GENERAL PRINCIPLES

I. Concepts, Nature and Characteristics of Taxation and Taxes.

Taxation Defined:
As a process, it is a means by which the sovereign, through its
law-making body, raises revenue to defray the necessary expenses of
the government. It is merely a way of apportioning the costs of
government among those who in some measures are privileged to
enjoy its benefits and must bear its burdens.
As a poer, taxation refers to the inherent power of the state to
demand enforced contributions for public purpose or purposes.
Rationa!e of Taxation " The Supreme ourt held!
"It is said that taxes are what we pay for civili#ed society.
$ithout taxes, the government would be paraly#ed for lack of the
motive power to activate and operate it. %ence, despite the natural
reluctance to surrender part of one&s hard-earned income to the taxing
authorities, every person who is able must contribute his share in the
running of the government. The government for its part is expected to
respond in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral and material
values. The s#$%iotic re!ationship is the rationa!e of taxation and
should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
Taxation is a symbiotic relationship, whereby in exchange for
the protection that the citi#ens get from the government, taxes are
paid.' (ommissioner of Internal )evenue vs *lgue, Inc.,et al., +-
,--./, 0eb. 12, 1.--3
Purposes and &%'ecti(es of Taxation
1. Re(enue ) to provide funds or property with which the State
promotes the general welfare and protection of its citi#ens.
,. Non"Re(enue 45)
,
657
a. Pro$otion of Genera! *e!fare ) Taxation may be used as an
implement of police power in order to promote the general welfare of
the people. 4see +ut# vs *raneta (.- 5hil 18-3 and 9sme:a vs 9rbos
(;.). <o. ..--/, =ar. >1, 1..>37
b. Re+u!ation ) *s in the case of taxes levied on excises and
privileges like those imposed in tobacco or alcoholic products or
amusement places like night clubs, cabarets, cockpits, etc.
In the case of Caltex Phils. Inc. vs COA (;.). <o. .,?-?,
=ay -, 1..,3, it was held that taxes may also be imposed for a
regulatory purpose as, for instance, in the rehabilitation and
stabili#ation of a threatened industry which is affected with public
industry like the oil industry.

c. Reduction of Socia! Ine,ua!it# @ this is made possible through
the progressive system of taxation where the objective is to prevent
the under-concentration of wealth in the hands of few individuals.
d. Encoura+e Econo$ic Groth @ in the realm of tax exemptions
and tax reliefs, for instance, the purpose is to grant incentives or
exemptions in order to encourage investments and thereby promote
the country&s economic growth.
e. Protectionis$ @ in some important sectors of the economy, as
in the case of foreign importations, taxes sometimes provide protection
to local industries like protective tariffs and customs duties.
Taxes Defined
Taxes are the enforced proportional contributions from persons
and property levied by the law-making body of the State by virtue of its
sovereignty for the support of government and for public needs.
Essentia! Characteristic of Taxes 4+6=5>S7
1. It is levied by the !a"$a-in+ %od# of the State
The power to tax is a legislative power which under the
onstitution only ongress can exercise through the enactment of
laws. *ccordingly, the obligation to pay taxes is a statutory liability.
,. It is an enforced contribution
* tax is not a voluntary payment or donation. It is not
dependent on the will or contractual assent, express or implied, of the
person taxed. Taxes are not contracts but positive acts of the
government.
>. It is generally payable in $one#
Tax is a pecuniary burden @ an exaction to be discharged
alone in the form of money which must be in legal tender, unless
Aualified by law, such as )* >B8 which allows backpay certificates as
payment of taxes.
8. It is proportionate in character - It is ordinarily based on the
taxpayers ability to pay.
?. It is levied on persons or propert# " * tax may also be imposed
on acts, transactions, rights or privileges.
/. It is levied for pu%!ic purpose or purposes " Taxation involves,
and a tax constitutes, a burden to provide income for public purposes.
2. It is levied by the State which has jurisdiction over the persons or
property. - The persons, property or service to be taxed must be
subject to the jurisdiction of the taxing state.
Theor# and .asis of Taxation
/. Necessit# Theor#
Taxes proceed upon the theory that the existence of the
government is a necessityC that it cannot continue without the means
to pay its expensesC and that for those means, it has the right to
compel all citi#ens and properties within its limits to contribute.
In a case, the Supreme ourt held that!
Taxation is a power emanating from necessity. It is a
necessary burden to preserve the State&s sovereignty and a means to
give the citi#enry an army to resist aggression, a navy to defend its
shores from invasion, a corps of civil servants to serve, public
improvements designed for the enjoyment of the citi#enry and those
which come with the State&s territory and facilities, and protection
which a government is supposed to provide. (Phil. Guaranty Co., Inc.
vs Commissioner of Internal evenue, !" #CA $$%&.
0. The .enefits"Protection Theor#1.enefit"Recei(ed Theor#
The basis of taxation is the reciprocal duty of protection
between the state and its inhabitants. In return for the contributions,
the taxpayer receives the general advantages and protection which the
government affords the taxpayer and his property.
2ua!ifications of the .enefit"Protection Theor#:
a. It does not mean that only those who are able to pay and do pay
taxes can enjoy the privileges and protection given to a citi#en by the
government.
b. 0rom the contributions received, the government renders no
special or commensurate benefit to any particular property or person.
c. The only benefit to which the taxpayer is entitled is that derived
from his enjoyment of the privileges of living in an organi#ed society
established and safeguarded by the devotion of taxes to public
purposes. (Gome' vs Palomar, (% #CA )(*&
d. * taxpayer cannot object to or resist the payment of taxes solely
because no personal benefit to him can be pointed out as arising from
the tax. (+oren'o vs Posa,as, -. Phil "%"&
3. Life%!ood Theor#
Taxes are the lifeblood of the government, being such, their
prompt and certain availability is an imperious need. (Collector of
Internal evenue vs. Goo,rich International ubber Co., #ept. -,
!*-%& $ithout taxes, the government would be paraly#ed for lack of
motive power to activate and operate it.
Nature of Taxin+ Poer
1. Inherent in so(erei+nt# @ The power of taxation is inherent in
sovereignty as an incident or attribute thereof, being essential to the
existence of every government. It can be exercised by the government
even if the onstitution is entirely silent on the subject.
a. onstitutional provisions relating to the power of taxation do not
operate as grants of the power to the government. They merely
constitute limitations upon a power which would otherwise be
practically without limit.
b. $hile the power to tax is not expressly provided for in our
constitutions, its existence is recogni#ed by the provisions relating to
taxation.
In the case of /actan Cebu International Airport Authority vs
/arcos, #ept. !!, !**-, as an incident of sovereignty, the power to tax
has been described as "unlimited in its range, acknowledging in its
very nature no limits, so that security against its abuse is to be found
only in the responsibility of the legislative which imposes the tax on the
constituency who are to pay it.'
,. Le+is!ati(e in character @ The power to tax is exclusively
legislative and cannot be exercised by the executive or judicial branch
of the government.
>. Su%'ect to constitutiona! and inherent !i$itations @ *lthough in
one decided case the Supreme ourt called it an awesome power, the
power of taxation is subject to certain limitations. =ost of these
limitations are specifically provided in the onstitution or implied
therefrom while the rest are inherent and they are those which spring
from the nature of the taxing power itself although, they may or may
not be provided in the onstitution.
Scope of Le+is!ati(e Taxin+ Poer 4S
,
* 5 D * =7
1. su%'ects of Taxation (the persons, property or occupation etc. to
be taxed3
0. a$ount or rate of the tax
3. purposes for hich taxes sha!! %e !e(ied pro(ided the# are
pu%!ic purposes
4. apportion$ent of the tax
5. situs of taxation
6. $ethod of co!!ection
Is the Poer to Tax the Poer to Destro#7
In the case of Churchill, et al. vs Concepcion (". Phil *-*& it
has been ruled that!
The power to impose taxes is one so unlimited in force and
so searching in extent so that the courts scarcely venture to declare
that it is subject to any restriction whatever, except such as rest in the
discretion of the authority which exercise it. <o attribute of sovereignty
is more pervading, and at no point does the power of government
affect more constantly and intimately all the relations of life than
through the exaction made under it.
*nd in the notable case of /cCulloch vs /arylan,, hief
Eustice =arshall laid down the rule that the power to tax involves the
power to destroy.
*ccording to an authority, the above principle is pertinent
only when there is no power to tax a particular subject and has no
relation to a case where such right to tax exists. This opt-Auoted
maxim instead of being regarded as a blanket authori#ation of the
unrestrained use of the taxing power for any and all purposes,
irrespective of revenue, is more reasonably construed as an
epigrammatic statement of the political and economic axiom that since
the financial needs of a state or nation may outrun any human
calculation, so the power to meet those needs by taxation must not be
limited even though the taxes become burdensome or confiscatory. To
say that "the power to tax is the power to destroy' is to describe not
the purposes for which the taxing power may be used but the degree
of vigor with which the taxing power may be employed in order to raise
revenue (I ooley 12.-1-13
Constitutiona! Restraints Re: Taxation is the Poer to
Destro#
$hile taxation is said to be the power to destroy, it is by no
means unlimited. It is eAually correct to postulate that the 0power to
tax is not the power to destroy while the Supreme Court sits,1
because of the constitutional restraints placed on a taxing power that
violated fundamental rights.
In the case of oxas, et al vs C2A (April (-, !*-)&, the S
reminds us that although the power of taxation is sometimes called the
power to destroy, in order to maintain the general public&s trust and
confidence in the ;overnment, this power must be used justly and not
treacherously. The Supreme ourt held!
"The power of taxation is sometimes called also the power to
destroy. Therefore it should be exercised with caution to minimi#e
injury to the proprietary rights of a taxpayer. It must be exercised fairly,
eAually and uniformly, lest the tax collector kill the Fhen that lays the
3ol,en e33&. *nd, in order to maintain the general public& trust and
confidence in the ;overnment this power must be used justly and not
treacherously.'
The doctrine seeks to describe, in an extreme, the
conseAuential nature of taxation and its resulting implications, to wit!
a. The power to tax must be exercised with caution to minimi#e
injury to proprietary rights of a taxpayerC
b. If the tax is lawful and not violative of any of the inherent and
constitutional limitations, the fact alone that it may destroy an activity
or object of taxation will not entirely permit the courts to afford any
reliefC and
c. * subject or object that may not be destroyed by the taxing
authority may not likewise be taxed. (e.g. exercise of a constitutional
right3
Poer of 8udicia! Re(ie in Taxation1Doctrine of 8udicia! Non"
Interference
The courts cannot review the wisdom or advisability or
expediency of a tax. The court&s power is limited only to the application
and interpretation of the law.
Eudicial action is limited only to review where involves!
1. The determination of validity on the tax in relation to constitutional
precepts or provisions.
,. The determination, in an appropriate case, of the application of the
law.
Aspects of Taxation
1. Le(# @ determination of the persons, property or excises to be
taxed, the sum or sums to be raised, the due date thereof and the time
and manner of levying and collecting taxes (strictly speaking, such
refers to taxation3
,. Co!!ection @ consists of the manner of enforcement of the
obligation on the part of those who are taxed. (this includes payment
by the taxpayer and is referred to as tax administration3
The two processes together constitute the "taxation
s#ste$'.
.asic Princip!es of a Sound Tax S#ste$ 40*T7
1. 9isca! Ade,uac# ) the sources of tax revenue should coincide
with, and approximate the needs of government expenditure. <either
an excess nor a deficiency of revenue vis-G-vis the needs of
government would be in keeping with the principle.
,. Ad$inistrati(e 9easi%i!it# ) tax laws should be capable of
convenient, just and effective administration.
>. Theoretica! 8ustice @ the tax burden should be in proportion to
the taxpayer&s ability to pay (ability4to4pay principle&. The 1.-2
onstitution reAuires taxation to be eAuitable and uniform.
II. C!assifications and Distinction
C!assification of Taxes
A. As to Su%'ect $atter
1. Persona!, capitation or po!! taxes @ taxes of fixed amount upon
all persons of a certain class within the jurisdiction of the taxing power
without regard to the amount of their property or occupations or
businesses in which they may be engaged in.
example! community tax
,. Propert# Taxes @ taxes on things or property of a certain class
within the jurisdiction of the taxing power.
example! real estate tax
>. Excise Taxes @ charges imposed upon the performance of an act,
the enjoyment of a privilege, or the engaging in an occupation.
examples! income tax, estate tax or donor&s tax
B. As to .urden
1. Direct Taxes @ taxes wherein both the 0inci,ence1 as well as the
0impact1 or burden of the tax faces on one person.
examples! income tax, community tax, donor&s tax, estate
tax
,. Indirect Taxes @ taxes wherein the incidence of or the liability for
the payment of the tax falls on one person, but the burden thereof can
be shifted or passed to another person.
examples! H*T, percentage taxes, customs duties excise
taxes on certain specific goods
I$portant Points to Consider re+ardin+ Indirect Taxes!
1. $hen the consumer or end-user of a manufacturer product is tax-
exempt, such exemption covers only those taxes for which such
consumer or end-user is directly liable. Indirect taxes are not included.
%ence, the manufacturer cannot claim exemption from the payment of
sales tax, neither can the consumer or buyer of the product demand
the refund of the tax that the manufacturer might have passed on to
him. (Phil. Acetylene Co. inc. vs Commissioner of Internal evenue et.
al., +4!*$5$, Au3.!$, !*)$&
,. $hen the transaction itself is the one that is tax-exempt but
through error the seller pays the tax and shifts the same to the buyer,
the seller gets the refund, but must hold it in trust for buyer. (American
ubber Co. case, +4!5*-", April "5, !*-"&
>. $here the exemption from indirect tax is given to the contractee,
but the evident intention is to exempt the contractor so that such
contractor may no longer shift or pass on any tax to the contractee, the
contractor may claim tax exemption on the transaction (Commissioner
of Internal evenue vs 6ohn Gotamco an, #ons, Inc., et.al., +4"!5*(,
7eb. ($, !*)$&
8. $hen the law granting tax exemption specifically includes indirect
taxes or when it is clearly manifest therein that legislative intention to
exempt embraces indirect taxes, then the buyer of the product or
service sold has a right to be reimbursed the amount of the taxes that
the sellers passed on to him. (/ace,a vs /acarai3,supra&
NOTE: In Contex Corp. vs. CI, (G.. 8o. !!!%"%. 6uly (, (55.&, the
ourt held that while, )* 2,,2 does not grant tax exemptions, such
grant is not all encompassing but is limited only to those taxes for
which an S=I* registered business may directly liable. %ence, Subic
Iay 0reefort Jone and 6nterprise (SI0J3 locators are not relieved
from indirect axes that may be shifted to them by a H*T registered
seller.
In an indirect tax, which also includes H*T, the amount of
tax paid on the goods, properties or services bought, transferred, or
leased may be shifted or passed on by the seller, transferor, or lessor
to the buyer, transferee or leasee.
C. As to Purpose
1. Genera!19isca!1Re(enue @ tax imposed for the general purposes
of the government, i.e., to raise revenues for governmental needs.
6xamples! income taxes, H*T, and almost all taxes
,. Specia!1Re+u!ator# @ tax imposed for special purposes, i.e., to
achieve some social or economic needs.
6xamples! educational fund tax under )eal 5roperty
Taxation
D. As to :easure of App!ication
1. Specific Tax @ tax imposed per head, unit or number, or by some
standard of weight or measurement and which reAuires no
assessment beyond a listing and classification of the subjects to be
taxed.
6xamples! taxes on distilled spirits, wines, and fermented
liAuors
,. Ad ;a!ore$ Tax @ tax based on the value of the article or thing
subject to tax.
example! real property taxes
E. As to Date
1. Pro+ressi(e Tax @ the rate or the amount of the tax increases as
the amount of the income or earning (tax base3 to be taxed increases.
examples! income tax, estate tax, donor&s tax
,. Re+ressi(e Tax @ the tax rate decreases as the amount of income
or earning (tax base3 to be taxed increases.
<ote! $e have no regressive taxes (this is according to Ke
+eon3
>. :ixed Tax @ tax rates are partly progressive and partly regressive.
8. Proportionate Tax @ tax rates are fixed on a flat tax base.
examples! real estate tax, H*T, and other percentage taxes
F. As to Scope or authorit# i$posin+ the tax
1. Nationa! Tax ) tax imposed by the <ational ;overnment.
examples! national internal revenue taxes, customs duties
,. :unicipa!1Loca! Tax @ tax imposed by +ocal ;overnment units.
examples! real estate tax, professional tax
Re+ressi(e S#ste$ of Taxation (is"<"(is Re+ressi(e Tax
* regressive tax, must not be confused with regressive
system of taxation.
Re+ressi(e Tax: tax the rate of which decreases as the tax
base increases.
Re+ressi(e S#ste$ of Taxation: focuses on indirect taxes,
it exists when there are more indirect taxes imposed than direct taxes.
Taxes distin+uished fro$ other I$positions
a. To!! (s Tax
To!! @ sum of money for the use of something, generally
applied to the consideration which is paid for the use of a road, bridge
of the like, of a public nature.
Kistinctions between Tax and Toll
Tax (s To!!
1. demand of sovereignty 1. demand of proprietorship
,. paid for the support of the
government
,. paid for the use of another&s
property
>. generally, no limit as to
amount imposed
>. amount depends on the cost
of construction or maintenance
of the public improvement used
8. imposed only by the
government
8. imposed by the government
or private individuals or entities
%. Pena!t# (s Tax
Pena!t# @ any sanctions imposed as a punishment for
violations of law or acts deemed injurious.
Tax (s Pena!t#
1. generally intended to raise
revenue
1. designed to regulate conduct
,. imposed only by the
government
,. imposed by the government
or private individuals or entities
c. Specia! Assess$ent (s Tax
Specia! Assess$ent @ an enforced proportional
contribution from owners of lands especially or particularly benefited
by public improvements.
Tax (s Specia! Assess$ent
1. imposed on persons,
property and excise
1. levied only on land
,. personal liability of the
person assessed
,. not a personal liability of the
person assessed, i.e. his liability
is limited only to the land
involved
>. based on necessity as well
as on benefits received
>. based wholly on benefits
8. general application (see
Apostolic Prefect vs 2reas. Of
9a3uio, $! Phil %.$&
8. exceptional both as time and
place
I$portant Points to Consider Re+ardin+ Specia! Assess$ents:
1. Since special assessments are not taxes within the constitutional
or statutory provisions on tax exemptions, it follows that the exemption
under Sec. ,-(>3, *rt. HI of the onstitution does not apply to special
assessments.
,. %owever, in view of the exempting proviso in #ec. (". of the +ocal
Government Co,e, properties which are actually, ,irectly an,
exclusively use, for reli3ious, charitable an, e,ucational purposes are
not exactly exempt from real property taxes but are exempt from the
imposition of special assessments as well.( see Aban&
> .The +enera! ru!e is that an exemption from taxation does not
include exemption from special assessment.
d. License or Per$it 9ee (s Tax
License or Per$it fee @ is a charge imposed under the
police power for the purposes of regulation.
Tax (s License1Per$it 9ee
1. enforced contribution
assessed by sovereign authority
to defray public expenses
1. legal compensation or
reward of an officer for specific
purposes
,. for revenue purposes ,. for regulation purposes
>. an exercise of the taxing
power
>. an exercise of the police
power
8. generally no limit in the
amount of tax to be paid
8. amount is limited to the
necessary expenses of
inspection and regulation
?. imposed also on persons
and property
?. imposed on the right to
exercise privilege
/. non-payment does not
necessarily make the act or
business illegal
/. non-payment makes the act
or business illegal
Three -inds of !icenses are reco+ni=ed in the !a:
1. +icenses for the regulation of useful occupations.
,. +icenses for the regulation or restriction of non-useful occupations
or enterprises
>. +icenses for revenue only
I$portance of the distinctions %eteen tax and !icense
fee:
1. Some limitations apply only to one and not to the other, and that
exemption from taxes may not include exemption from license fees.
,. The power to regulate as an exercise of police power does not
include the power to impose fees for revenue purposes. (see
American /ail +ine vs City of 9utuan, +4!(-.$, /ay "!, !*-$ an,
relate, cases&
>. *n extraction, however, maybe considered both a tax and a
license fee.
8. Iut a tax may have only a regulatory purpose.
?. The general rule is that the imposition is a tax if its primary
purpose is to generate revenue and regulation is merely incidentalC but
if regulation is the primary purpose, the fact that incidentally revenue is
also obtained does not make the imposition of a tax. (see Pro3ressive
:evelopment Corp. vs ;ue'on City, !$( #CA -(*&
e. De%t (s Tax
Kebt is based upon juridical tie, created by law, contracts,
delicts or Auasi-delicts between parties for their private interest or
resulting from their own acts or omissions.
Tax (s De%t
1. based on law 1. based on contracts,
express or implied
,. generally, cannot be
assigned
,. assignable
>. generally payable in money >. may be paid in kind
8. generally not subject to set-
off or compensation
8. may be subject to set-off or
compensation
?. imprisonment is a sanction
for non-payment of tax except
poll tax
?. no imprisonment for non-
payment of debt
/. governed by special
prescriptive periods provided
for in the Tax ode
/. governed by the ordinary
periods of prescriptions
2. does not draw interest
except only when delinAuent
2. draws interest when so
stipulated, or in case of default
Genera! Ru!e: Taxes are not subject to set-off or legal compensation.
The government and the taxpayer are not creditors and debtors or
each other. 9bligations in the nature of debts are due to the
government in its corporate capacity, while taxes are due to the
government in its sovereign capacity (Philex /inin3 Corp. vs CI, (*.
#CA -)$< epublic vs /ambulao +umber Co., - #CA -((&
Exception: $here both the claims of the government and the
taxpayer against each other have already become due and
demandable as well as fully liAuated. (see :omin3o vs Garlitos, +4
!)*5., 6une (*, !*-"&
Pertinent Case:
Philex Mining Corp. vs Commissioner of nternal !evenue
G.. 8o. !(%$5., Au3. (), !**)
The Supreme ourt held that! "$e have consistently ruled
that there can be no offsetting of taxes against the claims that the
taxpayer may have against the government. * person cannot refuse to
pay a tax on the ground that the government owes him an amount
eAual to or greater than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the government.'
f. Tax Distin+uished fro$ other Ter$s.
/. Su%sid# @ a pecuniary aid directly granted by the government to
an individual or private commercial enterprise deemed beneficial to the
public.
0. Re(enue @ refers to all the funds or income derived by the
government, whether from tax or from whatever source and whatever
manner.
3. Custo$s Duties @ taxes imposed on goods exported from or
imported into a country. The term taxes is broader in scope as it
includes customs duties.
4. Tariff @ it may be used in > senses!
*s a book of rates drawn usually in alphabetical order
containing the names of several kinds of merchandise with
the corresponding duties to be paid for the same.
*s duties payable on goods imported or exported (5K <o.
,>B3
*s the system or principle of imposing duties on the
importationLexportation of goods.
5. Interna! Re(enue @ refers to taxes imposed by the legislative
other than duties or imports and exports.
6. :ar+in 9ee @ a currency measure designed to stabili#e the
currency.
>. Tri%ute @ synonymous with taxC taxation implies tribute from the
governed to some form of sovereignty.
?. I$post @ in its general sense, it signifies any tax, tribute or duty. In
its limited sense, it means a duty on imported goods and merchandise.
Inherent Poers of the State
1. 5olice 5ower
,. 5ower of 6minent Komain
>. 5ower of Taxation
Distinctions a$on+ the Three Poers
Taxation Po!ice Poer E$inent Do$ain
P=PO#>
- levied for the
purpose of
raising
revenue
" exercised to promote
public welfare thru
regulations
- taking of property
for public use
A/O=82 O7 >?AC2IO8
- no limit

