or of a permanent establishment maintained in, the first-mentioned Contracting State; and (c) The remuneration is not borne as such by a permanent establishment which the employer has in that other Contracting State. (3) Notwithstanding the preceding provisions of this Article, remuneration derived by an employee of a resident of one of the Contracting States for labor or personal services performed as a member of the regular complement of a ship or aircraft operated in
international traffic by a resident of that Contracting State may be taxed only by that Contracting State. ARTICLE 17 ARTISTES AND ATHLETES (1) Notwithstanding the provisions of Article XV (Independent Personal Services) and XVI (Dependent Personal Services), income derived by public entertainers such as theater, motion picture, radio or television artistes, and musicians, and by athletes, from their personal activities as such may be taxed in the Contracting State in which these activities are exercised provided that (a) Such income exceeds 100 United States dollars or its equivalent in the Philippine pesos per day, or (b) Such income exceeds in the aggregate 3,000 United States dollars or its equivalent in Philippine pesos during the taxable year. (2) Where income in respect of personal activities as such of a public entertainer or athlete accrues not to that entertainer or athlete himself but to another person, that income may, notwithstanding the provisions of Articles 8 (Business Profits), 15 (Independent Personal Services) and 16 (Dependent Personal Services), be taxed in the Contracting State in which the activities of the entertainer or athlete are exercised. (3) Notwithstanding the provisions of paragraph (1) and Articles 15 (Independent Personal Services) and 16 (Dependent Personal Services), income derived from activities performed in a Contracting State by public entertainers or athletes shall be exempt from tax in that Contracting State if the visit to that State is substantially supported or sponsored by the other Contracting State and the public entertainer or athlete is certified as qualified under this provision by the competent authority of the sending State. ARTICLE 18 PRIVATE PENSIONS AND ANNUITIES (1) Except as provided in Article 20 (Governmental Functions), pensions and other similar remuneration paid to an individual in

consideration of past employment shall be taxable by the Contracting State where the service is rendered. (2) Annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that Contracting State. (3) Child support payments made by an individual who is resident of one of the Contracting States to an individual who is resident of the other Contracting State shall be exempt from tax in that other Contracting State. (4) The term "pensions and other similar remuneration", as used in this article, includes periodic payments other than social security payments covered in Article XIX (Social Security Payments) made (a) By reason of retirement or death and in consideration for services rendered or (b) By way of compensation for injuries or sickness received in connection with past employment. (5) The term "annuities", as used in this article, means a stated sum paid periodically at stated times during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). (6) The term "child support payments", as used in this article, means periodic payments for the support of a minor child made pursuant to a written separation agreement or a decree of divorce, separation maintenance, or compulsory support. ARTICLE 19 SOCIAL SECURITY PAYMENTS Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State (or in the case of such payments by the Philippines to an individual who is a citizen of the United States) shall be taxable only in the first-mentioned Contracting State. This article shall not apply to payments described in Article XX (Governmental Functions). ARTICLE 20 GOVERNMENTAL FUNCTIONS Wages, salaries and similar remuneration, including pensions, annuities, or similar benefits, paid from public funds of one of the Contracting States;
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(a) To a citizen of that Contracting State, or (b) To a citizen of a State other than a Contracting State who comes to the other Contracting State expressly for the purpose of being employed by the first-mentioned Contracting State. for labor or personal services performed as an employee of the national Government of that Contracting State, or any agency thereof, in the discharge of functions of a governmental nature shall be exempt from tax by the Contracting State. ARTICLE 21 TEACHERS (1) Where a resident of one of the Contracting States is invited by the Government of the other Contracting State, a political subdivision or local authority thereof, or by a university or other recognized educational institution in that other Contracting State to come to that other Contracting State for a period not expected to exceed 2 years for the purpose of teaching or engaging in research, or both, at a university or other recognized educational institution and such resident comes to that other Contracting State primarily for such purpose, his income from personal services for teaching or research at such university or educational institution shall be exempt from tax by that other Contracting State for a period not exceeding 2 years from the date of his arrival in that other Contracting State. (2) This article shall not apply to income from research if such research is undertaken not in the general interest but primarily for the private benefit of a specific person or persons. ARTICLE 22 STUDENTS AND TRAINEES (1) (a) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State for the primary purpose of (i) Studying at a university or other recognized educational institution in that other Contracting State, or (ii) Securing training required to qualify him to practice a profession or professional specialty, or