- limited to the cost of
regulations, issuance of
the license or surveillance
- no exaction,
compensation paid
by the government
9>8>7I2# >C>I@>:
- no special or
direct benefits
received but
the enjoyment
of the
privileges of
living in an
organi#ed
society
- no direct benefits but a
healthy economic
standard of society or
0,amnum absAue inBuria1
is attained
- direct benefit
results in the form
of just
compensation
8O84I/PAI/>82 O7 CO82AC2#
-the
impairment
rule subsist
- contract may be impaired - contracts may be
impaired
2A8#7> O7 POP>2C IGD2#
- taxes paid
become part
of public
funds
- no transfer but only
restraint on the exercise of
property right exists
- property is taken
by the gov&t upon
payment of just
compensation
#COP>
- affects all
persons,
property and
excise
- affects all persons,
property, privileges, and
even rights
- affects only the
particular property
comprehended
9A#I#
- public
necessity
- public necessity and the
right of the state and the
public to self-protection
and self-preservation
-public necessity,
private property is
taken for public
use
A=2DOI2C EDICD >?>CI#># 2D> POE>
- only by the
government
or its political
subdivisions
- only by the government
or its political subdivisions
- may be granted
to public service,
companies, or
public utilities
III. Li$itations on the Poer of Taxation
Li$itations, C!assified
a. Inherent Li$itations or those which restrict the power although
they are not embodied in the onstitution @P N I T EA
1. Pu%!ic 5urpose of Taxes
,. Non"de!e+a%i!it# of the Taxing 5ower
>. Territoria!it# or the Situs of Taxation
8. Exe$ption of the ;overnment from taxes
?. Internationa! omity
b. Constitutiona! Li$itations or those expressly found in the
constitution or implied from its provision
1. Due process of law
,. E,ua! protection of law
>. 0reedom of Speech and of the press
8. Non"infrin+e$ent of religious freedom
?. Non"i$pair$ent of contracts
/. Non"i$prison$ent for debt or non-payment of poll tax
2. 9rigin of Appropriation, )evenue and Tariff Iills
-. Bnifor$it#, 6Auitability and 5rogressitivity of Taxation
.. De!e+ation of +egislative *uthority to 0x Tariff )ates, Import and
6xport Muotas
1B. Tax 6xemption of Properties *ctually, Kirectly, and 6xclusively
used for )eligious haritable
11. Hoting reAuirements in connection with the +egislative Grant of
Tax 6xemption
1,. <on-impairment of the Supreme Courts& jurisdiction in Tax ases
1>. Tax exemption of Re(enues and *ssets, including ;rants,
6ndowments, Konations or ontributions to 6ducation Institutions
c. &ther Constitutiona! Pro(isions re!ated to Taxation
1. Su%'ect and Title of Iills
,. 5ower of the President to Heto an items in an *ppropriation,
)evenue or Tariff Iill
>. <ecessity of an Appropriation made before money
8. Appropriation of 5ublic =oney
?. Taxes +evied for Specia! 5urposes
/. *llotment to LGC
Inherent Li$itations
*. Pu%!ic Purpose of Taxes
/. I$portant Points to Consider:
a. If taxation is for a public purpose, the tax must be used!
a.13 for the support of the state or
a.,3 for some recogni#ed objects of governments or
a.>3 directly to promote the welfare of the community
(taxation as an implement of police power3
b. The term 0public purpose1 is synonymous with 03overnmental
purpose1< a purpose affecting the inhabitants of the state or taxing
district as a community and not merely as individuals.
c. * tax levied for a private purpose constitutes a taking of
property without due process of law.
d. The purposes to be accomplished by taxation need not be
exclusively public. *lthough private individuals are directly benefited,
the tax would still be valid provided such benefit is only incidental.
e. The test is not as to who receives the money, but the
character of the purpose for which it is expendedC not the immediate
result of the expenditure but rather the ultimate.
f. In the imposition of taxes, public purpose is presumed.
,. Test in deter$inin+ Pu%!ic Purposes in tax
a. Dut# Test @ whether the thing to be threatened by the appropriation
of public revenue is something which is the duty of the State, as a
government.
b. Pro$otion of Genera! *e!fare Test @ whether the law providing
the tax directly promotes the welfare of the community in eAual
measure.
I. Non"de!e+a%i!it# of Taxin+ Poer
1. Rationa!e: Koctrine of Separation of 5owers.
Taxation is purely legislative hence, ongress
cannot delegate the power to others.
0. Exceptions:
a. "elegation to the President #$rt.%. Se&. '(#') *+(,
Constitution)-.lexi/le Tariff Clause
The power granted to ongress under this constitutional
provision to authori#e the 5resident to fix within specified limits and
subject to such limitations and restrictions as it may impose, tariff rates
and other duties and imposts include tariffs rates even for revenue
purposes only. ustoms duties which are assessed at the prescribed
tariff rates are very much like taxes which are freAuently imposed for
both revenue-raising and regulatory purposes (Garcia vs >xecutive
#ecretary, et. al., G.. 8o. !5!($", 6uly ", !**(&
/. "elegations to the 0o&al 1overnment #$rt. 2. Se&. 34
*+(, Constitution)
It has been held that the general principle against the
delegation of legislative powers as a conseAuence of the theory of
separation of powers is subject to one well-established exception,
namely, that legislative power may be delegated to local governments.
The theory of non-delegation of legislative powers does not apply in
maters of local concern. (Pepsi4Cola 9ottlin3 Co. of the Phil, Inc. vs
City of 9utuan, et . al., +4(()!., Au3. (), !*-)&
NOTE: In =I** vs. =arcos, the Supreme ourt ruled that
considering the present provisions of the onstitution, +ocal
;overnment Nnits& power to tax is no longer just a delegated power
but a power granted by the onstitution.
&. "elegation to $dministrative $gen&ies with respe&t to
aspe&ts of Taxation not legislative in &hara&ter.
>xamplesF assessment an, collection
3. Li$itations on De!e+ation
a. It shall not contravene any onstitutional provisions or
inherent limitations of taxationC
b. The delegation is effected either by the onstitution or by
validly enacted legislative measures or statuteC and
c. The delegated levy power, except when the delegation is
by an express provision of onstitution itself, should only be in favor of
the local legislative body of the local or municipal government
concerned.
8. Tax Le+is!ation (is"<"(is Tax Ad$inistration " 6very system
of taxation consists of two parts!
a. the elements that enter into the imposition of the tax 4 S
0
A
P C A :7, or tax regulationC and
b. the steps taken for its assessment and collection or tax
administration
If what is delegated is tax legislation, the delegation is
invalidC but if what is involved is only tax administration, the non-
delegability rule is not violated.
. Territoria!it# or Situs of Taxation
/. I$portant Points to Consider:
a. Territoriality or Situs of Taxation means 0place of taxation1
depending on the nature of taxes being imposed.
b. It is an inherent mandate that taxation shall only be exercised
on persons, properties, and excise within the territory of the taxing
power because!
b.13 Tax laws do not operate beyond a country&s territorial
limit.
b.,3 5roperty which is wholly and exclusively within the
jurisdiction of another state receives none of the protection
for which a tax is supposed to be compensation.
c. %owever, the fundamental basis of the right to tax is the
capacity of the government to provide benefits and protection to
the object of the tax. * person may be taxed, even if he is
outside the taxing state, where there is between him and the
taxing state, a privity of relationship justifying the levy.
0. 9actors to Consider in deter$inin+ Situs of Taxation
a. kind and lassification of the Tax
b. location of the subject matter of the tax
c. domicile or residence of the person
d. citi#enship of the person
e. source of income
f. place where the privilege, business or occupation is being
exercised
K. Exe$ption of the Go(ern$ent fro$ Taxes
/. I$portant Points to Consider:
Reasons for Exe$ptions:
a.13 To levy tax upon public property would render
necessary new taxes on other public property for the
payment of the tax so laid and thus, the government would
be taxing itself to raise money to pay over to itselfC
a.,3 In order that the functions of the government shall not
be unduly impedeC and
a.>3 To reduce the amount of money that has to be handed
by the government in the course of itsoperations.
,. Nnless otherwise provided by law, the exemption applies
only to government entities through which the government
immediately and directly exercises its sovereign powers
(Infantry Post >xchan3e vs Posa,as, %. Phil )--&
>. <otwithstanding the immunity, the government may tax itself in
the absence of constitutional limitations.
8. ;overnment-owned or controlled corporations, when
performing proprietary functions are generally subject to tax in
the absence of tax exemption provisions in their charters or law
creating them.
6. Internationa! Co$it#
1. I$portant Points to Consider:
a. The property of a foreign state or government may not be
taxed by another.
b. The grounds for the above rule are!
b.13 sovereign eAuality among states
b.,3 usage among states that when one enter into the
territory of another, there is an implied understanding
that the power does not intend to degrade its dignity by
placing itself under the jurisdiction of the latter
b.>3 foreign government may not be sued without its consent
so that it is useless to assess the tax since it cannot be
collected
b.83 reciprocity among states
Constitutiona! Li$itations
1. Due Process of La
a. .asis: #ec. ! Art. " 08o person shall be ,eprive, of life,
liberty or property without ,ue process of law x x x.'
Re,uisites:
1. The interest of the public generally as
distinguished from those of a particular class
reAuire the intervention of the stateC
,. The means employed must be reasonably
necessary to the accomplishment for the purpose
and not unduly oppressiveC
>. The deprivation was done under the authority of a
valid law or of the constitutionC and
8. The deprivation was done after compliance with
fair and reasonable method of procedure
prescribed by law.
In a string of cases, the Supreme ourt held
that in order that due process of law must not be done
in an arbitrary, despotic, capricious, or whimsical
manner.
,. E,ua! Protection of the La
a. .asis: #ec.! Art. " 0 xxx 8or shall any person be ,enie, the
eAual protection of the laws.
I$portant Points to Consider!
1. 6Aual protection of the laws signifies that all
persons subject to legislation shall be treated under circumstances
and conditions both in the privileges conferred and liabilities imposed
,. This doctrine prohibits class legislation which
discriminates against some and favors others.
NOTE: see Tio (s. ;ideo+ra$, /5/ SCRA 0D?.
%. Re,uisites for a ;a!id C!assification
1. =ust not be arbitrary
,. =ust not be based upon substantial distinctions
>. =ust be germane to the purpose of law.
8. =ust not be limited to exiting conditions onlyC and
?. =ust apply eAually to all members of a class.
>. Bnifor$it#, E,uita%i!it# and Pro+ressi(it# of Taxation
a. .asis: Sec. ,-(13 *rt. HI. The rule of taxation shall be uniform
and eAuitable. The ongress shall evolve a progressive system
of taxation.
%. I$portant Points to Consider:
1. Bnifor$it# (eAuality or eAual protection of the laws3
means all taxable articles or kinds or property of the
same class shall be taxed at the same rate. * tax is
uniform when the same force and effect in every place
where the subject of it is found.
,. E,uita%!e means fair, just, reasonable and
proportionate to one&s ability to pay.
>. Pro+ressi(e s#ste$ of Taxation places stress on
direct rather than indirect taxes, or on the taxpayers&
ability to pay
8. IneAuality which results in singling out one particular
class for taxation or exemption infringes no
constitutional limitation. (see Commissioner vs.
+in3ayen Gulf >lectric, !-. #CA ($&
?. The rule of uniformity does not call for perfect uniformity
or perfect eAuality, because this is hardly attainable.
8. 9reedo$ of Speech and of the Press
a. .asis: Sec. 8 *rt. III. <o law shall be passed abridging the
freedom of speech, of expression or of the press xxx "
b. I$portant Points to Consider:
1. There is curtailment of press freedom and freedom of
thought if a tax is levied in order to suppress the basic right
of the people under the onstitution.
,. * business license may not be reAuired for the sale or
contribution of printed materials like newspaper for such
would be imposing a prior restraint on press freedom
>. %owever, an annual registration fee on all persons subject
to the value-added tax does not constitute a restraint on
press freedom since it is not imposed for the exercise of a
privilege but only for the purpose of defraying part of cost of
registration.
?. Non"infrin+e$ent of Re!i+ious 9reedo$
a. .asis: Sec. ? *rt. III. "<o law shall be made respecting an
establishment of religion or prohibiting the free exercise thereof.
The free exercise and enjoyment of religious profession and
worship, without discrimination or preference, shall forever be
allowed. x x x'
%. I$portant Points to Consider:
1. +icense feesLtaxes would constitute a restraint on the freedom of
worship as they are actually in the nature of a condition or permit
of the exercise of the right.
,. %owever, the onstitution or the 0ree 6xercise of )eligion clause
does not prohibit imposing a generally applicable sales and use
tax on the sale of religious materials by a religious organi#ation.
(see 2olentino vs #ecretary of 7inance, ("% #CA -"5&
/. Non"i$pair$ent of Contracts
a. .asis: Sec. 1B *rt. III. "<o law impairing the obligation of
contract shall be passed.'
%. I$portant Points to Consider:
1. * law which changes the terms of the contract by making new
conditions, or changing those in the contract, or dispenses with
those expressed, impairs the obligation.
,.The non-impairment rule, however, does not apply to public
utility franchise since a franchise is subject to amendment,
alteration or repeal by the ongress when the public interest so
reAuires.
2. Non"i$prison$ent for non"pa#$ent of po!! tax
a. .asis: Sec. ,B *rt. III. "<o person shall be imprisoned for
debt or non-payment of poll tax.'
%. I$portant Points to Consider:
1.The only penalty for delinAuency in payment is the payment of
surcharge in the form of interest at the rate of ,8O per annum
which shall be added to the unpaid amount from due date until
it is paid. (Sec. 1/1, +;3
,.The prohibition is against "imprisonment' for "non-payment of
poll tax'. Thus, a person is subject to imprisonment for violation
of the community tax law other than for non-payment of the tax
and for non-payment of other taxes as prescribed by law.
-. &ri+in or Re(enue, Appropriation and Tariff .i!!s
a. .asis: Sec. ,8 *rt. HI. "*ll appropriation, revenue or tariff
bills, bill authori#ing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the
%ouse of )epresentatives, but the Senate may propose or
concur with amendments.'
%. Nnder the above provision, the Senator&s power is notonly to
Eon!# concur ith a$end$entsF but also "to propose
amendments'. (2olentino vs #ec. of 7inance, supra&
.. De!e+ation of Le+is!ati(e Authorit# to 9ix Tariff Rates,
I$ports and Export 2uotas
a. .asis: Sec. ,-(,3 *rt. HI "x x x The ongress may, by law,
authori#e the 5resident to fix within specified limits, and subject
to such limitations and restrictions as it may impose, tariff rates,
import and export Auotas, tonnage and wharfage dues, and
other duties or imposts within the framework of the national
development program of the government.
1B. Tax Exe$ption of Properties Actua!!#, Direct!# and
Exc!usi(e!# used for Re!i+ious, Charita%!e and Educationa!
Purposes
a. .asis: Sec. ,-(>3 *rt. HI. "haritable institutions, churches
and parsonages or convents appurtenant thereto, mosAues,
non-profit cemeteries, and all lands, building, and improvements
actually, ,irectly an, exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.'
%. I$portant Points to Consider:
1. Test of the tax exemption! the use and not ownership of
the property
,. To be tax-exempt, the property must be actually,
directly and exclusively used for the purposes
mentioned.
>. The word "exclusively' means "primarily&.
NOTE: .ut see Lun+ Center (s. 2C, 0G 8une 0DD4
statin+ that Eexc!usi(e!#F $eans Eso!e!#F.
8. The exemption is not limited to property actually
indispensable but extends to facilities which are
incidental to and reasonably necessary for the
accomplishment of said purposes.
?. The constitutional exemption applies only to property
tax.
/. %owever, it would seem that under existing law, gifts
made in favor or religious charitable and educational
organi#ations would nevertheless Aualify for donor&s gift
tax exemption. (Sec. 1B1(.3(>3, <I)3
11. ;otin+ Re,uire$ents in connection ith the Le+is!ati(e
Grant for tax exe$ption
a. .asis: Sec. ,-(83 *rt. HI. "<o law granting any tax exemption
shall be passed without the concurrence of a majority of all the
members of the ongress.'
%. The above provision reAuires the concurrence of a majority
not of attendees constituting a Auorum but of all members of the
ongress.
1,. Non"i$pair$ent of the Supre$e CourtsH 'urisdiction in
Tax Cases
a. .asis: Sec. ? (,3 *rt. HIII. "The ongress shall have the
power to define, prescribe, and apportion the jurisdiction of the
various courts but may not deprive the Supreme ourt of its
jurisdiction over cases enumerated in Sec. ? hereof.'
Sec. ? (,b3 *rt. HIII. "The Supreme ourt shall have the
following powers! x x x(,3 )eview, revise, modify or affirm on
appeal or certiorari x x x final judgments and orders of lower
courts in x x x all cases involving the legality of any tax, impost,
assessment, or toll or any penalty imposed in relation thereto.'
1>. Tax Exe$ptions of Re(enues and Assets, inc!udin+
+rants, endo$ents, donations or contri%utions to Educationa!
Institutions
a. .asis: Sec. 8(83 *rt. PIH. "Subject to the conditions
prescribed by law, all grants, endowments, donations or
contributions used actually, directly and exclusively for
educational purposes shall be exempt from tax.'
%. I$portant Points to Consider:
1. The exemption granted to non-stock, non-profit educational
institution covers income, property, and donor&s taxes, and
custom duties.
,. To be exempt from tax or duty, the revenue, assets, property
or donation must be used actually, directly and exclusively
for educational purpose.
>. In the case or religious and charitable entities and non-profit
cemeteries, the exemption is limited to property tax.
8. The said constitutional provision granting tax exemption to
non-stock, non-profit educational institution is self-executing.
?. Tax exemptions, however, of proprietary (for profit3 educational
institutions reAuire prior legislative implementation. Their tax
exemption is not self-executing.
/. +ands, Iuildings, and improvements actually, directly, and
exclusively used for educational purposed are exempt from
property tax, whether the educational institution is
proprietary or non-profit.
c. Depart$ent of 9inance &rder No. /3>"?>, dated Dec. /6,
/G?>
The following are some of the highlights of the K90 order
governing the tax exemption of non-stock, non-profit educational
institutions!
1. The tax exemption is not only limited to revenues and assets
derived strictly from school operations like income from tuition and
other miscellaneous fees such as matriculation, library, )9T, etc.
fees, but it also extends to incidental income derived from canteen,
bookstore and dormitory facilities.
,. In the case, however, of incidental income, the facilities
mentioned must not only be owned and operated by the school itself
but such facilities must be located inside the school campus. anteens
operated by mere concessionaires are taxable.
>. Income which is unrelated to school operations like income
from bank deposits, trust fund and similar arrangements, royalties,
dividends and rental income are taxable.
8. The use of the school&s income or assets must be in
consonance with the purposes for which the school is createdC in short,
use must be school-related, like the grant of scholarships, faculty
development, and establishment of professional chairs, school building
expansion, library and school facilities.
&ther Constitutiona! Pro(isions re!ated to Taxation
1. Su%'ect and Tit!e of .i!!s ISec. 06I/J /G?> ConstitutionJ
"6very Iill passed by ongress shall embrace only one subject
which shall be expressed in the title thereof.'
NOTE: In the Tolentino 6-H*T case, supra, the 6-vat, or the
6xpanded Halue *dded Tax +aw ()* 221/3 was also Auestioned
on the ground that the constitutional reAuirement on the title of a
bill was not followed.
,. Poer of the President to ;eto ite$s in an Appropriation,
Re(enue or Tariff .i!! ISec. 0>I0J, Art. ;I of the /G?>
ConstitutionJ
"The 5resident shall have the power to veto any particular item or
items in an *ppropriation, )evenue or Tariff bill but the veto shall not
affect the item or items to which he does not object.'
>. Necessit# of an Appropriation $ade %efore $one# $a# %e
paid out of the Treasur# ISec. 0GI/J, Art. ;I of the /G?>
ConstitutionJ
"<o money shall be paid out of the Treasury except in pursuance
of an appropriation made by law.'
8. Appropriation of Pu%!ic :one# for the %enefit of an#
Church, Sect, or S#ste$ of Re!i+ion ISec. 0GI0J, Art. ;I of the /G?>
ConstitutionJ
'<o public money or property shall be appropriated, applied, paid
or employed, directly or indirectly for the use, benefit, support of any
sect, church, denomination, sectarian institution, or system of religion
or of any priest, preacher, minister, or other religious teacher or
dignitary as such except when such priest, preacher, minister or
dignitary is assigned to the armed forces or to any penal institution, or
government orphanage or leprosarium.'
?. Taxes !e(ied for Specia! Purpose ISec. 0GI3J, Art. ;I of the
/G?> ConstitutionJ
"*ll money collected or any tax levied for a special
purpose shall be treated as a special fund and paid out for such
purpose only. It the purpose for which a special fund was created has
been fulfilled or abandoned the balance, if any, shall be transferred to
the general funds of the government.'
*n example is the 9il 5rice Stabili#ation 0und created under
5.K. 1.?/ to stabili#e the prices of imported crude oil. In a decided
case, it was held that where under an executive order of the
5resident, this special fund is transferred from the general fund to
a "trust liability account,' the constitutional mandate is not violated.
The 95S0, according to the court, remains as a special fund
subject to 9* audit (OsmeGa vs Orbos, et al., G.. 8o. **))-,
/ar. "!, !**"&
/. A!!ot$ent to Loca! Go(ern$ents
.asis: Sec. 6, Art. K of the /G?> Constitution
"+ocal ;overnment units shall have a just share, as
determined by law, in the national taxes which shall be
automatically released to them.'
I;. Situs of Taxation and Dou%!e Taxation
Situs of Taxation
1. Situs of Taxation literally means the P!ace of Taxation.
,. .asic Ru!e @ state where the subject to be taxed has a situs
may rightfully levy and collect the tax
So$e .asic Considerations Affectin+ Situs of Taxation
/. Protection
* legal situs cannot be given to property for the purpose of
taxation where neither the property nor the person is within the
protection of the taxing state
In the case of /anila >lectric Co. vs Catco (-* Phil )*&, the
Supreme ourt ruled that insurance premium paid on a fire insurance
policy covering property situated in the 5hils. are taxable in the 5hils.
6ven though the fire insurance contract was executed outside the
5hils. and the insurance policy is delivered to the insured therein. This
is because the Philippine Government must 3et somethin3 in return for
the protection it 3ives to the insure, property in the Phils. an, by
reason of such protection, the insurer is benefite, thereby.
0. The $axi$ of Mo/ilia Se5uuntur Personam and Situs of
Taxation
*ccording to this maxim, which means 'movable follow the
person,' the situs of personal property is the domicile of the owner.
This is merely a fiction of law and is not allowed to stand in the way of
taxation of personalty in the place where it has its actual situs and the
reAuisite legislative jurisdiction exists.
Exa$p!e: shares of stock may have situs for purposes of
taxation in a state in which they are permanently kept regardless of the
domicile of the owner, or the state in which he corporation is
organi#ed.
3. Le+is!ati(e Poer to 9ix Situs
If no constitutional provisions are violated, the power of the
legislative to fix situs is undoubted.
Exa$p!e: our law fixes the situs of intangible personal
property for purposes of the estate and gift taxes. (see Se&. *674 *++,
N!C&
NOTE: In those cases where the situs for certain intangibles
are not categorically spelled out, there is room for applying the mobilia
rule.
8. Dou%!e Taxation and the Situs Li$itation (see later topic&
Criteria in 9ixin+ Tax Situs of Su%'ect of Taxation
a. Persons @ 5oll tax may be levied upon persons who are
residents of the State.
b. Rea! Propert# @ is subject to taxation in the State in which it
is located whether the owner is a resident or non-resident, and
is taxable only there.
Ru!e of Lex Rei Sitae
c. Tan+i%!e Persona! propert# @ taxable in the state where it
has actual situs @ where it is physically located. *lthough the
owner resides in another jurisdiction.
Ru!e of Lex Rei Sitae
d. Intan+i%!e Persona! Propert# @ situs or personal property is
the domicile of the owner, in accordance with the principle
E:&.ILIA SE2BBNTBR PERS&NA:F, said principle,
however, is not controlling when it is inconsistent with express
provisions of statute or when justice demands that it should be,
as where the property has in fact a situs elsewhere. (see Eells
7ar3o 9anH v. Collector $5 PDI+ "(%< Collector v. 7isher +4
!!-((, 6anuary, !*-!&
e. Inco$e @ properly exacted from persons who are residents
or citi#ens in the taxing jurisdiction and even those who are
neither residents nor citi#ens provided the income is derived
from sources within the taxing state.
f. .usiness, &ccupation, and Transaction @ power to levy an
excise tax depends upon the place where the business is done,
of the occupation is engaged in of the transaction not place.
g. Gratuitous Transfer of Propert# @ transmission of property
from donor to donee, or from a decedent to his heirs may be
subject to taxation in the state where the transferor was a
citi#en or resident, or where the property is located.
;. :u!tip!icit# of Situs
There is multiplicity of situs when the same subject of
taxation, like income or intangible, is subject to taxation in several
taxing jurisdictions. This happens due to!
a. Hariance in the concept of "domicile' for tax purposesC
b. =ultiple distinct relationship that may arise with respect to
intangible personalityC and
c. The use to which the property may have been devoted, all of
which may receive the protection of the laws of jurisdiction other than
the domicile of the owner
Re$ed# @ taxation jurisdiction may provide!
a. 6xemption or allowance of deductions or tax credit for foreign
taxes
b. 6nter into treaties with other states
Dou%!e Taxation
To I0J Cinds of Dou%!e Taxation
1. &%noxious or Direct Dup!icate Taxation (:ouble taxation in
its strict sense& - In the objectionable or prohibited sense means that
the same property is taxed twice when it should be taxed only once.
Re,uisites:
1. Same property is taxed twice
,. Same purpose
>. Same taxing authority
8. $ithin the same jurisdiction
?. Kuring the same taxing period
/. Same kind or character of tax
,. Per$issi(e or Indirect Dup!icate Taxation (:ouble taxation
in its broa, sense& @ This is the opposite of direct double taxation and
is not legally objectionable. The absence of one or more of the
foregoing reAuisites of the obnoxious direct tax makes it indirect.
Instances of Dou%!e Taxation in its .road Sense
1. * tax on the mortgage as personal property when the
mortgaged property is also taxed at its full value as real estateC
,. * tax upon a corporation for its capital stock as a whole and
upon the shareholders for their sharesC
>. * tax upon a corporation for its capital stock as a whole and
upon the shareholders for their sharesC
8. * tax upon depositions in the bank for their deposits and a tax
upon the bank for their property in which such deposits are invested
?. *n excise tax upon certain use of property and a property tax
upon the same propertyC and
/. * tax upon the same property imposed by two different states.
:eans to Reduce the Larsh Effect of Taxation
1. Tax Deduction ) subtraction from gross income in arriving a
taxable income
,. Tax Credit ) an amount subtracted from an individual&s or
entity&s tax liability to arrive at the total tax liability
* deduction differ from a tax credit in that a deduction
reduces taxable income while credit reduces tax liability
>. Exe$ptions
8. Treaties with other States
?. Princip!e of Reciprocit#
Constitutiona!it#
Kouble Taxation in its stricter sense is undoubtedly
unconstitutional but that in the broa,er sense is not necessarily so.
Genera! Ru!e: 9ur onstitution does not prohibit double taxationC
hence, it may not be invoked as a defense against the validity of tax
laws.
a. $here a tax is imposed by the <ational ;overnment and
another by the city for the exercise of occupation or business
as the taxes are not imposed by the same public authority (City
of 9a3uio vs :e +eon, Oct. "!, !*-)&
b. $hen a )eal 6state dealer&s tax is imposed for engaging in
the business of leasing real estate in addition to )eal 6state
Tax on the property leased and the tax on the income desired
as they are different kinds of tax
c. Tax on manufacturer&s products and another tax on the
privilege of storing exportable copra in warehouses within a
municipality are imposed as first tax is different from the
second
d. $here, aside from the tax, a license fee is imposed in the
exercise of police power.
Exception: Kouble Taxation while not forbidden, is something not
favored. Such taxation, it has been held, should, whenever possible,
be avoided and prevented.
a. Koubts as to whether double taxation has been imposed
should be resolved in favor of the taxpayer. The reason is to
avoid injustice and unfairness.
b. The taxpayer may seek relief under the Nniformity )ule or the
6Aual 5rotection guarantee.
9or$s of Escape fro$ Taxation
Six .asic 9or$s of Escape fro$ Taxation
1. Shifting
,. Capitali#ation
>. Transformation
8. Evasion
?. Avoidance
/. Exemption
1. Shiftin+ @ Transfer of the burden of a tax by the original payer
or the one on whom the tax was assessed or imposed to another or
someone else
I$pact of taxation @ is the point at which a tax is originally
imposed.
Incidence of Taxation @ is the point on which a tax burden
finally rests or settles down.
Re!ations a$on+ Shiftin+, I$pact and Incidence of
Taxation @ the impact is the initial phenomenon, the shifting is the
intermediate process, and the incidence is the result.
Cinds of Shiftin+:
a. 9orard Shiftin+ @ the burden of tax is transferred
from a factor of production through the factors of distribution until it
finally settles on the ultimate purchaser or consumer
b. .ac-ard Shiftin+ @ effected when the burden of
tax is transferred from the consumer or purchaser through the factors
of distribution to the factor of production
c. &nard Shiftin+ @ this occurs when the tax is
shifted two or more times either forward or backward
,. Capita!i=ation, defined @ the reduction in the price of the
taxed object eAual to the capitali#ed value of future taxes which the
purchaser expects to be called upon to pay
>. Transfor$ation @ The method whereby the manufacturer or
producer upon whom the tax has been imposed, fearing the loss of his
market if he should add the tax to the price, pays the tax and
endeavors to recoup himself by improving his process of production
thereby turning out his units of products at a lower cost.
8. Tax E(asion @ is the use of the taxpayer of illegal or
fraudulent means to defeat or lessen the payment of a tax.
Indicia of 9raud in Taxation
a. 0ailure to declare for taxation purposes true and actual
income derived from business for two consecutive years, and
b. Substantial underdeclaration of income tax returns of the
taxpayer for four consecutive years couple, with overstatement of
,e,uction.
6vasion of the tax takes place only when there are no
proceeds. 6vasion of Taxation is tantamount, fiscally speaking, to the
absence of taxation.
?. Tax A(oidance @ is the use by the taxpayer of legally
permissible alternative tax rates or method of assessing taxable
property or income in order to avoid or reduce tax liability.
Tax *voidance is not punishable by law, a taxpayer has the
legal right to decrease the amount of what otherwise would be his
taxes or altogether avoid by means which the law permits.
Distinction %eteen Tax E(asion and A(oidance
Tax E(asion (s Tax A(oidance
accomplished by breaking
the letter of the law
accomplished by legal procedures or
means which maybe contrary to the
intent of the sponsors of the tax law
but nevertheless do not violate the
letter of the law
;I. Exe$ption fro$ Taxation
*. Tax Exe$ption @ is a grant of immunity, express or implied, to
particular persons or corporations from the obligations to pay taxes.
I. Nature of Tax Exe$ption
1. It is merely a personal privilege of the grantee
,. It is generally revocable by the government unless the
exemption is founded on a contract which is protected from
impairment, but the contract must contain the other essential elements
of contracts, such as, for example, a valid cause or consideration.
>. It implies a waiver on the part of the government of its right
to collect what otherwise would be due to it, and in this sense is
prejudicial thereto.
8. It is not necessarily discriminatory so long as the exemption
has a reasonable foundation or rational basis.
. Rationa!e of tax Exe$ption
5ublic interest would be subserved by the exemption
allowed which the law-making body considers sufficient to offset
monetary loss entailed in the grant of the exemption. (CI vs 9othelo
#hippin3 Corp., +4(!-"", 6une (*, !*-$< CI vs PA+, +4(5*-5,
Oct. "!, !*-)&
Grounds for Tax Exe$ptions
1. =ay be based on a contract in which case, the public
represented by the ;overnment is supposed to receive a full
eAuivalent therefore
,. =ay be based on some ground of public policy, such as, for
example, to encourage new and necessary industries.
>. =ay be created in a treaty on grounds of reciprocity or to
lessen the rigors of international double or multiple taxation which
occur where there are many taxing jurisdictions, as in the taxation of
income and intangible personal property
K. E,uit#, not a +round for Tax Exe$ption
There is no tax exemption solely on the ground of eAuity, but
eAuity can be used as a basis for statutory exemption. *t times the
law authori#es condonation of taxes on eAuitable considerations. (Sec
,2/, ,22, +ocal ;overnment ode3
6. Cinds of Tax Exe$ptions
1. *s to %asis
a. Constitutiona! Exe$ptions ) Immunities from taxation
which originate from the onstitution
b. Statutor# Exe$ptions ) Those which emanate from
+egislation
,. *s to for$
a. Express Exe$ption ) $henever expressly granted by
organic or statute of law
b. I$p!ied Exe$ption ) 6xist whenever particular persons,
properties or excises are deemed exempt as they fall outside the
scope of the taxing provision itself
>. *s to extent
a. Tota! Exe$ption ) onnotes absolute immunity
b. Partia! Exe$ption ) 9ne where collection of a part of the
tax is dispensed with
0. Princip!es Go(ernin+ the Tax Exe$ption
1. 6xemptions from taxation are highly disfavored by law, and
he who claims an exemption must be able to justify by the clearest
grant of organic or statute of law. (Asiatic Petroleum vs +lanes, .*
PDI+ .--< Collector of Internal evenue vs. /anila 6ocHey Club, *)
PDI+ -$5&
,. %e who claims an exemption must justify that the legislative
intended to exempt him by words too plain to be mistaken. (@isayan
Cebu 2erminal vs CI, +4!*%"5, 7eb. ($, !*-%&
>. %e who claims exemptions should convincingly prove that he
is exempt
8. Tax exemptions must be strictly construed (Phil. Acetylene vs
CI, +4!*$5$, Au3. !$, !*-$&
?. Tax 6xemptions are not presumed. (+eal,a >lectric Co. vs
CI, +4!-.(), Apr. "5, !*-"&
/. onstitutional grants of tax exemptions are self-executing
(Opinion 8o. !"5, !*)$, #ec. Of 6ustice&
2. Tax exemption are personal.
-. Keductions for income tax purposes partake of the nature of
tax exemptions, hence, they are strictly construed against the tax
payer
.. * tax amnesty, much like a tax exemption is never favored or
presumed by law (CI vs CA, G.. 8o. !5)%$-, 6an. (5, !***&
1B. The rule of strict construction of tax exemption should not be
applied to organi#ations performing strictly religious, charitable, and
educational functions
;II. &ther Doctrines in Taxation
Prospecti(it# of Tax Las
Genera! Ru!e: Taxes must only be imposed prospectively
Exception: The language of the statute clearly ,eman,s or express
that it shall have a retroactive effect.
I$portant Points to Consider
1. In order to declare a tax transgressing the due process clause
of the onstitution it must be so harsh and oppressive in its retroactive
application (7ernan,e' vs 7ernan,e', ** PDI+*".&
,. Tax laws are neither political nor penal in nature they are
deemed laws of the occupied territory rather than the occupying
enemy. (Dila,o vs Collector, !55 PDI+ ())&
>. Tax laws not being penal in character, the rule in the
onstitution against the passage of the ex post facto laws cannot be
invoked, except for the penalty imposed.
I$prescripti%i!it# of Taxes
Genera! Ru!e: Taxes are imprescriptible
Exception: $hen provided otherwise by the tax law itself.
6xample! <I) provides for statutes of limitation in the
assessment and collection of taxes therein imposed
I$portant Point to Consider
1. The law on prescription, being a remedial measure, should be
liberally construed to afford protection as a corollary, the exceptions to
the law on prescription be strictly construed. (CI vs CA. G.. 8o.
!5.!$!, 7eb. (., !***&
Doctrine of E,uita%!e Recoup$ent
It provides that a claim for refund barred by prescription may
be allowed to offset unsettled tax liabilities should be pertinent only to
taxes arising from the same transaction on which an overpayment is
made and underpayment is due.
This doctrine, however, was rejected by the Supreme ourt,
saying that it was not convinced of the wisdom and proprietary thereof,
and that it may work to tempt both the collecting agency and the
taxpayer to delay and neglect their respective pursuits of legal action
within the period set by law. (Collector vs =#2, !5. PDI+ !5-(&