(iii) Studying or doing research as a recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or educational organization, shall be exempt from tax by that other Contracting State with respect to amounts described in subparagraph (b) for a period not exceeding 5 taxable years from the date of his arrival in that other Contracting State. (b) The amounts referred to in paragraph (a) are (i) Gifts from abroad for the purpose of his maintenance, education, study, research, or training; (ii) The grant, allowance, or award; and (iii) Income from personal services performed in that other Contracting State in an amount not in excess of 3,000 United States dollars or its equivalent in Philippine pesos for any taxable year. (2) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State as an employee of, or under contract with, a resident of the firstmentioned Contracting State, for the primary purpose of (a) Acquiring technical, professional, or business experience from a person other than that resident of the first-mentioned Contracting State or other than a person related to such resident, or (b) Studying at a university or other recognized educational institution in that other Contracting State, shall be exempt from tax by that Contracting State for a period not exceeding 12 consecutive months with respect to his income from personal services in an aggregate amount not in excess of 7,500 United States dollars or its equivalent in the Philippine pesos for any taxable year. (3) An individual who is a resident of one of the Contracting States at the time he becomes temporarily present in the other Contracting State and who is temporarily present in that other Contracting State for a period not exceeding 1 year, as a participant in a program sponsored by the Government of that other Contracting State, for the primary purpose of training, research, or study, shall be exempt from tax by that other Contracting State with respect to his income from personal services in respect of such training, research, or study
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performed in that other Contracting State in an aggregate amount not in excess of 10,000 United States dollars or its equivalent in Philippine pesos in any taxable year. (4) The benefits provided under Article 21 (Teachers) and paragraph (1) of this Article shall, when taken together, extend only for such period of time, not to exceed 5 taxable years from the date of arrival of the individual claiming such benefits, as may reasonably or customarily be required to effectuate the purpose of the visit. The benefits provided under Article 21 (Teachers) shall not be available to an individual if, during the immediately preceding period, such individual enjoyed the benefits of paragraph (1) of this Article. ARTICLE 23 RELIEF FROM DOUBLE TAXATION Double taxation of income shall be avoided in the following manner: (1) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. For the purpose of applying the United States credit in relation to taxes paid or accrued to the Philippines, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the United States credit in relation to taxes paid and accrued to the Philippines, the taxes

referred to in paragraphs (1)(b) and (2) of Article 1 (Taxes Covered) shall be considered to be income taxes. (2) In accordance with the provisions and subject to the limitations of the law of the Philippines (as it may be amended from time to time without changing the general principle hereof), the Philippines shall allow to a citizen or resident of the Philippines as a credit against the Philippine tax the appropriate amount of taxes paid or accrued to the United States and, in the case of a Philippine corporation owning more than 50 percent of the voting stock of a United States corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the United States by the United States corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the United States, but the credit shall not exceed the limitations ( for the purpose of limiting the credit to the Philippine tax on income from sources within the United States, and on income from sources outside the Philippines) provided by Philippine law for the taxable year. For the purpose of applying the Philippine credit in relation to taxes paid or accrued to the United States, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the Philippine credit in relation to taxes paid or accrued to the United States, the taxes referred to in paragraphs (1)(a) and (2) of Article 1 (Taxes Covered) shall be considered to be income taxes. ARTICLE 24 NON-DISCRIMINATION (1) A citizen of one of the Contracting States who is a resident of the other Contracting State shall not be subject in that other Contracting State to more burdensome taxes than a citizen of that other Contracting State who is a resident thereof. (2) A permanent establishment which a resident of one of the Contracting States has in the other Contracting State shall not be subject in that other Contracting State to more burdensome taxes than a resident of that other Contracting State carrying on the same activities. This paragraph shall not be construed as obliging a
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Contracting State to grant to individual residents of the other Contracting State any personal allowances, reliefs, or deductions for taxation purposes on account of civil status or family responsibilities which it grants to its own individual residents. (3) A corporation of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected with taxation which is other or more burdensome than the taxation and requirements to which a corporation of the first-mentioned Contracting State carrying on the same activities, the capital of which is wholly owned or controlled by one or more residents of the first-mentioned Contracting State, is or may be subjected. (4) Notwithstanding any other provision of this Convention, the term "taxes" or "taxation" means, for the purpose of this Article, taxes or taxation of every kind imposed at the national, state, or local level. (5) With respect to the taxes referred to in Article 1 (Taxes Covered), nothing in this Article shall prevent the Philippines from limiting to its citizens or corporations the enjoyment of tax incentives granted under the following enactments: (a) Section 6 of the Investment Incentives Act (Republic Act No. 5186), (b) Section 5 and Section 7(b) of the Export Incentives Act (Republic No. Act 6135), and (c) Section 9 of the Investment Incentives Program for the Tourism Industry (Presidential Decree No. 535) so far as they were in force on, and have not been modified since, the date of signature of this Convention, or have been modified only in minor respects so as not to affect their general character. (6) With respect to taxes other than the taxes referred to in Article 1 (Taxes Covered), nothing in this Article shall prevent the Philippines or a political subdivision or local authority thereof from limiting to Philippine citizens or corporations the enjoyment of tax incentives for the promotion of industry or business similar to those described in subparagraphs (a), (b) and (c) of paragraph (5) so far as they were in