Taxpa#erHs Suit " It is only when an act complained of, which may
include legislative enactment, directly involves the illegal disbursement
of public funds derived from taxation that the taxpayer&s suit may be
allowed.
;III. Interpretation and Construction of Tax Statutes
I$portant Points to Consider:
1. 9n the interpretation and construction of tax statutes,
legislative intention must be considered.
,. In case of doubt, tax statutes are construed strictly against
the government and liberally construed in favor of the taxpayer.
>. The rule of strict construction against the government is not
applicable where the language of the tax law is plain and there is no
doubt as to the legislative intent.
8. The exemptions (or eAuivalent provisions, such as tax
amnesty and tax condonation3 are not presumed and when granted
are strictly construed against the grantee.
?. The exemptions, however, are construed liberally in favor of
the grantee in the following!
a. $hen the law so provides for such liberal constructionC
b. 6xemptions from certain taxes granted under special
circumstances to special classes of personsC
c. 6xemptions in favor of the ;overnment, its political
subdivisionsC
d. 6xemptions to traditional exemptees, such as, those in
favor of charitable institutions.
/. The tax laws are presumed valid.
2. The power to tax is presumed to exist.
TAK AD:INISTRATI&N AND EN9&RCE:ENT
A+encies In(o!(ed in Tax Ad$inistration
1. Iureau of Internal )evenue and the Iureau of ustoms
for internal revenue and customs law enforcement,
respectively. It is noteworthy that the II) is largely
decentrali#ed in that a great extent of tax enforcement
duties are delegated to the )egional Kirectors and
)evenue Kistrict 9fficers.
,. 5rovincial, ity and =unicipal assessors and treasures
for local and real property taxes.
A+ents and Deputies for Co!!ection of Nationa! Interna! Re(enue
Taxes
Nnder Sec. 1, of the 1..2 <I), the following are
constituted as agents of the ommissioner!
a. The ommissioner of ustoms and his subordinates
with respect to the collection of national internal
revenue taxes on imported goodsC
b. The head of the appropriate government office and his
subordinates with respect to the collection of energy
taxC and
c. Ianks duly accredited by the ommissioner with
respect to receipt of payments of internal revenue taxes
authori#ed to be made through banks.
.ureau of Interna! Re(enue
Poers and Duties
a. 6xclusive and original power to interpret provisions of
the <I) and other tax laws, subject to review by the
Secretary of 0inanceC
b. *ssessment and ollection of all national internal
revenue taxes, fees and chargesC
c. 6nforcement of all forfeitures, penalties and fines
connected therewithC
d. 6xecution of judgment in all cases decided in its favor
by the ourt of Tax *ppeals and the ordinary courts.
e. 6ffecting and administering the supervisory and police
powers conferred to it by the Tax ode or other laws.
f. 9btaining information, summoning, examining and
taking testimony of persons for purposes of ascertaining
the correctness of any return or in determining the
liability of any person for any internal revenue tax, or in
collecting any such liability.
Ru!e of E No Estoppe! A+ainst the Go(ern$entF
It is a settled rule of law that in the performance of its
governmental functions, the state cannot be estopped by the neglect
of its agents and officers. <owhere is it more true than in the field of
taxation (CI vs. Aba,, et. al., +4!*-($, 6une ($, !*-)3. 6stoppel does
not apply to preclude the subseAuent findings on taxability (Ibid.3
The principle of tax law enforcement is! The 1overnment is
not estopped /y the mista8es or errors of its agents9 erroneous
appli&ation and enfor&ement of law /y pu/li& offi&ers do not
/lo&8 the su/se5uent &orre&t appli&ation of statutes (>.
o,ri3ue', Inc. vs. Collector of Internal evenue, +4("5.!, 6uly "!,
!*-*.&
Similarly, estoppel does not apply to deprive the government
of its right to raise defenses even if those defenses are being raised
only for the first time on appeal (CI vs Procter I Gamble Phil. G..
8o. --)"), !% April !*)).&
Exceptions:
The ourt ruled in Commissioner of Internal evenue vs.
C.A., et. al. G.. 8o. !!$*)(, - 7eb !**$ that like other principles of
law, the non-application of estoppel to the government admits of
ex&eptions in the interest of :usti&e and fair play4 as where
in:usti&e will result to the taxpayer.
Estoppe! A+ainst the Taxpa#er
$hile the principle of estoppel may not be invoked against
the government, this is not necessarily true in case of the taxpayer. In
CI vs. #uyac, !5. Phil )!*, the taxpayer made several reAuests for
the reinvestigation of its tax liabilities such that the government,
acceding to the taxpayers reAuest, postponed the collection of its
liability. The taxpayer cannot later on be permitted to raise the defense
of prescription inasmuch as his previous reAuests for reinvestigation
have the effect of placing him in estoppel.

Nature and Cinds of Assess$ents
$n assessment is the offi&ial a&tion of an administrative
offi&er determining the amount of tax due from a taxpayer4 or it
may /e the noti&e to the effe&t that the amount therein stated is
due from the taxpayer that the payment of the tax or defi&ien&y
stated therein. (9isaya +an, 2ransportation Co. vs CI, !5% Phil
!"")&
C!assifications:
a. Se!f"assess$ent" Tax is assessed by the taxpayer
himself. The amount is reflected in the tax return that is
filed by him and the tax is paid at the time he files his
return. (#ec. %- JAK L!K, !**$ 8IC&
%. Deficienc# Assess$ent- This is an assessment made
by the tax assessor whereby the correct amount of the
tax is determined after an examination or investigation
is conducted. The liability is determined and isC
therefore, assessed for the following reasons!
1. The amount ascertained exceeds that which
is shown as tax by the taxpayer in his returnC
,. <o amount is shown in the return orC
>. The taxpayer did not file any return at all.
(#ec. %- J9K K!K an, J(K !**$ 8IC&
c. I!!e+a! and ;oid Assess$ents" This is an assessment
wherein the tax assessor has no power to act at all
(@ictorias /illin3 vs. C2A, +4(.(!", !" /ar !*-)&
d. Erroneous Assess$ent ) This is an assessment
wherein the assessor has the power to assess but errs
in the exercise of that power (Ibid.3