force on, and have not been modified since, the date of signature of this Convention or have been modified only in minor respects so as not to affect their general character. ARTICLE 25 MUTUAL AGREEMENT PROCEDURE (1) Where a resident or citizen of one of the Contracting States considers that the action of one or both of the Contracting States results or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the national laws of the Contracting States, present his case to the competent authority of the Contracting State of which he is a resident or citizen. Should the resident's or citizen's claim be considered to have merit by the competent authority of the Contracting State to which the claim is made, it shall endeavor to come to an agreement with the competent authority of the other Contracting State with a view to the avoidance of taxation not in accordance with the provisions of this Convention. (2) The competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the application of this Convention. In particular, the competent authorities of the Contracting States may agree (a) To the same attribution of industrial or commercial profits to a resident of one of the Contracting States and its permanent establishment situated in the other Contracting State; (b) To the same allocation of income, deductions, credits, or allowances between a resident of one of the Contracting States and any related person and to the readjustment of taxes imposed by each Contracting State to reflect such allocation; (c) To the same determination of the source of particular items of income; or (d) To the same characterization of particular items of income. (3) The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of this Article. When it seems advisable for the purpose of reaching an agreement, the competent authorities may meet together for an oral exchange of opinions.
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(4) In the event that the competent authorities reach such agreement, taxes shall be imposed on such income in accordance with such agreement, and (a) In the case of the United States, refund or credit of taxes shall be allowed in accordance with such agreement, notwithstanding any procedural rule (including statutes of limitations) applicable under United States law. (b) In the case of the Philippines, refund or credit of taxes shall be allowed in accordance with such agreement, subject to any procedural rule (including statutes of limitations) applicable under Philippine law. However, notwithstanding any such Philippine procedural rule, a tax credit certificate shall be issued if a claim is filed with the competent authority of the Philippines no later than 2 years from the close of the taxable year in which the United States tax imposed under this paragraph is paid and such claim is filed within 5 taxable years from the close of the taxable year in issue. A tax credit certificate shall be issued with respect to a claim filed after the aforementioned 5-years period only if the claim is supported by the books and records of the taxpayer. The amount of the tax credit certificate shall be computed in the same manner as an actual refund (whether or not an actual refund of tax can be made), but may only be used as a credit against Philippine tax liability without giving rise to a refund. ARTICLE 26 EXCHANGE OF INFORMATION (1) The competent authorities shall exchange such information as is necessary for carrying out the provisions of this Convention or for the prevention of fraud or for the administration of statutory provisions concerning taxes to which this Convention applies provided the information is of a class that can be obtained under the laws and administrative practices of each Contracting State with respect to its own taxes. (2) Any information so exchanged shall be treated as secret, except that such information may be (a) Disclosed to any person concerned with, or