Princip!es Go(ernin+ Tax Assess$ents
/. $ssessments are prima fa&ie presumed &orre&t and
made in good faith.
The taxpayer has the duty of proving otherwise
(Interprovincial Autobus vs. CI, *) Phil (*5&
In the absence of any proof of any irregularities in the
performance of official duties, an assessment will not be
disturbed. (#y Po. @s. C2A, G.. 8o )!..-, ) Au3
!*))
*ll presumptions are in favor of tax assessments
(:ayrit vs. Cru', +4"**!5, (- #ept. !*))&
0ailure to present proof of error in the assessment will
justify judicial affirmation of said assessments. (CI vs
C.C. G.. 8o. !5.!%! an, !5%%-", !5 /ar !**%&
* party challenging an appraiser&s finding of value is
reAuired to prove not only that the appraised value is
erroneous but also what the proper value is (Caltex vs.
C.C. G.. 8o. !5.$)!, !5 6uly !**)&
,. *ssessments should not be based on presumptions no
matter how logical the presumption might be. In order to stand the
test of judicial scrutiny it must /e /ased on a&tual fa&ts.
>. *ssessment is discretionary on the part of the
ommissioner. Mandamus will not lie to &ompel him to
assess a tax after investigation if he finds no ground to
assess. Mandamus to &ompel the Commissioner to assess
will result in the en&roa&hment on exe&utive fun&tions
#/eralco #ecuirities Corp. vs. #avellano, +4"-!)! an, +4"-$.),
(" Oct !**(&.
Ex&ept:
The ;! Commissioner may /e &ompelled to assess /y
mandamus if in the exer&ise of his dis&retion there is
eviden&e of ar/itrariness and grave a/use of dis&retion as to
go /eyond statutory authority #/ace,a vs. /acarai3, G.. 8o.
))(*, ) 6une !**").
8. The authority vested in the ommissioner to assess taxes may
be delegated. $n assessment signed /y an employee for and
in /ehalf of the Commissioner of nternal !evenue is valid.
<owever4 it is settled that the power to ma8e final
assessments &annot /e delegated. The person to whom a
duty is delegated &annot lawfully delegate that duty to
another. #City +umber vs. :omin3o, +4!)-!!, "5 6an !*-.&.
?. *ssessments must be directed to the right party. <en&e4 if for
example4 the taxpayer /eing assessed is an estate of a
de&edent4 the administrator should /e the party to whom the
assessment should /e sent #epublic vs. ,ela ama, +4(!!5),
(* 8ov. !*--&4 and not the heirs of the de&edent.
:eans E$p!o#ed in the Assess$ent of Taxes
A. Exa$ination of Returns: Confidentiality !ule
The Tax ode reAuires that after the return is filed, the
ommissioner or his duly authori#ed representative shall examine the
same and assess the correct amount of tax. The tax or the deficiency
of the tax so assessed shall be paid upon notice and demand from the
ommissioner or from his duly authori#ed representative. *ny return,
statement or declaration filed in any office authori#ed to receive the
same shall not be withdrawn. %owever, within three (>3 days from the
date of such filing, the same may be modified, changed or amended,
provided that no notice for audit or investigation of such return,
statement or declaration has in the meantime been actually served
upon the taxpayer. (#ec -JAK, !**$ 8IC&
*lthough Sec. 21 of the 1..2 <I) provides that tax returns
shall constitute public records, it is necessary to know that these are
confidential in nature and may not be inAuired into in unauthori#ed
cases under pain of penalty of law provided for in Sec ,2B of the 1..2
<I).
The aforesaid rule, however, is subject to certain exceptions.
In the following cases, inAuiry into the income tax returns of taxpayers
may be authori#ed!
1. $hen the inspection of the return is authori#ed upon
the written order of the 5resident of the 5hilippines.
,. $hen inspection is authori#ed under the 0inance
)egulation <o. >> of the Secretary of 0inance.
>. $hen the production of the tax return is material
evidence in a criminal case wherein the ;overnment is
interested in the result. (Cu =nBien3, et. al. vs.
Posa,as, etc, %) Phil "-5&
8. $hen the production or inspection thereof is authori#ed
by the taxpayer himself (@era vs Cusi +4""!!%, (* 6une
!*$*&.
.. Assess$ent .ased on the .est E(idence &%taina%!e
The law authori#es the ommissioner to assess taxes on the
basis of the best evidence obtainable in the following cases!
1. if a person fails to file a return or other document at the
time prescribed by lawC or
,. he willfully or otherwise files a false or fraudulent return
or other document.
$hen the method is used, the ommissioner makes or
amends the return from his knowledge and from such information as
he can obtain through testimony or otherwise. *ssessments made as
such are deemed prima facie correct and sufficient for all legal
purposes. (#ec. - J9K, !**$ 8IC&
;est Eviden&e O/taina/le refers to any data, record,
papers, documents, or any evidence gathered by internal revenue
officers from government offices or agencies, corporations, employers,
clients or patients, tenants, lessees, vendees and from all other
sources, with whom the taxpayer had previous transactions or from
whom he received any income, after ascertaining that a report reAuired
by law as basis for the assessment of any internal revenue tax has not
been filed or when there is reason to believe that any such report is
false, incomplete or erroneous.
* case in point on the use of the best evidence obtainable is
#y Po vs C2A. In that case, there was a demand made by the
ommissioner on the Silver up $ine ompany owned by petitioner&s
deceased husband 5o Iien Seng. The demand was for the taxpayer
to submit to the II) for examination the factory&s books of accounts
and records, so II) investigators raided the factory and sei#ed
different brands of alcoholic beverages.
The investigators, on the basis of the wines sei#ed and the
sworn statements of the factory&s employees on the Auantity of raw
materials consumed in the manufacture of liAuor, assessed the
corresponding deficiency income and specific taxes. The Supreme
ourt, on appeal, upheld the legality of the assessment.
C. In(entor# Ta-in+, Sur(ei!!ance and Presu$pti(e Gross Sa!es
and Receipts
The ommissioner is authori#ed at any time during the
taxable year to order the inventory-taking of goods of any taxpayer as
a basis for assessment.
If there is reason to believe that a person is not declaring his
correct income, sales or receipts for internal revenue tax purposes, his
business operation may be placed under observation or surveillance.
The finding made in the surveillance may be used as a basis for
assessing the taxes for the other months or Auarters of the same or
different taxable years. (#ec. - JCK, !**$ 8IC&
D. Ter$ination of Taxa%!e Period
The ommissioner shall declare the tax period of a taxpayer
terminated at any time when it shall come to his knowledge!
a. That the taxpayer is retiring from business subject to
taxC
b. That he intends to leave the 5hilippines or remove his
property therefromC
c. That the taxpayer hides or conceals his propertyC or
d. That he performs any act tending to obstruct the
proceedings for the collection of the tax for the past or
current Auarter or year or to render the same totally or
partly ineffective unless such proceedings are begun
immediately.
The written decision to terminate the tax period shall be
accompanied with a reAuest for the immediate payment of the tax for
the period so declared terminated and the tax for the preceding year or
Auarter, or such portion thereof as may be unpaid. Said taxes shall be
due and payable immediately and shall be subject to all the penalties
prescribed unless paid within the time fixed in the demand made by
the ommissioner (#ec. - J,K, !**$ 8IC3
E. 9ixin+ of Rea! Propert# ;a!ues
0or purposes of computing any internal revenue tax, the
value of the property shall be whichever is the higher of ! (13 the fair
market value as determined by the ommissionerC or (,3 the fair
market value as shown in the schedule of values of the 5rovincial and
ity *ssessors for real tax purposes (#ec - J>K, !**$ 8IC&.
9. In,uir# into .an- Deposits
6xamination of bank deposits enables the ommissioner to
assess the correct tax liabilities of taxpayers. %owever, bank deposits
are confidential under ).*. 18B?. <otwithstanding any contrary
provisions of ).*. 18B? and other general or special laws, the
ommissioner is authori#ed to inAuire into the bank deposits ofC
1. a decedent to determine his gross estateC and
,. any taxpayer who has filed an application for compromise
of his tax liability under Sec. ,B8 (*3 (Q3 of the Tax ode by reason of
his financial incapacity to pay his tax liability. In this case, the
application for compromise shall not be considered unless and until he
waives in writin3 his privilege under ).*. 18B?, or under other general
or special laws, and such waiver shall constitute the authority of the
ommissioner to inAuire into bank deposits of the taxpayer (#ec. -J7K,
!**$ 8IC&.
Net *orth :ethod in In(esti+ation
The basis of using the <et $orth =ethod of investigation is
Re(enue :e$orandu$ Circu!ar No. 43">0. This method of
investigation, otherwise known as "inventory method of income tax
verification' is a very effective method of determining taxable income
and deficiency income tax due from a taxpayer.
.asic Concept and Theor#
The method is an extension of the basic accounting
principle! assets minus liabilities eAuals net worth. The taxpayer&s net
worth is determined both at the beginning and at the end of the same
taxable year. The increase or decrease in net worth is adjusted by
adding all non-deductible items and subtracting therefrom non-taxable
receipts. The theory is that the unexplained increase in net worth of a
taxpayer is presumed to be derived from taxable sources.
Le+a! Source of authorit# for use of the :ethod
The ommissioner&s authority to use the net worth method
and other indirect methods of establishing taxable income is found in
Sec. 8>, 1..2 <I). This authority has been upheld by the courts in a
long line of cases, notable among which is the leading case of Pere'
vs. C2A, !5" Phil !!-$. The method is a practical necessity if a fair
and efficient system of collecting revenue is to be maintained.
=oreover, Sec. /4I7, 1..2 <I), provides for a broad and
general investigatory power to assess the proper tax on the best
evidence obtainable whenever a report reAuired by law as basis for the
assessment of any national internal revenue tax shall not be
forthcoming within the time fixed by law or regulation, or when there is
reason to believe that any such report is false, incomplete or
erroneous.
Conditions for the use of the $ethod
IaJ That the taxpa#erMs %oo-s of accounts do not
c!ear!# ref!ect his inco$e, or the taxpa#er has no
%oo-s, or if he has %oo-s, he refuses to produce
the$ #nade5uate !e&ords).
The ;overnment may be forced to resort
to the net worth method of proof where the few records
of the taxpayer were destroyedC for, to reAuire more
would be tantamount to holding that skillful
concealment is an inevitable barrier to proof.
I%J That there is e(idence of a possi%!e source or
sources of inco$e to account for the increase in
net orth or the expenditures #Need for eviden&e of
the sour&es of in&ome).
In all leading cases on this matter, courts
are unanimous in holding that when the tax case is civil
in nature, direct proof of sources of income is not
essential-that the government is not reAuired to negate
all possible non-taxable sources of the alleged net
worth increases. The burden of proof is upon the
taxpayer to show that his net worth increase was
derived from non-taxable sources.
*s stated by the Supreme ourt, in civil
cases, the assessor need not prove the specific source
of income. This reasonable on the basic assumption
that most assets are derived from a taxable source and
that when this is not true, the taxpayer is in a position
to explain the discrepancy. (Pere' vs. C2A, supra3
Dowever, when the taxpayer is criminally
prosecuted for tax evasion, the need for evidence of a
likely source of income becomes a prereAuisite for a
successful prosecution. The burden of proof is always
with the ;overnment. onviction in such cases, as in
any criminal case, rests on proof beyond reasonable
doubt.

IcJ That there is a fixed startin+ point or openin+ net
orth, i.e., a date %e+innin+ ith a taxa%!e #ear or
prior to it, at hich ti$e the taxpa#erHs financia!
condition can %e affir$ati(e!# esta%!ished ith
so$e definiteness.
This is an essential condition,
considered to be the cornerstone of a net worth
case. If the starting point or opening net worth is
proven to be wrong, the whole superstructure
usually fails. The courts have uniformly stressed
that the validity of the result of any investigation
under this method will depend entirely upon a
correct opening net worth.
IdJ That the circu$stances are such that the $ethod
does not ref!ect the taxpa#erHs inco$e ith
reasona%!e accurac# and certaint# and proper and
'ust additions of persona! expenses and other non"
deducti%!e expenditures ere $ade and correct, fair
and e,uita%!e credit ad'ust$ents ere +i(en %# a#
of e!i$inatin+ non"taxa%!e ite$s. #Proper
ad:ustments to &onform to the in&ome tax laws)
5roper adjustments for non-deductible items must
be made. The following non-deductibles, as the case
may be, must be added to the increase or decrease in
the net worth!
1. personal, living or family expensesC
,. premiums paid on any life insurance policyC
>. losses from sales or exchanges of property
between members of the familyC
8. income taxes paidC
?. estate, inheritance and gift taxesC
/. other non-deductible taxesC
2. election expenses and other expenses
against public policyC
-. non-deductible contributionsC
.. gifts to othersC
1B. net capital loss, and the like
9n the other hand, non-taxable items should be
deducted therefrom. These items are necessary
adjustments to avoid the inclusion of what otherwise
are non-taxable receipts. They are!
1. inheritance, gifts and beAuests receivedC
,. non-taxable capital gainsC
>. compensation for injuries or sicknessC
8. proceeds of life insurance policiesC
?. sweepstakes winningsC
/. interest on government securities and the like
Increase in net worth are not taxable if they
are shown not to be the result of unreported income
but to be the result of the correction of errors in the
taxpayer&s entries in the books relating to indebtedness
to certain creditors, erroneously listed although already
paid. (7ernan,e' Dermanos Inc. vs. CI, +4(!%%!, "5
#ept. !*-*&
Enforce$ent of 9orfeitures and Pena!ties
Statutor# &ffenses and Pena!ties
/. Additions to the Tax
*dditions to the tax are increments to the basic tax
incident due to the taxpayer&s non-compliance with certain
legal reAuirements, like the taxpayer&s refusal or failure to
pay taxes andLor other violations of taxing provisions.
*dditions to the tax consist of the!
(13 civil penalty, otherwise known as surchar3e,
which may either be ,?O or ?B O of the tax depending upon
the nature of the violationC
(,3 interest either for a deficiency tax or
delinAuency as to paymentC
(>3 other civil penalties or administrative fines such
as for failure to file certain information returns and violations
committed by withholding agents. (#ecs. (.$ to (%(, !**$
8IC&
Genera! Considerations on the Addition to tax
a. *dditions to the tax or deficiency tax apply to all
taxes, fees, and charges imposed in the Tax ode.
b. The amount so added to the tax shall be
collected at the same time, in the same manner, and as
part of the tax.
c. If the withholding agent is the government or
any of its agencies, political subdivisions or
instrumentalities, or a government owned or controlled
corporation, the employee thereof responsible for the
withholding and remittance of the tax shall be personally
liable for the additions to the tax prescribed (#ec. (.$JbK,
!**$ 8IC& such as the ,?O surcharge and the ,BO
interest per annum on the delinAuency (#ecs. (.) an, (.*
JCK, !**$ 8IC&
Surchar+e
The payment of the surcharge is man,atory and
the ommissioner of Internal )evenue is not vested with any
authority to waive or dispense with the collection thereof. In
one case, the Supreme ourt held that the fact that on
account of riots directed against the hinese on certain
dates, they were prevented from paying their internal
revenue taxes on time, does not authori#e the ommissioner
to extend the time prescribed for the payment of taxes or to
accept them without the additional penalty (+im Co Chui vs.
Posa,as, .$ Phil .-5&
The ommissioner is not vested with any authority
to waive or dispense with the collection therof. (CI vs. CA,
supra&. The penalty and interest are not penal but
compensatory for the concomitant use of the funds by the
taxpayer beyond the date when he is supposed to have paid
them to the ;overnment.(Philippine efinin3 Company vs.
C.A., G.. 8o. !!))$*., ) /ay !**-&.
*n extension of time to pay taxes granted by the
ommissioner does not excuse payment of the surcharge
(CI vs. Cu =nBien3, +4(-)-*, - Au3. !*$%&
The following cases, however, show the instances
when the imposition of the ,?O surcharge had been waived!
1. $here the taxpayer in good faith made a mistake in the
interpretation of the applicable regulations thereby
resulting in delay in the payment of taxes. (Connel
9ros. Co. vs. CI, +4!%.$5, (- :ec. !*-"&
,. * SubseAuent reversal by the II) of a prior ruling relied
upon by the taxpayer may also be a ground for
dispensing with the ,?O surcharge. (CI vs. epublic
Cement Corp., +4"%-$$, !5 Au3. !*)"&
>. $here a doubt existed on the part of the Iureau as to
whether or not ).*. ?8>1 abolished the income tax
exemptions of corporations (including electric power
franchise grantees3 except those exempt under Sec. ,2
(now, Sec. >B, 1..2 <I)3, the imposition of the
surcharge may be dispensed with (Ca3ayan >lectreic
Power I +i3ht Co. vs CI, G.. 8o. -5!(-, (% #ept.
!*)%&
8. In the case of failure to make and file a return or list
within the time prescribed by law, not due to willful
neglect, where such return or list is voluntarily filed by
the taxpayer without notice from the I) or other
officers, and it is shown that the failure to file it in due
time was due to a reasonable cause, no surcharge will
be added to the amount of tax due on the return. In
such case, in order to avoid the imposition of the
surcharge, the taxpayer must make a statement
showing all the facts alleged as reasonable causes for
failure to file the return on time in the form of an
affidavit, which should be attached to the return.
Interest
This is an increment on any unpaid amount of tax,
assessed at the rate of twenty percent (,BO3 per annum, or
such higher rate as may be prescribed y rules and
regulations, from the date prescribed for payment until the
amount is fully paid. (#ec. (.* JAK, !**$ 8IC&
Interest is c!assified into:
/. Deficienc# interest
*ny deficiency in the tax due, as the term is defined in
this code, shall be subject to the interest of ,BO per annum,
or such higher rate as may be prescribed by rules and
regulations, which shall be assessed and collected from the
date prescribed for its payment until the full payment thereof
(#ec. (.* J9K, !**$ 8IC&

0. De!in,uenc# interest
This kind of interest is imposed in case of failure to
pay!
(13 The amount of the tax due on any return
reAuired to be filed, or
(,3 The amount of the tax due for which no return
is reAuired, or
(>3 * deficiency tax, or any surcharge or interest
thereon on the due date appearing in the
notice and demand of the ommissioner.
3. Interest on Extended Pa#$ent
Imposed when a person reAuired to pay the tax is Aualified
and elects to pay the tax on installment under the provisions of the
ode, but fails to pay the tax or any installment thereof, or any part of
such amount or installment on or before the date prescribed for its
payment, or where the ommissioner has authori#ed an extension of
time within which to pay a tax or a deficiency tax or any part thereof.
(#ec. (.*J,K, !**$ 8IC&
Ad$inistrati(e &ffenses
1. 0ailure to 0ile ertain Information )eturns
,. 0ailure of a $ithholding *gent to ollect and )emit
Taxes
>. 0ailure of a $ithholding *gent to )efund 6xcess
$ithholding Tax
GENERAL C&NCEPT AND ITE:S &9 INC&:E
I. Inco$e in Genera!
A. Inco$e means all wealth which flows
into the taxpayer other than as a mere return on capital.
It denotes the amount of money or property received by a
person or corporation within a specified time, whether as payment for
services, interests, or profits from investments.(0isher vs. Trinidad, 8>
5hil .2>3
"* mere return of capital'
e.g. 5ayments of loans
vs.
"9ther than a mere return of capital'
e. g. interest paid on such loans
Income is not merely increase in value of propertyC but a
gain, a profit in excess of capital as a result of exchange transactions.
.. .asic 9eature of our Present Inco$e Tax S#ste$
1. The law has adopted the most
co$prehensi(e tax situs by using all possible legal criteria in the
determination of its tax base as well as the source of the taxable
income.
,. The individual income tax
system, in the main, is pro+ressi(e in nature, i. e. the tax rates
increase as the tax base increases. In certain cases, however, final
taxes are imposed on passive income.
>. The present income tax law is
now more schedu!ar than +!o%a! in the case of individual income
taxpayers, but it has maintained much of its global treatment on
corporation.

C. 9or$s of Inco$e
Income may either be received in the form of!
1. Cash @ income pertains to
money or money substitutes derived as compensation or
earning derived from labor, practice of profession and conduct
of business.
,. Propert# @ income denotes
the earned right of ownership over tangible or intangible thing
as a result of labor, business or practice of profession.
>. Ser(ices @ income based on
the performance received in payment for the work previously
rendered by one person to another.
8. ombination of cash, services
or property.
D. C!assification of Inco$e
1. Co$pensation Inco$e @
the gain derived from labor
especially employment such as salaries and commission.
,. Profession or .usiness
Inco$e @ the value derived from an exercise of profession,
business or utili#ation of capital assets. e.g. income derived
from sale of assets used in trade or business
>. Passi(e Inco$e @ income in
which the taxpayer merely waits for the amount to come in. e.
g. interest derived from bank accounts
8. Capita! Gain @ an income
derived from the sale of assets not used in trade or business.
e.g. income from sale of personal property
E. Distinction %eteen &ther Ter$s and Inco$e
Inco$e Capita!
-- 0low of wealth -- 9riginal investment or fund
used in order to generate
earnings
-- Service of wealth -- wealth
-- 0ruit -- Tree
Inco$e Re(enue
-- )efers to the earnings of
individual person, partnership,
corporation or estate and trust.
-- )efers to all funds occurring to
the treasury of the gov&t.
Inco$e Receipts
-- )efers to the amount after
excluding capital invested, cost
of goods, and other allowable
deductions.
-- )efer to all wealth collected
over a certain period. It may
include capital as well as income.
9. Inco$e $a# %e c!assified as Non ) taxa%!e or Taxa%!eN
1. Non ) Taxa%!e Inco$e @
income received but not included in determination of taxable
income, nor as part of the gross income.
6.xamples!
1>
th
month pay not exceeding 5>Bk
$innings from lotto or sweepstakes
,. Taxa%!e Inco$e @ it is the
amount of the income upon which the tax rate prescribed by law
is applied to obtain the amount of Income Tax.
Taxable Income may be grouped into three (>3 categories!
5assive investment income subject to final tax R eg.
)oyalties, interest from 5hil. Iank deposit.
Compensation income @ refers to all income payments,
in money or in kind, "arising from personal' services
under an employer @ employee relationship.
8on M compensation income or 9usiness N Professional
Income M any other income that is not derived from
personal services or not related to an 6) @ 66
(employer @ employee3 relationship and is generally
subject to tax on net income basis.
G. Re,uisites for inco$e to %e taxa%!e.
1. There $ust %e +ain @ there must be a value received in the form
of cash or its eAuivalent as a result of rendition of service or
earnings in excess of capital invested.
* mere expectation of profits is not an income
* transaction where- by nothing of exchangeable value
comes to or is received by the taxpayer does not give
rise to or create taxable income.
Items or amounts received which do not add to the
taxpayer&s net worth or redound to his benefits such as
amounts merely deposited or entrusted to him are not
considered as gains (I) vs. Tours specialist, 1->
S)* 8B,3.
;ain need not be necessarily in cash. It may be in form
of payment, reduction or cancellation of T&s
indebtedness, or gain from exchange of property.
,. The +ain $ust actua!!# %e or constructi(e!# rea!i=ed or
recei(ed.
1ENE!$0 !=0E: * mere increase in the value of property without
actual reali#ation, either through sale or other disposition, is not
taxable. The increase in value is a mere unreali'e, increase in capital.
>?C>P2F EC&N&:IC .ENE9IT PRINCIPLE (II) )N+I<; <9. B,.
@ .-, =*)% 1., 1..-3
-That even without the sale or other disposition if by reason
of appraisal, the cost basis is used as the new tax base for purposes
of computing the allowable depreciation expense, the net difference
between the original cost basis and new basis due to appraisal is
taxable.
*n income is constructively received by a person when
- it is credited to the amount of or segregated in his
favor and which maybe drawn by him at any time
without any limitations e. g.!
Interest credited on savings bank deposits
Kividends applied by the corporation against the
indebted- ness of stockholder
Share in the profit of a partner in ;eneral 5rofessional
5artnership

>. The +ain $ust not %e exc!uded %# the !a or treat# fro$ the
taxation.
The gain must not be exempte,.
5roperty or money received by a taxpayer in which he
has "no business transaction right to retain, but a duty
to return "To the one person from whom it was received
is not considered as income (e. g. payment by mistake3.
easonF The receipt is offset by a liability to the party
making the excess payment. %owever, where the duty
to return is unclear, the recipient may be reAuired to pay
the tax.
II. GR&SS INC&:E
A. Gross Inco$e @ means all income
derived during a taxable year by a taxpayer from
whatever source, whether le3al or ille3al.
The term ",erive, from whatever source "implies the
inclusion of all income under the law, irrespective of the
voluntary or involuntary action of the taxpayer in
producing the gains.
It includes ille3al 3ains arising from @ gambling, betting,
lotteries extortion and fraud.