(b) Made part of a public record with respect to, the assessment, collection, or enforcement of, or litigation with respect to, the taxes to which this Convention applies. (3) No information shall be exchanged which would be contrary to public policy. (4) If information is requested by a Contracting State in accordance with this article. the other Contracting State shall obtain the information to which the request relates from or with respect to its residents or corporations in the same manner and to the same extent as if the tax of the requesting State were the tax of the other State and were being imposed by that other State. A Contracting State may obtain information from or with respect to its residents or corporations in accordance with this paragraph for the sole purpose of assisting the other Contracting State in the determination of the taxes of that other State. (5) If specifically requested by the competent authority of a Contracting State, the competent authority of the other Contracting State shall provide information under this Article in the form of depositions of witnesses and copies of unedited original documents (including books, papers, statements, records, accounts, or writings) to the same extent such depositions and documents can be obtained under the laws and administrative practices of each Contracting State with respect to its own taxes. (6) The exchange of information shall be either on a routine basis or on request with reference to particular cases. The competent authorities of the Contracting States may agree on the list of information which shall be furnished on a routine basis. ARTICLE 27 ASSISTANCE IN COLLECTION (1) Each of the Contracting States shall endeavor to collect on behalf of the other Contracting State such taxes imposed by that other Contracting State as will ensure that any exemption or reduced rate of the tax granted under this Convention by that other Contracting State shall not be enjoyed by persons not entitled to such benefits. (2) In no case shall this Article be construed so as to impose upon a Contracting State the obligations to carry out measures at variance
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with the laws or administrative practices of either Contracting State with respect to the collection of its own taxes. ARTICLE 28 DIPLOMATIC AND CONSULAR OFFICERS Nothing in this Convention shall affect the fiscal privileges of diplomatic and consular officials under the general rules of international law or under the provisions of special agreements. ARTICLE 29 ENTRY INTO FORCE (1) This Convention shall be subject to ratification in accordance with the constitutional procedures of each Contracting State and instruments of ratification shall be exchanged at Washington as soon as possible. It shall enter into force 30 days after the date of exchange of instruments of ratification and shall then have effect for the first time: (a) As respects the rate of withholding tax, to amounts paid on or after the first day of January immediately following the year in which this Convention enters into force; (b) As respects other taxes, to taxable years beginning on or after January 1 of the year following the date on which this Convention enters into force. (2) However, in the case of payments received as a consideration for the use of, or the right to use, a copyright of cinematographic films or films or tapes used for radio or television broadcasting, paragraph (2)(b) (iii) of Article 13 (Royalties) shall not have effect before January 1, 1979. ARTICLE 30 TERMINATION This Convention shall remain in force until terminated by one of the Contracting States. Either Contracting State may terminate the Convention at any time after 5 years from the date on which this Convention enters into force provided that at least 6 months' prior notice of termination has been given through diplomatic channels. In such event, the Convention shall cease to have force and effect as respects income of calendar years or taxable years beginning (or, in

the case of taxes payable at the source, payments made) on or after January 1 next following the expiration of the 6-month period. Done at Manila in duplicate this 1st day of October 1976. PROTOCOL SUPPLEMENTING THE CONVENTION BETWEEN THE REPUBLIC OF THE PHILIPPINES AND THE UNITED STATES OF AMERICA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME The Government of the Republic of the Philippines and the Government of the United States of America, Desiring to conclude a Protocol to supplement the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed on October 1, 1976 at Washington as modified by an exchange of notes dated November 24, 1976, acd Have accordingly appointed their respective representatives for this purpose, and have agreed as follows: ARTICLE 1 Notwithstanding the provisions of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of a real property interest located in that country. Likewise, both countries may tax gain from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term "real property interest" is to have the meaning it has under the law of the country in which the underlying real property is located. ARTICLE 2 Notwithstanding the provisions of paragraph (2) of Article 9 of the Convention, the tax imposed on profits derived by a resident of one of the Contracting States from sources within the other Contracting State from the operation of aircraft in international traffic may be as much as but shall not exceed, the lesser of one and one-half percent of the
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gross revenue derived from sources within that State, and the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State. ARTICLE 3 Notwithstanding Article 9 and paragraph (6) of Article 11 of the Convention, the Philippines may not impose on earnings of a corporation attributable to a permanent establishment in the Philippines, which earnings are described in Article 9 of the Convention, a tax in addition to the tax which would be chargeable on the earnings of a Philippine corporation. ARTICLE 4 Notwithstanding the provisions of Article 26 of the Convention, the appropriate Congressional Committees and the General Accounting Office shall be afforded access to the information exchanged under this Convention where such access to the information exchanged is necessary to carry out their oversight responsibilities, subject only to the limitations and procedures of the Internal Revenue Code. ARTICLE 5 1. The present Protocol shall be regarded as an integral part of the aforestated Convention. 2. The present Protocol shall enter into force together with the Convention on the date of exchange of instruments of ratification. 3. The present Protocol shall continue in force as long as the aforesaid Convention remains effective. E. E-Commerce Tax SEC. 23. Place of Dispatch and Receipt of Electronic Data Message or Electronic Document. - Unless otherwise agreed between the originator and the addressee, an electronic data message or electronic document is deemed to be dispatched at the place where the originator has its place of business and received at the place where the addressee has its place of business. This rule shall apply even if the originator or addressee had used a laptop or other portable device

to transmit or receive his electronic data message or electronic document. This rule shall also apply to determine the tax situs of such transaction. For the purpose hereof - a. If the originator or the addressee has more than one place of business, the place of business is that which has the closest relationship to the underlying transaction or, where there is no underlying transaction, the principal place of business. b. If the originator of the addressee does not have a place of business, reference is to be made to its habitual residence; or a. The "usual place of residence" in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted.
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Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Gross rentals, charter and other fees from

Tax Law Review Atty. Salvador

Shall not be subject to income tax

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador

Tax Law Review Atty. Salvador