.. Items included in the determination of ;ross Income,
but not limited to the followingC ( - ;
,
I)
,
5
>
*K3
1. Co$pensation for ser(ices
in hate(er for$ paid, inc!udin+ %ut not !i$ited
toN
a. #alaries @ refer to earnings received periodically for
regular work other than manual labor.
b. Ea3es @ are earnings received usually according
to specified intervals of work, as by the hour, day
or week.
c. 7ees - amount received by an employee for the
services rendered to the employer.
d. Commission @ refers to percentage of total or an
certain Auota of sales volume attained as part of
incentives, such a sales commission.
e. #imilar items @ like pension or retiring allowance.
* pension awarded to a person where no
services have been ren,ere, are mere gifts or
gratuities and not taxable as income. They are
subject to donor&s tax payable by the donee.
ompensation for personal services is taxable
when!
a. Income for services rendered is taxable in the year
of receipt.(cash basis3
b. ash, property or services earned during the taxable
year though not actually received are deemed to have
accrued to the taxpayer and are classified as income
(accrual basis3.
9or$s of Co$pensation
a. money
b. in kind
ompensation paid to an employee of a
corporation in its stock is to be treated as if
the corporation sold the stock for its market
value and paid to the employee in cash.
+iving Auarters furnished to the employee in
addition to cash salary. The rental value
should be reported as income.
=eals given to employee, the value thereof
substitutes income.
C&N;ENIENCE &9 TLE E:PL&OER RBLE
The allowances furnished to the employee which are for the
convenience and advantage of the employer or for proper performance
of the employees& duty, shall not be taxable on the part of the
employee receiving the same.
>;=I#I2>#F
a. They must be furnished within the employer
business premises.
b. The employer accepts the same as a condition
of his employment
--- Promissory notes or other evi,ence of in,ebte,ness
received in payment of services are considered as income to the
extent of their fair market value.
--- *n individual who performs services for a creditor, who in
consideration thereof cancels his debt, income to that amount is
reali#ed by the debtor as compensation for his services. %owever, if
the cre,itor con,ones Ncancels the ,ebt without any service ren,ere,
by the ,ebtor, the amount of such debt is a gift and need not be
included in the gross income of the debtor. The amount is subBects to
,onors tax.
c. Ioth in money and in kind.

,. Gross inco$e deri(ed fro$ the conduct of trade,
%usiness or the exercise of a profession.
(a3. Ketermination of gross income in case of
manufacturin3, merchan,isin3 or minin3 business.
9or$u!a: ;ross Income R (;ross Sales @ cost of goods sold3 S other
income
(b3. Income from a lon3 term contract @ long term
contract means building, installation and construction
contract covering a period in excess of one year.
NOTE: any income derived from these contracts shall be reported
upon the basis of Percenta3e of Completion.
(c3. Income from farmin3 may be reported in any of the
following methods!
(13. Cash basis @ no inventory is used in
determining profits.
(,3. Accrual basis @ an inventory is used in
determining profits.
(>3. Crop basis @ it is generally used when the
farmer is engaged in producing crops which take
more than a year to gather and dispose of from the
time of planting.
>. Gains deri(ed fro$ dea!in+s in propert# @ refers
to the income derived from the sale and or exchange of assets,
which result in gain because of the excess of the amount of value
received by the taxpayer.
1ENE!$0 !=0E: The entire amount of the 3ain or
loss arising from the transaction shall be taxable or
deductible, or the case may be.
8. Ro#a!t# Inco$e @ these are the compensations or
payments for the use of property and are paid to the owner of a
right.
?. Renta! Inco$e @ refers to earning derived from
leasing real estate as well as personal property. It includes all
other obligations assumed to be paid by the lessee to the third
party in behalf of the lessor.
Taxes paid by the tenant (lessee3 to or for a
lessor for a business property are a,,itional rent and
constitute income taxable to the lessor.
*dvanced rentals!
(a3. if the advanced rental is a #ecurity :eposit which
restricts the lessor as to its use -- such amount shall be
"exclu,e,1 in the determination of rental income.
(b3. If the advance rental is Prepai, ental received
without restriction as to its use @ the entire amount is
"taxable' in the year it is received.
5ermanent improvements made by the lessee on
leased property.
$hen the lessee makes improve @ ments on the
leased property and the said improvements will belong
to the lessor upon the expiration of the lease contract,
the lessor may report the income there from upon either
by the following methods!
(a3. Outri3ht metho, @ the lessor will report as
income the 0=H (fair market value3 of the
improvements on the year of completion.
(b&. #prea, out metho, @ the lessor may spread
over the life of the lease the estimated depreciated
value of such improvements at the termination of the
lease and report as income of each year of the lease an
aliAuot part theory.
Income resulting from pre @ mature termination of
the lease contract.
RBLES:
1. If the improvement is destroyed before the termination of the
lease contract -- the lessor is entitled to "deduct' as a loss
for the year when such destruction takes place the amount
previously reported as income.
,. If the lease is terminated prior to the expiration of the lease
contract for any reason, other than a bonafide sale to the
lessor @ the lessor received "additional income' for the year
the value of the improvements exceed the amount of income
already reported.
Income of corporation from leased property.
$here the property of a corporation is leased to
the lessee in consideration that the latter shall pay
in lieu of rental an amount eAuivalent to a certain
rate of dividend on the lessor&s capital stockC it
shall be considered asC
(a3. )entals (income3 @ to lessee and
lessor (income to the corp.3
(b3. Kividend from the lessor corporation
@ as far as the shareholders are concerned.
6. Interest Inco$e
*n earning derived from depositing or lending of money,
goods or credits.
1ENE!$0 !=0E: Interest received by a taxpayer, whether usurious
or not, is subject to income tax.
E2CEPT: $hen interest income is exempted by law from income tax.
>. Pri=es and innin+s
1ENE!$0 !=0E: 5ri#es and winnings whether in cash or in kind are
taxable.
5ri#es and winnings are subject to ,BO final tax.
$here the amount of pri#es or winning is 51Bk or
less @ subject to schedular rate.
?. Pension
)efers to allowance paid regularly to a person on his
retirement or to his dependents on his death, in consideration of past
services, meritorious work, age, loss or injury.
G. PartnerHs distri%uti(e profits fro$ the net inco$e
of a Genera! Professiona! Partnership.
NOTE: ;en. 5rofessional 5artnership -- is created by a group of
individuals for the purpose of exercising their common profession
6. g. +aw firm
/D. Annuities
*mount payable yearly or at other regular intervals for a
certain or uncertain period
They also represent as installment payments for life
insurance sold by insurance companies.
If the part of annuity payments represent "interest1 O
taxable income.
If the annuity is a mere return of premium R not taxable.
//. Di(idends
-- =eans any distributions made by a stock corporation to
its stockholders out of its earnings or profits and payable to its
stockholders in money or other property.
N&N ) TAKA.LE INTER ) C&RP&RATE PRINCIPLE
Kividends from the domesticLresident corporations and
shares in profits of taxable partnerships received by
domesticLresident corp. are exempt from income tax.
Sources of dividends payment! 6very dividend declared
by a corporation is presumed to come from the "most
recently accumulate, profit'.
Taxable dividends include the following!
(a3 Cash :ivi,en, M a dividend paid in cash and
is taxable to the extent of the cash received.
(b3 +iAui,atin3 ,ivi,en, @ a dividend distributed
to the S%s upon dissolution of the
corporation.
(c3 #crip :ivi,en, M issued in a form of
promissory note and it is taxable in its 0air
=arket Halue.
(d3 In,irect ,ivi,en, @ when a corporation
forgives the indebtedness of its stockholders,
the transaction has the effect of payment of
dividend to the extent of the amount of the
debt.
(e3 Property ,ivi,en,Ta dividend paid in
property of a corporation such as stock
investment, bands or securities held by the
corporation and to the extent of the 0=H of
the property received at the time of the
distribution.
(f3 #tocH :ivi,en, -- Involves the transfer of a
portion of retained earning to capital stock by
action of stockholders. it simply means the
capitali#ation of retained earnings.
1ENE!$0 !=0E: * mere issuance of stock dividends is not subject
to income tax, because it merely represents capital and it does not
constitute income to its recipient. Iefore disposition thereof, stock
dividends are nothing but a representation of interest in the corporate
entity.
E2CEPTONS: $hen stock dividends are subject to tax!
a.3 These shares are later redeemed for a consideration
by the corporation or otherwise conveyed by the
stockholder to the extent of such contribution. Nnder
the <I), if a corporation, after the distribution of a
non-taxable stock dividend, proceeds to cancel or
redeem its stock at such time and in such manner as
to make the distribution and cancellation or
redemption essentially eAuivalent to the distribution of
a tax of a taxable dividend, the amount received in
redemption or cancellation of the stock shall be treated
as a taxable dividend to the extent that it represents a
distribution of earnings or profits. (#ec.$" (9&, 8IC&.
Kepending on the circumstances, corporate earnings
may be distributed under the guise of initial
capitali#ation by declaring the stock dividends
previously issued and later redeem or cancel said
dividends by paying cash to the stockholder. This
process amounts to distribution of taxable dividends
which is just delayed so as to escape the tax. (CI vs.
CA, "5! #CA !%(&
b.3 he recipient is other than the stockholder. (9achrach
vs. #eifert, %$ PDI+ .)"&
c.3 * change in the stockholder&s eAuity results by virtue
of the stock dividend issuance.
Stoc- di(idend is c!assified into:
(1&. 8on M taxable @ is one where the new shares confer the same
rights and interest as the old share. There is no change in the
corporate identity. *fter the distribution thereof, there is no
change in the proportionate interest of S%s.
(,3. 2axable #tocH ,ivi,en, @ is one where there either has been a
change of corporate identity or a change in the nature of the shares,
where the proportionate interest of the S%s changes.
Nnder the corp. code, stock dividend being
one payable in capital stock, cannot be declared
out of outstanding capital stock but from retained
earnings of the corporation.
$here corporate earnings are used to
purchase outstanding stocks treated as treasury
stock (stocks issued and fully paid for and
subseAuently reacAuired by the corporation of
purchase, redemption or through same other
means3 as a technical but prohibited device, to
avoid the effects of income taxation, distribution of
said corporate earnings in the form of stock
dividend will subject S%s receiving them to income
tax. The corporation parting with a portion of its
earnings "to buy' the outstanding stock is in
ultimate effect and result making a distribution of
such earnings to the stockholders. (Commissioner
vs. /annin3, -- #CA !.&
III. EKCLBSI&N 9R&: INC&:E
*. Exc!usion @ refers to income received or earned but is not taxable
as income because it is exempted by law or by treaty. )eceipts which
are not in fact income are also excluded from ;ross Income.
Exc!usion Deductions
-- not taken into account in
determining gross income
they are subtracted
from gross income
6xclusions are in the nature of tax exemptions, thus the
claimant must establish them convincingly.
.. Exc!usion under the Code. ILAGI C :R G
0
J
1J. Life Insurance Proceed
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.
<ote!
)eason for exclusion! The contract of insurance is
a contract of indemnity hence, the proceeds
thereof are considered indemnity rather than a
gain or profits.
Instances when proceeds from insurance are
taxable!
a.3 $here proceeds are held by the insurer under
an agreement to pay interest. The interest is
included in determination of gross income.
b.3 $here the transfer is for valuable consideration.
,.3 A$ount Recei(ed %# Insured as Return of Pre$iu$
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 of the contract of upon
surrender.
eason for the exclusion! The return of premium is a mere return of
capital. %owever, where the inclu,e, in the 3ross amount receive,
excee, the a33re3ate premiums pai,, the excess shall be income.

".& Gift, .e,uests, and De(ises
The value the property acAuired by gift, devise, or descent shall
be excluded. %owever, the income from such property, as well as gift,
beAuest, devise, or descent of income from property, in cases of
transfers of divided interest, shall be included in gross income.
83. Inco$e Exe$pt under Treat#
Income of any kind, to the extent reAuired by any treaty obligation
binding upon the ;overnment of the 5hilippines.
?.3 Co$pensation for In'uries or Sic-ness
*mounts received, through *ccident or %ealth Insurance or
under $orkmen&s ompensation *cts, as compensation for personal
injuries or sickness, plus the amounts of any damages received,
whether by suit or agreement, on the account of such injuries or
sickness.
6xample of damages recovered from personal
injuries! =oral damages for personal injuries.
If the award of damages is to compensate loss of
property or an award of damages to compensate loss
of income L profits, such is subject to tax.
/.J :isce!!aneous Ite$s
a.3 Income derived by 0oreign ;overnment @ Income
derived from investments in the 5hilippines in loans, stocks, bonds or
other domestic securities or from interest on deposits in banks in the
5hilippines by!
(i3 0oreign governments,
(ii3 0inancing institutions owned, controlled or enjoying
refinancing from foreign governments, and
(iii3 International or regional financial institutions
established by foreign governments.
b.3 Income derived by the ;overnment or its 5olitical
Subdivision @ Income derived from any public utility or from the
exercise of any essential governmental function accruing to the
;overnment of the 5hilippines or to any political subdivision thereof.
c.3 5ri#es and *ward - 5ri#es and award to be excluded,
the following conditions must concurC
(13 5ri#es and award made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary,
or civic achievement.
(,3 The recipient was selected without
any action on his part to enter the
contest or proceeding.
(>3 The recipient is not reAuired to render
substantial future services as a
condition in receiving the award.
d.3 5ri#es and *ward in Sports ompetition - *ll
pri#es and award granted to athletes in local and international
sports competitions and tournaments whether held in the 5hils.
9r abroad and sanctioned by sports associations.
e.3 1>
th
=onth 5ay and 9ther Ienefits - The total
exclusion shall not exceed 5>Bk.
f.3 ;SIS, SSS, =edicare and 9ther ontributions
2.J Retire$ent .enefits, Pension, Gratuities, etc.
The following items are exempt from taxation!
(a3. )etirements benefits received under )* 2/81 and those received
by officials and employees of private firms in accordance with
reasonable PI@A2> 9>8>7I2 P+A8.
eAuisitesF
(1.3 The retiring official or employee has been in service of the same
employer for at least ten years.
(,.3 Is not less than ?B yrs. of age at the time of his retirement.
(>.3 *nd is available to official or employee only once.
Pri(ate retire$ent %enefit p!an
* "reasona/le private /enefit plan' means a pensionC
gratuity, stock bonus or profit sharing plan maintained by an
employer for the benefit of some or all of his employees @
a.3 wherein contributions are made by such employer or
employees, or both, for the purpose of distributing to
such employer the earnings and principal of the fund
thus accumulatedC and
b.3 wherein said plan provides that at no time shall any part
of the principal or income of the fund be used for, or be
diverted to, any purpose other than for the ex&lusive
/enefit of said employee
(b3. *ny amount received by an official or employees or by his heirs
from the employer as a "conseAuence of separation from service due
to death, sickness or other physical disability beyond the control of the
said official or employer.
(c3. Terminal leave and other social security benefits.
The terminal leave pay of government employees whose
employment is co-terminous is exempt since it falls within the meaning
of the phrase "for any cause beyon, the control of the sai, official or
employees1 (II) )uling 18>-.-3
(d3. Ienefits received under the NS veterans *dministration.
(e3. Ienefits received from SSS
(f3 Ienefits received from ;SIS
-.J Gains fro$ the Sa!e of .onds, De%entures or other Certificates
of Inde%tedness ith $aturit# of $ore than fi(e I5J #ears.
..3 Gains fro$ Rede$ption of Shares in :utua! 9und.
C. Exc!usion fro$ inco$e under Specia! Las
1. 5ri#es received by winners in charity horse race sweepstakes
from 5S9.
,. Iack pay benefits
>. Income of cooperative marketing association
8. Salaries and stipends in dollars received by non @ 0ilipino
citi#ens on the technical staff of I))I (International )ice )esearch
Institutes3.
?. Supplemental allowances per diem, benefits received by officer or
employees of the 0oreign Service.
/. Income from bonds and securities for sale in the international
market.
I;. 9RINGE .ENE9ITS
A. .!N1E ;ENE.TS @ mean any good, service or other benefit
furnished or granted in cash or in kind by an employer to an individual
employee, except ranH an, file employee.
Pursuant to Re(enue Re+u!ations No. 3 ) G?
Idated :a# 0/, /GG?J implementing section >> of the
Tax ode, the special treatment of fringe benefits
shall be applied to fringe benefits given or furnished
to managerial or supervising employees and not to
the rank and file.
Ran- and fi!e @ means all employees who are
holding neither managerial nor
:ana+eria! E$p!o#ee @ is one who is vested with
powers or prerogatives to lay down and execute
management policies andLor to hire, transfer, lay @
off, recall, discharge, assign, or discipline employees.
Super(isor# E$p!o#ees @ are those who, in the
interest of the employer, effectively recommend such
managerial actions if the exercise of such authority is
not merely routinely or clerical in nature but reAuires
the use of independent judgment.
The regulation does not cover those benefits properly
forming part of compensation income subject to
withholding tax.
9rin+e .enefit Tax I9.TJ @ refers to monetary
burden imposed on any good, services or other
benefits furnished or granted by an employer, in cash
or in kind, in addition to basic salaries, to an
individual employee, except rank and file employee.
0ormula!
;=H R =H divided /-O (as of Ean. 1, ,BBB3
0IT R (fb3 ;=H x >,O (as of Ean 1, ,BBB3
.. ;ALBATI&N &9 TLE 9RINGE .ENE9ITS
9rin+e .enefit Ifor$sJ ;a!ue of 9rin+e .enefits
13. =oney The value is the amount received
,3. 5roperty with owner ship
transferred to the employee.
0air market value of the property
>3. 5roperty wLo transfer of
ownership
Kepreciation value of the
property
. ITE:S *LICL ARE C&NSIDERED AS 9RINGE
.ENE9ITS IL
0
IT ) 9I;
0
E
0
J
/J. Lousin+
Lousin+ Pri(i!e+e 9. tax %ase
(a3 +ease of residential property for
the use of the employee as his usual
place of residence.
=H R ?BO x rental
payments
(b3 )esidential 5roperty owned by 6)
and *ssigned to employee as his
usual place of residence.
=H R 4?O (0=H or Jonal
Halue whichever is
higher37 x ?BO

(c3 )esidential property purchased by
6) on installment basis for the use of
6) as his usual place of residence.
=H R 4?O x *
(*cAuisition37 x ?BO
(d3 )esidential property purchased by
6) and ownership is transferred to 66
as his usual place of residence.
=H R 0=H or ,H $Lever
is increase
(e3 )esidential property transferred to
employee at less than employer&s
acAuisition cost.
=H R 0=H or Jonal Halue
(whichever is higher3 @
*cAuisition ost
<on @ taxable %ousing 0ringe Ienefits
(a3 %ousing privilege of military officials of *05
(b3 %ousing unit, which is situated inside or adjacent to
the premise of a business or factory. * housing unit is considered
adjacent if it is located within the maximum %5 meters from the
perimeter of the business premises.
(c3 %ousing benefit granted to employees on a temporary
basis not excee,in3 three ("& months.
0J. Louseho!d Expenses @ )efer to expenses of the employee paid
by the employer for household personnel or other personal expenses.
%ousehold expenses shall include!
(a3 salaries of household helper
(b3 personal driver of the 66 (employee3
(c3 5ayment for homeowner assoc., etc.
3J. Interest on !oan at !ess than $ar-et rate
if the 6) (employer3 lends money to his employee
-- free of interest or at a rate lower than 1,O (or
prevailing market rate3 the interest foregone by the 6)
or the difference of the interest assumed by the 6) and
the 1,O rate shall be treated as taxable fringe benefit.
*pplicable to installment payment or loan with interest
rate lower than 1, O starting Eanuary 1, 1..-.
4J. Expenses for 9orei+n Tra(e!
1ENE!$0 !=0E: 6xpenses for foreign travel insured by the
employee andLor family members of the employee borne by
the employer shall be treated as taxable fringe benefits of
the 66.
E2CEPT:
$here the expenses for foreign travel paid by the
employer for the employee are for the purpose of
attending business meeting or convention. The exemption
covers only the following expenses!
1. Inland travel expenses except lodging cost in
hotel averaging NSU >BB or less per dayC and
,. ost of economy or business class airline ticket
4V%owever, if the ticket is a first class one,
>BO of the cost of the ticket shall be subject
to a fringe benefit tax7.
Travel expenses should be supported by documents
proving the actual occurrences of the meetings or
conventions. +ikewise, documents and evidence showing
the business purpose of the employees& travel must be
presented otherwise, the entire cost will be considered
taxable fringe benefit.
5J. :e$%ership fees, dues and other expenses %orne %# the ER
for his EE, in social or athletic clubs or other similar organi#ations )
These are treated as taxable 0ringe Ienefits of the 66 in full.
6J. Life or Lea!th Insurance "
1ENE!$0 !=0E: The cost of life or health insurance and other non @
life insurance premiums or similar amounts in excess of what the law
allows borne by the 6) for his 66 shall be treated as taxable fringe
benefits.
E2CEPT:
(a.3 ontribution of the 6) for the benefits of the 66 pursuant to
existing laws such as )* -,-2 (SSS3 or )* -,.1 (;SIS3.
(b.3 The cost of premium borne by the 6) for the group insurance of
his 66.
>J. Lo!ida#s and ;acation Expense
?J. :otor ;ehic!e
Haluation of =otor Hehicle of any kind
(a.3 =otor vehicle purchased by 6) in
name of 66
=H R * (acAuisition
ost3
(b.3 "cash for the purchased provided by
the 6), the ownership is placed in the
name of the 66
=H R cash received by
the 66
(c.3 5urchase on "Installment' basis, the
ownership is placed in the name of the
66
=H R * (exclusive of
interest3L ? years
(d.3 "5ortion' of purchased price
shouldered by 6)
=H R amount
shouldered by the 6)
(e.3 0leet of motor vehicle "leased' by the
6)
=H R ?BO x rental
payment
(f3 0leet of =otor vehicles owned and
maintained by the 6)
=H R 4*L?7 x ?BO
<ote! In case of letters a, b, c and d, regardless of whether the motor
vehicle is used for the personal purpose of the 66 and partly for the
benefit of his 6), the monetary value shall be the entire value of the
benefit.
Nnder letters e and f, the fleet of motor vehicles is for the
use of the business and the 66s. The value of the benefit shall be the
rental payments (e3 or the acAuisition cost (f3 of all motor vehicles not
normally used for sales, freight, delivery service and non-personal use.
The use of CACD2 whether owned and maintained or
leased by the 6) shall be treated as taxable fringe benefit @
the value of the benefit shall be measured based on the
depreciation of the Wacht at an estimated useful life of ,B
yrs.
The use of AICA72 (including helicopters3 owned and
maintained by the 6) shall be treated as "business use' and
not subject to 0IT.
GJ. Expense Account
<9T6!
6xpense *ccount subject to 0ringe Ienefit Tax
(a.3 6xpenses incurred by the 66 but pai, by his 6).
(b.3 6xpenses paid by the 66 but reimburse, by his
6).
6xpense account not subject to 0IT.
(a.3 expenses duly receipted for in the name of the
6) and
(b.3 The expenditures do not partake the nature
of personal expenses attributable to the 66.
5ersonal expenses of the 66 (like groceries3 paid
for or reimbursed by the 6) are taxable fringe
benefits, whether or not duly receipted for in the
name of the 66.
)epresentation and Transportation
*llowances ()*T*3
--- refers to fixed amounts which are regularly
received by the 66s as part of their monthly
compensation income.
--- they are not treated as Taxable 0ringe Ienefits
but the same are treated as Taxable
ompensation Income.
/DJ. Educationa! Assistance
NOTE:
GENERAL RBLE: The cost of the educational assistance to the 66 or
his dependents which are borne by the 6) shall be treated as Taxable
0ringe Ienefits.
EKCEPTI&N:
6ducational assistance not treated as Taxable
0ringe Ienefits
a3 6ducation granted to 66
)eAuisites!
(1.3 6ducational grant whereby the study is directly
connected with the trade, business or profession of
the 6).
(,.3 *nd there is a written contract obligating the
66 to remain under the employment for a certain
period.
(b.3 6ducational *ssistance granted to the
dependents of the employee in the nature of
educational assistance to the dependents of the 66
through a competitive scheme un,er a scholarship
pro3ram of the company.

D. 9RINGE .ENE9ITS N&T SB.8ECT T& TLE 9RINGE .ENE9IT
TAK
13. ontributions of 6) for the benefits of 66 to retirement, insurance,
and hospitali#ation benefits plans.
,3. Ienefits given to rank and file 66s whether granted under I* or
not.
>3. 0ringe Ienefits which are exempted from income tax under the tax
code or other special laws.
83. 0ringe Ienefits which are reAuired by the nature of, or necessary to
the trade, business or profession of the 6).
?3. 0ringe Ienefits granted for the convenience or advantage of the
6).
/3. Ke minimis benefits as may be define by the Secretary of 0inance.
<9T6!
DE :INI:IS .enefits @ are privileges granted by the
6) to the 66s which are relatively of small value for the
purpose of the promoting the health, goodwill,
contentment and efficiency of the 66s.
6xamples of Ke =inimis benefits are the following!
(1.3 =oneti#ed unused vacation leave credits of not more
than ten (1B3 days during the year.
(,.3 =edical cash allowance to dependent of the 66S not
more than 52?B per employee per semester or 51,? per
month.
(>.3 )ice Subsidy @ worth 51BBB or one (13 sack of ?B kg.
rice per month
(8.3 Nniform and clothing allowances @ not more than 5>k
per annum.
(?.3 =edical Ienefit yearly @ not more than 51Bk per
annum.
;. DEDBCTI&NS 9R&: GR&SS INC&:E
A. :e,uctions -- these are items or amounts authori#ed by the law to
be subtracted from the pertinent items of the gross income to
arrive at the taxable income.
Iasic 5rinciple governing deductions!
(1.3 The taxpayer seeking a deduction must point
out some specific provisions of the statue
authori#ing the deductionC and
(,.3 %e must be able to prove that he is entitled to
the deduction authori#ed or allowed.
Time of availing deductions! a taxpayer has the right to
deduct all authori#ed allowances for the taxable year.
%e cannot deduct them from the income of the next or
any succeeding year.
.. Cinds of Deductions
13. Keductions from compensation income of individual taxpayers @
taxpayers whose income is derived purely from compensation income
(one that arises from an 6) @ 66 relationship3.
*n in,ivi,ual taxpayer whose income is ,erive, from
>4>> relationship is also not allowed to deduct
itemi#ed deductions (Sec. >8 <I)3, except 5remium
5ayments on %ealth andLor %ospitali#ation
Insurance, if applicable.
*n individual taxpayer whose income derived from 6) @
66 relationship is not allowed to elect an optional
standard deduction (9SK3 of 1BO of his income.
,3. Keduction for self @ employed and 5rofessionals @ individual
taxpayer who are self employed and Lor professionals engaged in the
practice of their profession may deduct the following items from their
gross income!
(a.3 itemi#ed deductions or the optional deduction
(9SK3.
(b.3 5remium payments on health or hospitali#ation
insurance.
>3. Keductions from corporate income.
NOTE:
orporations include "partnership' other than general
professional partnership engaged in trade or business
in the 5hils.
They are entitled to claim the itemi#ed deductions.
83. Special Keduction
-- Keductions allowed to be subtracted in addition to the
itemi#ed deductions allowable to corporations.
<9T6!
These deductions may be availed of by!
(a.3 Insurance companies
(b.3 6state and Trust
(c.3 5rivate educational Institutions.
C. The fo!!oin+ are the taxpa#ers ho are entit!ed to a(ai! of
deduction.
13. iti#ens of the 5hilippines
,3. )esident aliens
>3. <on @ resident aliens engaged in trade or business in the 5hils
83. Komestic corporation
?3. )esident foreign corporationL engaged in trade or business in the
5hilippines
/3. Taxable co @ partnership and ;eneral 5rofessional 5artnership
23. 6states and Trusts
Taxpayers who are taxed only on the basis of their
gross income received from within the 5hils.
(a.3 <)* (6TI3 @ non @ resident aliens not
engaged in trade or business in the 5hils.
(b.3 <)0 @ non resident foreign corp. those not
engaged in trade or business in the 5hils.
;I. ALL&*A.LE ITE:IPED DEDBCTI&NS
*vailable only to taxpayers !
(a.3 self @ employedL those in the exercise of
their profession
(b.3 orporations
A. .usiness Expenses
Genera! Re,uisites for Deducti%i!it#:
(1.3 The expenses must be ordinary and necessary
&rdinar# @ expenses which are commonly incurred in
the trade or business of the taxpayers as distinguished
from capital expenditures. *n expense is ordinary if it is
normal or usual to the line of business.
0 CINDS &9 EKPENDITBRES
Ia.J capita! expenditure I%.J ordinar# expenditure
-- not deductible from the gross
income
-- deductible from the gross
income in the year it was incurred
-- has the effect of prolonging the
life of an asset
-- does not prolong the life of an
asset for more than a year
-- if the property acAuired has a
useful life of more than 1 yr. the
expenses thereof are considered
capital expenditure
--The acAuired property has a
useful life of not more than 1 yr.
-- expenditure for extra
ordinaryLmajor repairs
-- expenditure for minorLordinary
repair
Necessar# expenses @ expenses which are
appropriate and helpful to the taxpayer&s business or if it
is intended to reali#ed profit or to minimi#e a loss.
>xtraor,inary repairs - those in the nature of
replacements, alteration, and expansion to the extent
that they arrest deterioration and prolong the life of the
property.
Or,inary repairs @ those made to keep the property
ordinarily efficient working condition and do not
materially add to the value of the property.
(,.3 It must be paid or incurred during the taxable year.
NOTE:
5aid @ the payment is on cash receipt basis, expenses
are deductible in the year they are incurred.
Incurred @ the payment thereof is on accrual basis,
expenses are deductible in the year they are incurred,
whether paid or not.
(>.3 It must be directly connected with trade or business or profession
of the taxpayer.
(8.3 it must be substantiated by adeAuate proof
NOTE:
The claimed deduction must be evidenced by
official receipts or other adeAuate records.
The evidence must establish the following!
(a.3 the amount of expenses being deductedC
and
(b.3 the direct relation of such to the
development, management, operation,
andLor conduct of the trade, business or
profession of the taxpayer.
(?.3 It must not be against the law, morals, public policy or public order.
6xamples of ille3itimate business expenses! (not
deductible3
(a.3 Iribe given to obtain protection from
arrest and prosecution
(b.3 Dickback
(c.3 5ayments to secure political influence to
obtain favorable public contracts.
(d.3 5rotection payments
- The le3itimate expenses of an
illegitimate business however, are
deductible on the theory that income tax is
not a tax on gross income even if such
income is earned as an illegal business.
Specific expenses that are part of expense in +enera!.
(13 ompensation for personal services. (Including ;rossed Np
monetary value of fringe benefit3
<9T6!
)eAuisites for deductibilityC (In addition to the
general reAuisites for deductibility3
(a.3 They are reasonable
(b.3 5ayments for personal service
actually rendered.
(c.3 $ithholding tax imposed has been
paid.
Some factors in determining reasonableness of
compensation.
(a.3 5ayment must be made in good faith
(b.3 haracter of taxpayer&s business
(c.3 Holume and amount of its net earning
(d.3 +ocality in which the business is in
(e.3 ;eneral and economic conditions, etc.
There is no fixed test for determining the
reasonableness of a given compensation. It is just
to assume that a reasonable compensation is only
such amount as would be ordinarily be paid for like
services by like enterprises in like circumstances.
Ionuses to be deductible must be!
(a.3 made in good faith
(b.3 for service actually rendered
(c.3 must be reasonable
V If the bonuses were granted without any service
rendered, they are not considered as deductible
from gross income.
5remiums paid on life insurance of an officer,
employee, or business associate, where the
taxpayer is directly or indirectly a beneficiary under
the policy is not deductible.
5ension and compensation for injuries are also
deductible limited to the amount not compensated
for by insurance or otherwise.
I0.J Tra(e! Expenses
Travel expenses include @ transportation expenses and
meals and lodging, here andLor abroad.
)eAuisites for deductibility! (In addition to the
general reAuisites3
(a.3 reasonable and necessary
(b.3 incurred or paid "while away from home' @ it
means away from principal place
of business
<ote! If the trip is undertaken for purposes other than business or
exercise of profession, the transportation expenses are personal
expenses and the meals and lodging are living expenses and are not
deductible.
Transportation expenses of an employee from his residence
to his office and back are not deductible. They are personal expenses.
%owever, transportation expenses from his office to his customer&s
place of business and back are deductible. They are business
expenses.
(c3 5aid or incurred in the conduct of trade or
business.
I3.J Renta!s
)eAuisites for deductibility (In addition to the
general reAuisites3
(a.3 =ust be made on condition to the continued use
or possession of the property.
(b.3 The taxpayer has not taken or is not taking title
to the rented property.
(c.3 )ented property is used in conduct of the
business, trade, or profession of the employer.
(d.3 =ust be paid or incurred within the taxable year.
I4.J Entertain$ent, A$use$ent and Recreation expenses.
)eAuisites for Keductibility (In addition to the
general reAuisites3
(a.3 The expenses are directly related to or in furtherance of
the trade, business or profession of the taxpayer
(b.3 The same must be directly connected in the
development, management and operation of the trade,
business or profession of the Taxpayer
(c.3 The expenses must be reasonable and not contrary to
the law, morals, public policy or public order
(d.3 Substantiated by adeAuate receipts andLor records.
(e.3 =ust be paid or incurred during the taxable year.
(f.3 =ust not exceed the ceiling provided by the Sec. of
0inance
C&LAN RBLE
$here it is certain from the evidence adduced that the
taxpayer did incur expenses but that the actual amount thereof has not
been established, the commissioner should make a close
"approximate' thereof and his determination thereof shall bear heavily
on the taxpayer for his inexactitude. (@isayas Cebu 2erminal v.
Collector !5) PDI+ "(5&.
OP2IO8 GA82>: 2O PI@A2> >:=CA2IO8A+
I8#2I2=2IO8#.
- 5rivate educational institution may, at its option, elect either!
(a.3 To deduct expenditure otherwise considered as capital
outlays of depreciable assets incurred during the taxable year, for
the expansion of school facilities or
(b.3 to deduct an allowance for depreciation thereof.
.. Interest Expenses
Interest @ refers to the compensation allowed by the law fixed by
the parties for the loan or forbearance of money, goods or credits.
Re,uisites for Deducti%i!it#:
(a.3 there must be indebtedness.
(b.3 the indebtedness must be that of the taxpayer
(c.3 the indebtedness must be connected with the trade, business
or profession of the taxpayer
(d.3 the interest must have been paid or incurred during the
taxable year
(e.3 the interest must have been stipulated in writing
(f.3 the deduction for interest expense shall be reduced by an
amount eAual to >-O of the interest income subject to final tax
(beginning Ean. 1, ,BBB3.
Interest expenses that cannot be deducted from gross income!
(1.3 Interest paid in advance by a taxpayer reporting income on
cash basis provided!
(a.3 Such interest may be allowed as deduction in the year
the indebtedness is paid! and
(b.3 If the indebtedness is payable in periodic amorti#ation --
the interest corresponding to the amorti#ed principal may be
deducted during the taxable year.
(,.3 If the indebtedness is incurred to finance petroleum
exploration.
(>.3 Interest on loans between related taxpayer!
(a3 between members of a family
- Irothers and sisters (whether by whole or by half
blood3.
- Spouse
- *ncestors
- +ineal descendants
(b.3 between an individual and a corporation --- where
more than ?B O in the value of outstanding capital stock
is owned by such individual except in the case of
distribution in liAuidation.
(c.3 between two corporations @ where more than ?BO
of the 9S of which is owned directly or indirectly by or
for the same individual except distribution in liAuidation.
(d.3 between the ;rantor and the fiduciary in Trust
(e.3 between the fiduciary of a trust and a fiduciary of
another trust if the same person is a grantor with
respect to each trust.
(f.3The interest should not be given to related taxpayers
The taxpayer has the
option of either treating the interest incurred to acAuired property used
in trade, business or exercise of a profession as a!
(a.3 as deductions or
(b.3 as capital expenditures
Ru!e: -- but the election of one excludes the other.
9ther deductible interest
(a.3 interest paid on account of delinAuency in the payment
of tax because a tax obligation is considered indebtedness
to the government for purpose of income tax.
6xcept! fines and penalties
(b.3 Interest on scrip dividend given by a corporation to a S%
in the form of a promissory note.
--- It is deductible expense on the part of the corporation
Except: Interest in preferred stock is not deductible because it is not
interest expense incurred in indebtedness but actually a dividend on
shares of stocks.
(c3 In the case of banks and loan or trust companies, interest
paid within the year on deposits or on savings received for
investment and secured by interest-bearing certificates of
indebtedness issued by such bank or company.
C. Taxes
The deduction is allowed to taxes proper only and not allowed in
amounts representingC
(a.3 surcharge
(b.3 penalties
(c.3 0ines incident to delinAuency
Taxes that are deductible 4II+K*57
1. business taxes
,. import duties
>. license taxes
8. documentary stamp taxes
?. any other taxes paid directly to the government,
national or local, paid or accrued within the taxable
year, in connection with taxpayer&s trade, business or
profession.
/. privilege taxes
Taxes that are not deductible 40
,
6STIH67
1. 0oreign income tax, if claimed as tax credit
Income tax imposed by a foreign country are
deductible only if!
(a.3 the taxpayer is Aualified to avail of tax creditC
(b.3 %e does not signify in the return his desire to
avail of the same as a tax credit.
;6<)N+6! Taxes allowed as deduction, when refundable 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.
The right to deduct income taxes paid to a foreign
government is given only as an "alternative or
substitute "to his right to claim a tax credit for such
foreign income taxes.
+imitation on deduction
(a.3 non @ resident alien engaged in trade or
business in the 5hils.
(b.3 resident foreign corporation --- the deductions
for taxes shall be allowed only if and to the extent
that they are connected with income from "sources
within' the 5hils.
,. 0inal Taxes
>. 6state and donor&s taxes
8. Stock transaction tax on the sale, barter or exchange of
sLs listed and traded through the local stock exchange.
?. Taxes assessed against local benefits tending to increase
the value of the property (special assessment or levies3.
/. Taxes which are not in connection with the trade,
business or profession of Taxpayer.
2. Income tax imposed by the 5hilippine gov&t.
-. Halue @ added Tax (H*T3
.. 6nergy Taxes
<ote! To be deductible, the taxes must be imposed by law and
payable by the taxpayer. Thus, a value- added tax is not deductible by
the customer upon whom the burden of the tax is shifted by the seller.
%owever, the customer may consider the tax burden as part of his cost
as an ordinary or capital expenditure if incurred in business or trade.
D. Tax Credit
--- refers to the taxpayer&s right to deduct from the income
tax due, the amount of tax he has paid to foreign country.
<9T6!
Tax Credit Tax deduction
-- deducted from 5hil income
tax
-- deducted from the gross
income
-- all taxes are allowed to be
deducted with the exception of
the taxes expressly excluded
-- only foreign income taxes
may be claimed as credits

5ersons entitled to tax credit
1. )esident iti#en of the 5hilippines
,. Komestic orp. except ;eneral 5rofessional
5artnership
>. =embers of the ;55
8. Ieneficiaries of 6states and Trusts.
5ersons not entitled to Tax credit
1. <on )esident iti#en
,. *liens, whether residents or non @ residents
>. 0oreign orporation, whether residents or non -
residents
onditions for allowance of tax credit!
(a.3 The taxpayer must signify in his income tax
return his desire to claim tax credit
(b.3 The return must be accompanied by
appropriate form prescribed by I)
(c.3 The form must be carefully filed with all the
informations reAuired.
(d.3 *dditional information must be furnished
(e.3 If the credit is sought for taxpayer already paid,
the form must have attached to it the receipt for tax payment.
+imitations on Tax redit
(a.3 0or taxes paid to one foreign country- The
amount of tax credit in respect of 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 net
income from sources within such country taxable under the
tax code bears to his entire taxable income for the same
year.
9or$u!a! <et Income from 0oreign country x 5hil. Income
Tax R +imit on the amount of credit.
(b.3 0or taxes paid to two or more foreign
countries. The total amount of the credit shall not exceed
the same proportion of the tax against which such credit is
taken, which the taxpayer&s net income from sources outside
the 5hils. taxable under the tax code.
9or$u!a:
<et Income from sources outside the 5hils x 5hil.
Income Tax R +imit on the amount of credit.
<et income from all sources
E. Losses " implies an unintentional parting with something of value
)eAuisites for Keductibility!
(a.3 The loss must be that of the taxpayer.
(b.3 There must be an actual loss suffered in a closed and
completed transaction.
--- "closed transaction "means that taxable year
when the amount of loss was finally ascertained.
(c.3 The loss must be connected with the taxpayer&s trade,
business or profession.
(d.3 The loss must not be compensated for by insurance or
otherwise.
(e.3 The loss must be liAuidated and charge @ off during the
taxable year.
-- The deduction shall be in full or not at all.
(f.3 The loss must be reported to II) within 8? days from
date of loss.
(g.3 The loss must not be claimed as deduction for estate tax
purposes in the estate tax return.
lassifications of +osses!
13. 9rdinary +osses
(a.3 +osses incurred in trade, business or
profession.
(b.3 +osses incurred of property connected with the
trade, business or profession, if due to casualty or from
robbery, theft or embe##lement.
,3. apital +osses
(a.3 +osses from sale or exchange of capital
assets.
(b.3 +osses resulting from securities becoming
worthless and which are capital assets.
* mere loss on account of the shrinkage in value
of securities or shares of stock is not deductible.
The loss to be deducted must be actually suffered
when the stock is disposed.
(c3 +osses from short sales of property.
(d3 +osses due to failure to exercise privilege or
options to buy or sell.
>3. Special Dinds of +osses
(a.3 +osses from wash sale of stock or securities
+oss on wash sales not deductible
whenC
(1.3 * taxpayer who is not a dealer of
stocks in trade has disposed shares
and
(,.3 $ithin the period of /B(sixty3 days
beginning >B days before the date of
such sale and ending >B days after
such date.
(>.3 The taxpayer has acAuired
substantially identical stocks or
securities.
%owever, if losses from wash sales are claimed by a
"dealer' in securities in the ordinary course of business,
such losses are deductible.
(b.3 +osses of the useful value of capital assets
due to same change in business conditions.
6. g. $here a new law is passed directly
or indirectly making the continued profitable use of
the property impossible.
(c.3 *bandonment losses in petroleum operations.
<9T6!
In case of petroleum operations which are
abandoned in whole or in part, all
accumulated exploration and development
expenditures to a certain extent may be
allowed as deduction.
In case of producing well subseAuently
abandoned, the amorti#ed cost therof as well
as the undepreciated cost of eAuipment
directly used therein shall be allowed as a
deduction in the year of abandonment.
(d.3 +osses due to voluntary removal of building,
machinery, etc.,
If the demolition is incident to renewal and
replacement R deductible
If the demolition or removal of building is for
the purpose of erecting a new one R not
deductible expense.
(e.3 $agering +osses (gambling3
$agering losses are deductible only to the
extent of the gains from such wagering
transaction. If there is no gain from the
wagering transaction, the loss therefrom
cannot be deducted from gross income.
$agering transactions - are those in which
the outcome is uncertain or those that involve
games of chance.
NET &PERATING L&SS CARRO ) &;ER IN&LC&J
<9T6!
Net &peratin+ Loss @ denotes the excess of allowable
deductions over gross income.
<et 9perating loss arry @ over (<9+93@ it means that the net
operating loss for the taxable year immediately preceding the
current taxable year shall be carried over as a deduction from
gross income for the next three (>3 consecutive taxable yrs.
immediately following the year of such loss in an amount not to
exceed the taxable income during the year the loss was
sustained.
+imitations of availability of <9+9
(a.3 There must be no substantial change in ownership of the
business or enterprise in that!
1. <ot less than 2?O in nominal value of the outstanding
issued shares, if the business is on the name of the
corporation, is held by or on behalf of the same personsC or
,. <ot less than 2?O of the paid up capital of the
corporation, if the business is in the name of the corporation,
is held by or on behalf of the same persons.
(b.3 $here one business operation is income tax @ exempt and
the other is not, the losses in the latter operations are not
deductible from the profits in the taxable operation.
(c.3 *ny net loss incurred in a taxable year during which the
taxpayer was exempt from income tax shall not be allowed to be
carried over to the next three years.
<9+9 0or mines other than oil and gas wells.
--- the net operating loss of mines incurred in the first 1B yrs.
of operation shall be carried over to the next five (?3 yrs following the
loss.
9. .ad De%ts
Definitions
1. Iad debts are debts due to the taxpayer when actually
ascertained to be worthless and charged-off within the
taxable year. (Sec.>8 4617, <I)3.
,. They refer to those debts resulting from the
worthlessness or uncollectibility, in whole or in part, of
amounts due to the taxpayer by others, arising from
money lent or from uncollectible amounts of income
from goods sold or services rendered. (Sec., 4a7, )ev.
)egs. <o.?-..3
Re,uisites for deducti%i!it# of %ad de%ts
1. 2here must be a vali, an, subsistin3 ,ebt.
* valid and subsisting debt is one the collection of
which may be enforced in a court of law. * debt which
had prescribed is no longer valid and subsisting.
(. 2he same must be connecte, with the taxpayers tra,e,
business or practice of profession.
>. 2he same must not be sustaine, in a transaction
entere, into between relate, parties enumerate, un,er
#ec. "- (9& of the 8IC.
The said section provides!
In computing net income, no deduction shall in any
case be allowed in respect of losses from sales or
exchange of property directly or indirectly.
i. ;etween mem/ers of a family. 0or the
purpose of this paragraph, the family of an individual
shall include only his brothers and sisters (whether
by the whole half-blood3, spouse, ancestors, and
lineal descendantsC or
ii. 6xcept in the case of distributions in liAuidation,
/etween an individual and a &orporation more
than fifty percent (?BO3 in value of the outstanding
stock of which is owned, directly or indirectly, by or
for such individualC or
iii. 6xcept in the case of distributions in liAuidation,
/etween two &orporations more than fifty percent
(?BO3 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 companyC
iv. ;etween the grantor and a fidu&iary of any
trustC or
v. ;etween the fidu&iary of a trust and the
fidu&iary of another trust if the same person is a
grantor with respect to each trustC or
vi. ;etween a fidu&iary of a trust and a
/enefi&iary of su&h trust.
8. 2he same must be actually char3e,4off the booHs of
accounts of the taxpayer as of the en, of the taxable
yearC
* partial writing-off of a bad debt is not allowedC it
must be charged-off in full or not at all (7ernan,e'
Dermanos, Inc. vs. Commissioner, (* #CA %%(<
Philippine efinin3 Co. vs. Court of appeals, $5 #CA:
%.., (%- #CA --$&.
%. 2he same must be actually ascertaine, to be worthless
an, uncollectible as of the en, of the taxable year.
In general, a de/t is not worthless simply
/e&ause it is of dou/tful value or diffi&ult to &olle&t.
$orthlessness is determined upon the exercise of a
sound business judgment. The determination of
worthlessness in a given case must depend upon the
particular facts and circumstances of the case.
The following, coupled with the creditor&s
reasonable efforts to collect, may justify an
ascertainment of the worthlessness of a debt.
i. The flight or disappearance of the debtor
(onnel Iros. o. 45hil.7 vs. omm., T* ase <os.
811 and /1B, *pril ,B, 1.//3C
ii. Insufficiency of collateral (par. 1, Sec. 1B,,
)egs.C 5hil. Trust o. vs. oll., T* ase <o. >/2,
Eanuary >B, 1./13C
iii. Iankruptcy or insolvencyC
iv. +oss of evidence of indebtedness ($estern
5acific orp. vs. oll., T* ase <o. 2,B3C
v. Keath of debtor leaving no assetsC
vi. Injury to debtor incapacitating him from work
vii. *bsence of visible properties of the debtor
(6sso Standard 6astern, Inc. vs. omm., T* ase
<o. 1?>B, <ov. 11, 1./-3C and
viii. 0ruitless efforts to collect small amounts from
debtors scattered all over the country. (6l 5owenir
)ubber 5roducts, Inc. vs. Hera, T* ases <os.
12B, and 12B?, Euly ,/, 1./..3
In the case of banks, in lieu of reAuisite <o. (?3, the
Iangko Sentral ng 5ilipinas (IS53, thru its =onetary
Ioard, 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.
In no case may a receivable from an insurance or
surety company be written-off from the taxpayers&
books and claimed as bad debts deduction unless such
company has been declared closed due to insolvency
or for any such similar reason by the Insurance
ommission. (Sec. >, )ev. )egs. <o. ?-..3
In order that bad debts may be deducted from
gross income it must be "actually ascertained to be
worthless and charge-off within the taxa/le year.> The
law does not permit the charging off and the deduction
of a bad debt in year other than in the year in which it is
determined to be worthless. (5hil. Trust o. vs.
ollector.3
$here under a foreclosure of a mortgage, the
mortgagee buys the mortgaged property and credits the
indebtedness with the purchase price, the difference
between the purchase price and the indebtedness will
not be allowed as a deduction for bad debts. The
determination of loss is deferred until the disposal of the
property.

Securities %eco$in+ orth!ess
If any securities which are capital assets, are
ascertained to be worthless and charged-off within the
taxable year, the loss resulting therefrom to the taxpayer
(other than a bank or trust company incorporated under the
laws of the 5hil.3 is not &onsidered as a /ad de/t /ut as a
&apital loss.
Losses fro$ theft or e$%e==!e$ent
The /ad de/t theory holds that since the
embe##lement of funds creates a debtor-creditor
relationshipC the loss is deductible as bad debt in the year
when the right of recovery becomes worthless.
Tax .enefit Ru!e
The rule provides that the recovery of bad debts
previously allowed as deduction in the preceding years shall
be included as part of the gross income in the year of
recovery to the extent of the Inco$e Tax .enefit of said
deduction. (Sec. >8 46, 17 <I)3
If a taxpayer reali#ed a reduction of income tax from
him on account of his bad debt deduction, his subseAuent
recovery thereof shall be treated as a receipt of rea!i=ed
taxa%!e inco$e.
If a taxpayer did not benefit from the deduction of the
bad debt 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 dedu&tion of the /ad de/ts written?off)C then his
subseAuent recovery shall be treated as a $ere reco(er# or
a return of capita!. (Sec. 8, )ev. )egs. <o. ?-..3, hence
not taxable.
$here the bad debt expense was disallowed by the II)
as a deduction, the subseAuent collection of the debt is not
taxable.
)ecoveries of bad debts previously deducted from
gross income do not constitute taxable income unless the
deduction in prior years resulted in a reduction of income tax
liability. This has given rise to the Ee,uita%!e doctrine of
tax %enefit.F
G. Depreciation
Definition
1. Kepreciation is the gradual diminution in the useful
value of tangi/le property used in trade or business
resulting from exhaustion, wear and tear4 and normal
o/soles&en&e.
,. The term is also applied to amorti#ation of value of
intangi/le assets the use of which in trade or business
is definitely limited in duration. (9asilan >states, Inc.
vs. Comm., (! #CA !$&.
Rationa!e
The taxpayer is entitled to see that from earnings the
value of the property invested is kept unimpaired4 so that
at the end of any given term of years, the original
investment remains as it was in the /eginning.
*ccordingly, the law permits the taxpayer to recover
gradually his capital investment in wasting assets free from
tax. (9asilan >state, Inc. vs. Comm., supra&.
The necessity for depreciation allowance arises from
the fact that certain property used in business gradually
approaches a point where its usefulness is exhausted.
Persons Entit!ed to c!ai$ depreciation a!!oance
1. Resident citi=ens and resident a!iens (Sec. >8 40, 17,
<I)3
a.3 In general
i. * taxpayer who owns property and has a capital
investment in the property may claim
depreciation.
ii. In the case of property held by one person for
life with remainder to another person (e.g.
usufruct or fideicommissary substitution3, the
deduction shall be computed as if the life tenant
were the absolute owner of the property and
shall be allowed to the life tenant.
iii. In the case of property held in trust, the
allowable deduction shall be apportioned
between the income beneficiaries and the
trustee 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.
iv. If the remainder of the terms of lease is greater
than the probable life of the building erected or
of the improvements made by the lessee in
pursuance of an agreement with the lessee, an
annual deduction in the form of an allowance for
depreciation may be made (Sec. 8., 28,
regulations3.
b.3 Kepreciation of properties used in petroleum
operations
The service contractor at his option may use
the declining method or the straight-line method of
depreciation. %owever, if the service contractor
initially elects the declining balance method, it
may, at any subseAuent date, shift to the straight-
line method.
The useful life of properties directly related to
production of petroleum shall be ten #*6) years of
such shorter life as may be permitted by the
ommissioner of Internal )evenue
5roperties not used directly in production of
petroleum shall be depreciated under the straight
line method on the basis of an estimated useful life
of five #3) years (Sec. >8 40, 87, <I)3.
c.3 Kepreciation of properties used in mining
operations
i. It shall be computed at the normal rate of
depreciation if the expected life is ten #*6) years
or lessC or
ii. Kepreciated over any number of years between
five (?3 years and the expected life is more than
ten #*6) years (Sec. >8 40, ?7, <I)3.
0. Non"resident a!iens en+a+ed in trade or %usiness
and resident forei+n corporations
* reasonable allowance for the deterioration of
property arising out of its use or employment or its non-
use in the business, trade or profession conducted by
them in the 5hils. shall be permitted only when su&h
property is lo&ated within the Phils. (Sec. >8 40, /7,
<I)3.
Re,uisites for deducti%i!it#
1. 2he allowance for ,epreciation must be reasonable
(Iacolod-=urcia =illing o. Inc. vs. omm., T* ase
<o. 18B,, 9ct. >1, 1./.3.
,. It must be for property arisin3 out of its use or
employment in the business or tra,e, or out of its not
bein3 use, temporarily ,urin3 the year (onnel Iros.
o. vs. ollector, T* ases <o. 811 X /1B, *pril >B,
1.//3.
>. It must be char3e,4off ,urin3 the taxable year<
The deduction must be made in the year in which
the wear X tear occurs. Kepreciation may not be
accumulated.
.. A statement on the allowance must be attache, to the
return.
%. 2he property must have a limite, useful life.
The following property may not be depreciated!
,. Inventories or stock in tradeC
>. +and, apart from improvements or physical
development added to itC
8. Iodies of minerals which through the process
of removal suffer depletion
?. *utomobiles or other transportation
eAuipment used solely by the taxpayer for
pleasureC
/. Iuilding used solely by the taxpayer as his
residenceC
2. 0urniture or furnishing used in the said
buildingC
-. 5ersonal effects or clothing except properties
or costumes used exclusively in a business
such as theatrical business
.. Intangibles, the use of which in business or
trade is not of limited durationC and
1B. Incidental repairs which neither materially add
to the value of property nor prolong the life,
but keep it in an ordinary efficient operating
condition.
Li$itation of Deduction
The law allows a deduction from gross income of
depreciation but limits the recovery to the capital invested in
the assets being appreciated. It does not authori#e
depreciation of assets beyond its acAuisition cost.
)eason! Keductions are mere privileges.
=oreover, it will transgress the underlying purpose of
depreciation allowance.
:ethods of co$putin+ depreciation a!!oance
Some of the common methods are!
1.3 #trai3ht4line metho,N 7ixe, Percenta3e /etho, -
This method spreads the total depreciation over
the useful life of the asset and generally results in
an eAual depreciation per unit of time regardless of
the use to which the properties are put.
,.3 :eclinin3 9alance /etho, - This method uses a
rate (usually 1.? or , times the straight-line rate3 to
the declining book value of the asset. Kepreciation
is largest in amount the first year and declines in
the years thereafter.
>.3 EorHin34Dours /etho, @The total working hours
of the machine until its retirement is estimated and
a charge per hour is determined using the
following formulas!
8.3 =nit of pro,uction metho, @ This is similar to the
working-hours method with the difference that the
estimated service life is stated in units of products
instead of working hours.
?.3 2he sum of the Cears M :i3its /etho, @ This
method reAuires the application of a changing
fraction to the cost basis of the property, reduced
by the estimated residual salvage value.
A+ree$ent as to usefu! !ife on hich depreciation rate is
%ased
The taxpayer and the ommissioner of Internal
)evenue may enter into agreement in writing specifically
dealing with the useful life and rate depreciation of any
property.
I
In case of modification in the agreed rate and useful life
of depreciation, the taxpayer must notify the ommissioner
in writing.
L. Dep!etion
Definitions
1. Kepletion is the exhaustion of natural resources like mines
and oil or gas wells as a result of production or severance
from such mines or wells.
,. It also refers to the periodic allocation of the cost of a
wasting asset over the period the natural resources is
extracted or produced.
@asting assets refer to natural resources, which
are physically consumed and once consumed, are
irreplaceable. 6xamples include coal, oil, ore, precious
metals like gold and silver, and timber.
Rationa!e
*s the product of the mine is sold, a gradual sale is being
made of the taxpayer&s capital interest in the property.
Kepletion allowance enables the taxpayer to recover that
capital interest free of income tax.
$hen the allowance shall eAual the capital invested, no
further allowance shall be granted.
Persona! entit!ed to c!ai$ dep!etion a!!oance
*nnual depletion deduction are allowed only to mining
entities which own an economic interest in mineral deposit or
those which have capital investment in the mineral deposit.
(Sec. >, )ev. )egulation <o. ?-2/3.
In the case of a resident foreign corporation or an alien
individual engaged in trade or business in the 5hils.
allowance for depreciation of oil and gas wells or mines shall
be authori#ed only in respect to oil and gas wells or mines
located within the 5hils. (Sec. >8 4;, >7, <I)3.
I. Charita%!e and other Contri%utions
Cinds of contri%utions a!!oed as deduction:
1. 9rdinary or contributions with limit or subject to
limitation
,. Special or contributions deductible in full
Re,uisites for deducti%i!it#
!.& 2he contribution must actually be pai, or ma,e to the
Phil. Government or any of its a3encies or political
sub,ivision or to any ,omestic corporations or
associations specifie, by the 2ax Co,e or other entities
as allowe, by the 2ax Co,e an, existin3 special laws.
(.& It must be ma,e within the taxable year<
".& It must not excee, *6A of the individualBs taxable
income an, 3A of the &orporationBs taxable income
/efore ,e,uctin3 the contribution (applicable only to
contributions with limit&< an,
..& It must be evi,ence, by a,eAuate recor,s or receipts
(#ec. ". JDK, 8IC&.
Contri%utions ith !i$it
The following are subject to limit (?OY1BO limit3!
1.3 Konations to the 5hilippine government or any of its
agencies or any political subdivision thereof
ex&lusively for pu/li& purposesC
,.3 Konations to a&&redited domestic corporations or
associations organi#ed and operated exc!usi(e!#
for!
a.3 )eligionsC
b.3 haritableC
c.3 ScientificC
d.3 Wouth and sports developmentC
e.3 ulturalC or
f.3 6ducational purposesC or for the
g.3 )ehabilitations of veteransC and
>.3 Konations to social welfare institutions or to non-
government organi#ations in accordance with rules
and regulations promulgated by the Secretary of
0inance, provided no part of the net in&ome of
whi&h inures to the /enefit of any private
sto&8holders or individual. (Sec. >8 4%,17, <I)3.
Contri%utions deducti%!e in fu!! under the Tax Code:
1.3 Konations to the government of the 5hilippines or to
any of its agencies or political subdivisions including
fully-owned government corporations ex&lusively to
finance, to provide for, or to be used in undertaking
priority activities in!
a.3 6ducationC
b.3 %ealthC
c.3 Wouth and sports developmentC
d.3 %uman settlementsC
e.3 Science and cultureC and
f.3 6conomic development
$&&ording to the national priority plan determined
/y NE"$ provided, that donations not in accordance
with the said annual priority plan shall be with limitC
,.3 Konations to foreign institutions or international
organi#ations in pursuance or compliance with
agreements, treaties, or commitments entered into by
the government of the and the foreign laws or
international organi#ations or in pursuance of special
laws, and
>.3 Konations to certain accredited non-government
organi#ation (see Sec. >8, 4%, ,73.
Bnder P.D. No. 5D>!
ontributions, donations, gifts and beAuests to
social welfare, cultural and charitable
Institutions, no part of the net in&ome of whi&h
inures to the /enefit of any individual, are
dedu&ti/le in full in computing the donor&s taxable
income and are also exempt from donor&s and estate
tax.
;a!uation of Contri%utions
The amount of any charitable contribution of property
other than money shall be based on the a&5uisition
&ost of said property.
8. Research and De(e!op$ent
* taxpayer may treat research or development expenditures
which are paid or incurred by him during the taxable year in
&onne&tion with his trade4 /usiness or profession as ordinary
and necessary expenses which are not chargeable to capital
account. The expenditures so treated shall be allowed as
deduction during the taxa/le year when paid or in&urred. (Sec.
>8, 4I, 17, <I)3.
To a#s of treatin+ Research and De(e!op$ent Cost
1.3 *s an outright expense, in which case it may be
deducted during the taxable year when paid or incurredC
or (Sec.>8, 4I, 17, <I)3.
,.3 *s a deferred expense, in which case it is to be
amorti#ed over a period of not less than C6 months.
(Sec >8, 4I, ,7, <I)3.
The following research and development expenditures
at the option of the taxpayer may be treated as deferred
expenses!
1.3 paid or incurred by the taxpayer in connection with
his trade, business or professionC
,.3 not treated as expensesC
>.3 the expenditure must not be chargeable to capital
account

Li$itations on Deductions
The following are not deductible as research and
development costs!
1.3 *ny expenditures for the acAuisition or improvement of
land, or for the improvement of property to be used in
connection with research and development of a
character which is subject to depreciation and
depletionC and
,.3 *ny expenditures paid or incurred for the purpose of
ascertaining the existence, location, extent, or Auality of
any deposit of ore or other mineral, including oil or gas.
(exploration expenditures subject to depletion3 4Sec. >8,
4I, >7, <I)7.
C. Pension Trusts
Re,uisites for deducti%i!it# of pa#$ents to pension trust
Iunder Sec. 34, @8A, NIRCJ
1.3 2he employer must have establishe, a pension or
retirement plan to provi,e for the payment of
reasonable pensions to its employeesC
,.3 2he pension plan is reasonable an, actuarially soun,
(Sec. 11-, )egs.3C
".& It must be fun,e, by the employer< i.e., the employer
contributes cash to the plan<
..& 2he amount contribute, must no lon3er be subBect to its
control or ,isposition< an,
%.& 2he payment has not therefore been allowe, as a
,e,uction.
A!!oa%!e deductions in re!ation to pension trusts
1.3 ontributions to such trusts during the taxable year to
cover the pension liability accruing during the year.
These are considered as ordinary and necessary
/usiness expenses allowed as a deduction under Sec.
>8, 4*, 17, of the <I).
,.3 * reasonable amount transferred or paid into such trust
during the taxable year in ex&ess of the &ontri/utions
but only if such amount!
a.3 has not therefore been allowed as a deductionC
and
b.3 is apportioned in eAual parts over a period of ten
(1B3 consecutive years beginning with the year in
which the transfer or payment is made
these are those referred to as payments to the
pensions trust deductible pursuant to Section >8 (E3 of
the <I).
L. &ptiona! Standard Deduction
6lements of 9ptional Standard Keduction!
1.3 It is in lieu of itemi#ed deductions allowed under
Section >8 (* to E3, <I).
,.3 It is available only to individual taxpayers other
than one with pure compensation income and a
nonresident alien,
>.3 The amount deductible should not ex&eed *6A of the
taxpayerBs gross in&ome.
,.3 The taxpayer must signify in his return his intention to
avail of the 9SK, otherwise he shall be considered as
having availed himself of the itemi#ed deductions.
>.3 9nce elected, it is irrevocable for the taxable year for
which the return is made
8.3 The taxpayer need not submit with his return, financial
statements, however, he must keep such records
pertaining to his gross income during the taxable year.
:. Pre$iu$ Pa#$ents
The premiums payments or health andL or hospitali#ation
insurance of an individual taxpayer including his family are
deductible regardless of whether the taxpayer is engaged in
trade4 /usiness4 or profession4 or deriving &ompensation
in&ome out of an employer?employee relationship.
*n individual taxpayer who elects the 9SK may still deduct
the premium payments when applicable.
Re,uisites for a!!oance as deduction
!.& 2he amount of premiums that may be ,e,ucte, shall
not excee, P(,.55 per family or P(55 a month ,urin3
the taxable year<
(.& 2he health an,N or hospitali'ation insurance is taHen by
the taxpayer for himself or for any member or members
of his family<
".& 2he family of the taxpayer has a 3ross income of not
more than P(%5,555 for the taxable year< an,
..& In case the taxpayer is marrie,, only the spouse
claimin3 the a,,itional exemption for ,epen,ents shall
be entitle, to the ,e,uction.
;II. Specia! Deductions
The <I) provides special rules for deductible from gross
income for the following!
1.3 Insurance companiesC
,.3 =utual Insurance companiesC
>.3 =utual marine insurance companiesC
8.3 *ssessment insurance companiesC
?.3 6states and trustsC and
/.3 5rivate educational institutions
Insurance companies
$hether domestic or foreign, doing business in the
5hils., they are allowed to deduct, in addition to the
itemi#ed deductions under Section >8 of the Tax ode,
the following!
1.3 <et additions, if any, reAuired by law to be made
within the year to reserve funds, and
,.3 Sums other than dividends paid within the year on
policy and annuity contracts. The released reserve
shall be treated as income for the year of release.
(Sec. >2, 4*7, <I), Sec. 1,/, )egs.3
=utual insurance companies
These companies (other than mutual life X mutual
marine3 are allowed to deduct from gross income the
following!
1.3 *ny portion of the premium deposits returned to
the policy holders
,.3 Such portion of the premium deposits as are
retained for the payment of losses, expenses and
reinsurance reserves. (Sec. >2, I, <I)C Sec.
1,2, )egs.3
=utual marine insurance companies
They are entitled to deduct from gross income the
following!
1.3 *mounts repaid to policy holders on account of
premium previously paid by themC and
,.3 Interest paid upon those amounts between the
ascertainment date and the date of its payment.
(Sec. >2, 47, <I), Sec. 1,-, )egs.3
*ssessment insurance companies
$hether domestic or foreign, they may deduct in a
taxable year the sum actually deposited with the officers
of the govt. of the 5hils., pursuant to law as additions to
guarantee or reserve funds. (Sec. >2 4K7, <I)3.
;III. Ite$s not Deducti%!e
In computing taxable net income, the following are not
deductible!
1.3 5ersonal living or family expensesC
These are not deductible from compensation and
businessLprofessional income under Section ,8, (*3,
<I).
,.3 *ny amounts paid for new buildings or for permanent
improvements, or betterments made to increase the
value of any property or estateC
<o., does not apply to intangible drilling and
development cost incurred in petroleum operations
which are deductible under Sec.>8
(;,13 of the <I).(Kepletion3
E2CEPT: 5roprietary 6ducational Institutions for the
capital expenditures for school expansion purposes.
>.3 *ny amount expended in restoring property or in
making good the exhaustion thereof for which as
allowance is or has been madeC
Items in nos. , and > are capita! expenditures or
those expenditures that result in obtaining benefits of a
permanent nature such as lands, buildings and
machineries
8.3 5remiums 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 policyC and
* person is said to be finan&ially interested in the
taxpayer&s business, if he is a stockholders thereof or
he is to receive as his compensation a share of the
property of the business.
?.3 +osses from sales or exchange of property between
related taxpayers (Sec. >/, <I)3.
Inco$e Tax Treat$ent on the Sa!e or Exchan+e of Propert#
Cate+ories of Sa!e or Exchan+e Transactions
/.J SALE &R EKCLANGE &9 &RDINARO ASSETS
Kefinitions
a.3 Or,inary Assets ) refer to properties held by the
taxpayer in the pursuit of his profession, trade or
business, they are!
i. Stock in TradeC
ii. 5roperty of a kind which would properly be
included in the inventory if on hand at the close of
the taxable yearC
iii. 5roperty held by the taxpayer primarily for sale to
customers in the ordinary course of trade or
businessC
iv. 5roperty used in trade or business which is subject
to the allowance for depreciationC and
v. )eal property used in trade or business. (Sec. >.,
4*7, <I)3
b.3 Or,inary income (or,inary 3ain& ) includes any gain
from the sale or exchange of property which is not a
capital asset (Sec. ,,, 4J7, <I)3
c.3 Or,inary +oss ) includes any loss from the sale or
exchange of property which is not a capital asset. (Sec.
,,, 4J7, <I)3
Income Tax Treatment on the Sale or 6xchange of 9rdinary
*ssets
The general rule in income taxation apply both as to the
gain and as to the loss, any gain shall be reported as
ordinary income and any loss may be allowed as a
deduction in gross income.
6xemplification of )ules
1.3 If an individual taxpayer is engaged in real estate
business or is a real estate dealer, the gains he may
derive from the said activity will be considered as
ordinary income and the losses he may incur is
deductible from his gross income. The /O tax imposed
on the sale of real property which is a capital asset is
inapplicable to him.
,.3 If a ,omestic corporation is engaged in real estate
business, the gains it may derive from said activity is
considered as ordinary income and any loss incurred is
considered as an ordinary loss. The loss is deductible
from the corporation&s ordinary income and from its
income from any other source whether or,inary or
capital.
&rdinar# !osses (whether the taxpayer is an
individual or a corporation3 are deductible either from
ordinary gains or capital gains.
0.J SALE &R EKCLANGE &9 CAPITAL ASSETS
Kefinitions
a.3 Capital Asset means property held by the taxpayer
(whether or not connected with his trade or business3
but does not include!
i. Stock in tradeC
ii. 5roperty of a kind which would properly be
included in the inventory if on hand at the close of
the taxable yearC
iii. 5roperty held by the taxpayer primarily for sale to
customers in the ordinary course of trade or
businessC
iv. 5roperty used in trade or business which in subject
to the allowance for depreciationC and
v. )eal property used in trade or business. (Sec. >.,
4*7, <I)3
This is an enumeration by exclusion, all others not
enumerated are capital assets.
b.3 Capital 3ain is the gain from the sale or exchange of
capital assets.
c.3 Capital loss is the loss incurred from the sale or
exchange of capital assets.
d.3 8et Capital 3ain is the excess of the gains from sales or
exchange of capital assets over the losses from such
sales or exchanges (Sec. >., 4*, ,7, <I)3.
e.3 8et capital +oss is the excess of the losses from sales
or exchanges of capital assets over the gains from such
sales or exchanges. (Sec. >., 4*, >7, <I)3.
f.3 8et Capital +oss Carry Over INCLC&J means that!
i. If any taxpayer, other than a corporation, sustains
in any taxable year a net capital lossC
ii. Such net capital loss cannot be deducted from
ordinary income due to the loss limitation rule<
iii. Such loss could be carried over to the next taxable
year (not thereafter3 as a deduction against net
capital gain in an amount not in excess of the
taxable income (i.e. net income before
exemptions3 in the year the loss was sustaine,C
and
iv. Such loss shall be treated as a loss from the sale
or exchange of capital assets held for not more
than twelve (!(& months. (Sec. >., 4K7, <I)3
g.3 Dol,in3 perio, refers to the percentages of the gain or
loss taken into account in computing the net capital gain
net capital loss and net income. The percentages are!
/DDQ - if the capital asset has been held for not more
than twelve #*') months (short4term&N and
5DQ " if the capital asset has been held for more than
twelve #*') months #long?term)
The holding period of capital assets is only
applicable to individual taxpayer and not to
corporations.
h.3 0oss 0imitation !ule provides that Capital losses are
deductible only to the extent of capital 3ains.
Specific 6xamples of 5roperties classified as capital assets
Capita! assets include personal property (not use, in
tra,e or business3 such as movables in one&s residence,
personal vehicles, appliances and furniture for personal use,
jewelries etc. as well as real property (not use, in tra,e or
business3 such as residential land, idle land not used in
business operations and residential house.
Tax Treatment of apital gains and apital losses
a.3 *s to Individual Taxpayers
13 9n personal property classified as capital asset
(other than shares of stock3
The following are the applicable rules!
a. The percentages of gain or loss to be
taken into account shall be -
a.13 !55P if the capital asset has been held
for !( months or lessC and
a.,3 %5P if the capital asset has been held for
more than !( months (hol,in3 perio,
rule&
b. apital losses shall be deducted only to
the extent of the capital gains (loss
limitation rule&
c. 8et Capital +oss Carry Over ule is
applicable.
,3 9n real property classified as capital assets
The following are the applicable rulesC
a. * final capital gains tax is imposed on
individuals inclu,in3 estates an, trusts
computed as follows!
tax base! gross selling price or fair market
value, whichever is higher
tax rate! /O
b. The tax is imposed on capital gains
presumed to have been reali#ed from
the sale, exchange or disposition of real
property located in the 5hils. classified
as capital assets inclu,in3 pacto ,e retro
sales an, other forms of con,itional
sales (such as mortgage foreclosure
sale3
c. The tax shall be in lieu of the income tax
imposed on individuals under graduated
rates in Sec. ,8, 4*7.apital gains from
sale of real property shall not be
included in the gross income of the
individual taxpayer.
d. There are two situations wherein the /O
final tax rate may not be applied, to wit!
*. If the real property classified as
capital asset is sold to the
government or any of its political
subdivisions or to gov&t. owned or
controlled corporations, the /O final
tax rate or the graduated income
tax rates may be used on the actual
gain of the taxpayer, at the option
of the taxpayerN and
I. If the principal residence of the
individual taxpayer is sold and the
proceeds of the sale is used to
acAuire or construct a new
residence within !) months from
the date of the sale, the sale is
exempt from income tax provided!
I.13 That the ommissioner is
notified by the taxpayer within thirty
("5& ,ays from the date of the sale
or disposition through a prescribed
return of his intention to avail of tax
exemptionC
I.,3 The tax exemption can only be
availed of once every ten (!5&
yearsC and
I.>3 If there is no full utili#ation of
the proceeds of the sale or
disposition, the portion of the gain
presumed to have been reali#ed
from the sale or disposition shall be
subject to capital gains tax.
e. The sale of rights over realty, although
classified as real property under the ivil
ode, is not subject to capital gains tax
because the situs of these rights follow
their owner who may not be located in
the 5hils. 9nly real property located in
the 5hils. is subject to capital gains tax.
(Sec. ,8 4b, 17, <I)C II) )uling <o.
B->-.., Eune ,,, 1...3.
>3 &n shares of sto&8 not held /y dealers in
se&urities
The following are the applicable rules!
a. * final capital gains tax is imposed on
capital gain from sale of shares of stock,
computed as follows!
1. 9n non-listed stocks or on sales of
shares (listed or unlisted with stock
exchanges3! not effected through
the stock exchanges!
%P on net capital gains not
over P!55, 555
!5P on net capital 3ains in
excess of P!55, 555 (Sec. ,8,
47, ,? 4I7, ,2 4K, ,7, ,- 4*, 2, 7,
4I, ?, 73
,. 0or sale of shares listed and traded
in the stock exchange the same
shall be exempt from income tax
but it shall be subject to a Stock
Transfer Tax of Z of 1O of the
;ross Selling 5rice.
b. The final capital gains tax is in lieu of
the ordinary income tax on individuals,
corporations and other taxpayers
(estates X trusts3.
c. The net capital gains on stock
transactions shall not be included in
the gross income of the seller or
transferor in computing his income tax
liability.
d. It is a final tax, which shall in no case,
be allowed as a deduction against
income or credited against income tax
or any other tax
e. *lso subject to a stock transfer tax at
a different rate are shares of stock
sold or exchanged through initial
public offering.
b.3 *s to orporations
The following rules apply whether the capital asset
is personal or real property!
b.13 apital gains and losses are recogni#ed to the
extent of 1BBO regardless of the holding period
(holding period is not applicable3C
b.,3 The net capital loss carry-over is not applicableC
b.>3 apital losses are deductible only to the extent
of capital gainsC and
b.839rdinary losses are deductible from capital gains
but net capital loss cannot be deducted from
ordinary gain or income.
1. 9n persona! propert# classified as capital
asset (other than shares of stock37
- 9nly the +oss +imitation )ule applies.
,. 9n rea! propert# classified as capital assets
- The following are the additional rules
applicable!
i. * final tax of six percent (/O3 is imposed
on the gain based on the gross selling price
or fair market value, whichever is higher, of
such lands andLor buildings. (Sec. ,2, 4*, ?7,
<I)3
ii. The tax shall be in lieu of the income tax
imposed on corporations under the graduated
rates in Sec. ,2 (*3 of the Tax ode.

>. 9n shares of stoc- not he!d %# dea!ers in
securities
- The rules applicable to individual taxpayer
are also applicable.
)eAuisites for recognition of capital gain or loss
They are!
1.3 The transaction must involve property classified as
capital assetC and
1.3 The transaction must arise from sale or exchange.
+imitation on apital losses
General ule! apital losses are allowed only to the
extent of capital gains.
>xception! *ny loss sustained by a domestic bank or
trust company from the sale of bonds, debentures, notes or
certificates or other evidences of indebtedness issued by
any corporation including those issued by the government is
considered as an ordinary loss and dedu&ti/le from
ordinary in&ome.
eason! Ianks and trust companies are considered as
dealers in se&urities, hence, these securities are
considered as property primarily held for sale to
&ustomers in the ordinary &ourse of /usiness.
9ther apital *sset Transactions
The following are considered as sales or exchanges of
capital assets!
1. Retire$ent of %onds ith interest coupons or in
re+istered for$
*mounts received by the holder upon the
retirement of bonds, debentures, notes or certificates or
other services of indebtedness issued by any
corporation (including those issued by a gov&t. or
political subdivision thereof3 with the interest coupons or
in registered forms, shall be considered as amounts
receive, in exchan3e thereof. (Sec. >., 467, <I)3
,. Short sa!es of propert#
* short sale takes place when a seller first make a
sale of stock or security which he does not own (he
merely borrows the stock certificate through or from his
stock broker3 and subseAuently buys or covers the
stock to complete the transaction.
The seller sells the shares short in the expectation
of a decrease in value thereof within a reasonably short
period of time. %e covers his short sale when the
expected decrease in the value materiali#es or when
the time for the return of the borrowed shares comes.
,.3 9ai!ure to exercise pri(i!e+e or option to %u# or se!!
propert#
;ains or losses attributable to the failure to
exercise privileges or options to buy and sell property
shall be considered as capital gains or losses, such as
the option given to a taxpayer to buy an agricultural
land is a &apital asset and the gain or the loss that may
be incurred by him from the disposition of said option is
either a &apital gain or a &apital loss.
>.3 Securities %eco$in+ orth!ess
If any securities which are capital assets are
ascertained to be worthless and written off during the
taxable year, the loss resulting therefrom in the case of
a taxpayer other than a bank or a trust company
incorporated under the laws of the 5hils. a substantial
part of whose business is the receipt of deposits, is
considered a capital loss.
8.3 Distri%ution in !i,uidation
If, in liAuidation or dissolution, the corporation
acAuires its own stock and exchanges its assets (land3
for the shares, the shareholders who surrendered their
shares for land shall likewise be subject to the capital
gains tax prescribed under Section ,8 (3 of the Tax
ode.
;ains or losses from liAuidating dividends are
considered as capital gains or losses inasmuch as
liAuidating dividends are considered as full payment
from the corporation in exchange for stocks held by the
stockholders.
?.3 Read'ust$ent of interest in a +enera! professiona!
partnership
$hen a partner retires from a general professional
partnership or the partnership is dissolved, he reali#es a
gain or loss measured by the difference between the
price he received for his interest and cost to him of his
interest in the partnership.
3.J SALES &R EKCLANGES RESBLTING IN NON?!ECO1NTON
O. 1$NS O! 0OSSES
a.3 Exchan+e solely in 8ind Iexchange of property solely for
stocHs3 in legitimate mergers or consolidations.
/J * corporation which is a party to a merger or
consolidation ex&hanges property solely for sto&8 in a
corporation which is a party to the merger or consolidationC
0J * corporation which is a party to a merger or
consolidation receives in ex&hange for property not only
sto&8 of another &orporation /ut also money and-or
other property and distri/utes it in pursuan&e of the
plan of merger or &onsolidation. @Section 4DIcJI3JI6JIiJA
3J * shareholder ex&hanges sto&8 in a corporation which
is a party to the merger or consolidation solely for the
sto&8 of another corporation, also a party to the merger or
consolidation.
4J * security holder of a corporation which is a party to the
merger or consolidation ex&hanges his se&urities in such
corporation solely for sto&8 or se&urities in another
corporation, a party to the merger or consolidation.
b.3 Transfer or exchange of property for stock resulting in
a&5uisition of &orporate &ontrol
* person exchanges his property for stock or unit of
participation in a corporation of which as a result of such
exchange said person, alone or together with others, not
exceeding four persons, gains control of said corporation
EControlF means ownership of stocks in a corporation
possessing at least ?1O of the total voting power of all
classes of stock entitled to vote.
The items enumerated above are also called Etax?
exempt ex&hanges.F
8,J TRANSACTI&NS RESBLTING IN T$2$;0E 1$NS ;=T NON?
!ECO1NTON O. 0OSSES
a.3 Transactions between related taxpayers (Sec, >/, <I)3
b.3 Illegal transactions
c.3 $ash sales (except those made by dealers in securities3
@ash sale is a sale of securities where substantially
identical securities are acAuired or purchased within a /1-
day period beginning >B days before the sale and ending >B
days after the sale. (Sec. >-, 4*7, <I)3.
)eAuisites for non-deductibility!
13 The sale or other disposition of stocks or securities
resulted in a lossC
,3 There was an acAuisition, or contract or option for
acAuisition of stock or securities within thirty (>B3
days before the sale or thirty (>B3 days after the
saleC and
>3 The stock or securities sold where substantially the
same as those acAuired within the /1-day period.
The word Ea&5uired' means acAuired by
purchase or by an exchange, and comprehends
cases where the taxpayer has entered into a
contract or option within the sixty-one-day period
to acAuire by a purchase or by such an exchange
(Sec. 1>1, 4f7, )egs.3
ESu/stantially identi&al' means that the
stock must be of the same class, or in the case of
bonds, the terms thereof must be the same.
The following are not substantially identical!
i. The common stock and the preferred stock of
the same corporationC
ii. * non-voting stock and a stock with voting
powerC
iii. The stock of the corporation and the stock of
another corporationC and
iv. Two series of bonds where one is secured by
a mortgage and the other is notC or which
differ as to interest rates.
d.3 6xchanges not solely in 8ind in mergers and consolidations
/J If in connection with an exchange described earlier
resulting in non-recognition of gains or losses, an individual,
a shareholder, a security holder or a corporation receives not
only stock or securities permitted to be received without the
recognition of gain or loss, /ut also money and-or
property, the gain, if an#, /ut not the loss, shall /e
re&ogniDed but in an amount not in excess of the sum of the
money and the fair market value of such other property
received.
5rovided, that as to the shareholder, if the money
andLor property received has the effect of a distri/ution of
a taxa/le dividend, there shall be taxed as dividend to the
shareholder an amount of the gain recogni#ed not in excess
of his proportionate share of the undistributed earnings and
profits of the corporation, the remainder if any, of the gain
recogni#ed shall be treated as a capital gain. (Sec. 8B, 4>, a73
0J If a corporation which is a party to the merger or
consolidation receives not only stock permitted to be
received without the recognition of gain or loss, but also
money an,Nor property, an, ,oes not ,istribute it in
pursuan&e of the plan of merger or &onsolidation, the
gain, if any, shall be recogni#ed in an amount not in excess
of the sum of such money and the fair market value of such
other property so received, which is not distributed. ISec. 4D,
C,@3, %AJ
3J If a 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
consideration, another party to the exchange assumes a
liability of the taxpayer, or acAuires from the taxpayer
property subject to a liability, then such assumption or
acAuisition shall not /e treated as money and-or other
property4 and4 therefore any gain or loss would still not
/e re&ogniDed if no money andLor property was involved in
the exchange.
4J 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 shall be
consi,ere, as a 3ain from the sale or exchange of a capital
asset or of property, which is not a capital asset, as the case
may be. (Sec. 8B, 4, 87, <I)3
e.J Sa!es or exchan+es hich are not at ar$s !en+th
Deter$ination of Gain or Loss
omputation of ;ain or +oss
The gain from the sale or other disposition of property
shall be the excess of the amount reali#ed over the basis or
adjusted basis for determining gain.
The loss shall be the excess of the basis or adjusted
basis for determining loss over the amount reali#ed.
The amount realiDed from the sale or other disposition
of property shall be the sum of money received plus the fair
market value of the property (other than money3 received.
Iasis of 5roperty
In case the property was acAuired /efore =arch 1,
1.1>! fair market value as of said date
In case the property was acAuired on or after =arch 1,
1.1>!
a.3 Iy purchase @ the cost
b.3 Iy gratuitous title @
b.13 Inheritance @ the fair market price or value at the
date of acAuisition
b.,3 ;ift @ the same as it would be in the hands of the
donor or the last preceding owner by whom it was
not acAuired by gift
c.3 0or less than an adeAuate consideration in money or
money&s worth! amount paid by the transferee for the
property
d.3 In a transaction where gain or loss is not recogni#ed in
pursuance of a plan of merger or consolidation! the
basis of the stock or securities received by the
transferor @ same as the basis of the property, stock or
securities exchanged decreased by!
13 the money received and
,3 fair market value of the other property
received
increased by!
13 the amount treated as dividend of the
shareholder and
,3 the amount of any gain recogni#ed on the
exchange
e.3 If as a part of the consideration, the transferee
assumes liability of the transferor or acAuires from the
latter property subject to a liability such assumption or
acAuisition shall be treated as money received by the
transferor.
f.3 0or the "boot' received! its fair market value. (Sec.
8B, 4, ?73
Sources of Inco$e
Sources of Inco$e in Genera!
The source of an income is the property, activity or
services that produce the income. (Commissioner vs. 9ritish
Overseas Airways Corp., !.* #CA "*%3
The term "source' is not a place but an activity or
property and as such, it has a situs or location.
The ascertainment of the sources of income becomes
important when it is considered that not all taxpayers,
whether natural or juridical, pay income taxes on all their
income.
13 )esident citi#ens of the 5hils. @ taxa%!e upon inco$e
deri(ed fro$ all sour&es Ifro$ sources ithin and
ithout the Phi!s.J
,3 Komestic corporations @ taxa%!e inco$e deri(ed fro$
all sour&es Ifro$ sources ithin and ithout the
Phi!s.J
>3 <onresident citi#ens of the 5hils. @ taxa%!e upon
inco$e deri(ed fro$ Phil. sour&es only Ion!# fro$
sources ithin the Phi!s.J
83 )esident aliens @ taxa%!e upon inco$e deri(ed fro$
Phil. sour&es only Ion!# fro$ sources ithin the
Phi!s.J
?3 <on-resident aliens
a.3 6ngaged in trade or business in the 5hils. @
taxa%!e upon inco$e deri(ed fro$ Phi!. sources
on!# Ion!# fro$ sources ithin the Phi!s.J
b.3 <ot engaged in trade or business in the 5hils. @
taxa%!e upon inco$e deri(ed from Phil. sour&es
only Ion!# fro$ sources ithin the Phi!s.J
/3 0oreign
a.3 )esident (engaged in trade or business in the
5hils.3 @ taxa%!e upon inco$e deri(ed fro$ Phil.
sour&es only Ion!# fro$ sources ithin the Phi!s.J
b.3 <on-resident (not engaged in trade or business in
the 5hils.3 @ taxa%!e upon inco$e deri(ed fro$ Phil.
sour&es only Ion!# fro$ sources ithin the Phi!s.J
C!assification of inco$e as to source
13 Income which is derived in full from source within the
5hils.
,3 Income which is derived in full from source outside the
5hils.
>3 Income which is derived partly from sources within and
partly from sources outside the 5hils. (Sec. 8,, <I)3
Gross inco$e fro$ sources ithin the Phi!s.
13 Interests!
a.3 Interests derived from sources within the 5hils.
b.3 Interests on bonds, notes or other interest-bearing
obligations of residents, corporate or otherwise. (Sec.
8,, 4*, 17, <I)3
,3 Kividends!
a.3 0rom a domestic corporation, and
b.3 0rom a foreign corporation ?BO or more of the
gross income of which for the >-year period ending with
the close of the taxable year preceding the declaration
of such dividends (or for such part of such period as the
corporation has been in existence3 was derived from
sources within the 5hilippines. (Sec. 8,, 4*, ,7, <I)3
It must be 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 5hilippines bears to its gross income from all
sources.
>3 ompensation for labor or personal services performed
in the 5hils. (Sec. 8,, 4*, >7, <I)3
83 )entals and )oyalties from property locate, in the
Phils. or from any interest in such property, including
rentals or royalties for @
a.3 The use of, or the right or privilege to use in the
Phils. any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark,
trade brand or other like property or nightC
b.3 The use of, or the right to use in the Phils. any
industrial, commercial or scientific eAuipmentC
c.3 The supply of scientific, technical, industrial or
commercial knowledge or informationC
d.3 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 (a3,
any such eAuipment as is mentioned in paragraph
(b3 or any such knowledge or information as is
mentioned in paragraph (c3C
e.3 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
personC
f.3 Technical advice, assistance or services rendered
in connection with technical management or
administration of any scientific, industrial or
commercial undertaking, venture, project or
schemeC and
g.3 The use of, or the right to use!
1. =otion picture filmsC
,. films or video tapes for use in connection with
televisionC and
>. tapes for use in connection with radio
broadcasting
?3 ;ains, profits, and income from the sale of real property
lo&ated in the Phils. and
/3 ;ains, profits, and income from sale of personal
property, treated as derived entirely from the &ountry
where it is sold.
Ex&eption to the rule! gain from the sale of
shares of stock in a domestic corporation which is
treated as derived entirely from sources within the 5hils.
regardless of where the shares are sold.
Passage of title test! it is the prevailing view that
in ascertaining the place of sale, the determination of
where and when the title to the goods passes from the
seller to the buyer is decisive.
Enu$eration in Section 40 not a!!"inc!usi(e
In the case of Commissioner vs. 9ritish Overseas
Airways Corporation (9OAC& J!.* #CA "*%7, the Supreme
ourt held!
Exxx Se&tion E, #now Se&tion 7') /y its
language4 does not intend the enumeration to /e
ex&lusive. t merely dire&ts that the types of in&ome
listed therein /e treated as in&ome from sour&es
within the Phils. a &ursory reading of the se&tion
will show that it does not state that it is an all?
in&lusive enumeration4 and that no other 8ind of
in&ome may /e so &onsidered.xxxF
. The Supreme ourt further held!
"xxxThe absence of flight operations to and from
the 5hils. is not determination of the source of income
on the situs of income taxation. *dmittedly, I9* was
an off-line international airline at the time pertinent to
this case. The test of taxa/ility is the sour&e4 and
the sour&e of an in&ome is that a&tivity xxx whi&h
produ&ed the in&ome. NnAuestionably the passage
documentations in these cases were sold in the 5hils.
and the revenue therefrom was derived from a business
activity regularly pursued within the 5hils.xxx'
Gross Inco$e fro$ sources outside the Phi!ippines
Interest other than that derived from sources within the 5hils.
1. Kividends other than those derived from sources within the
5hils.
a. Kividends from foreign corporations in generalC
and
b. Kividends derived from foreign corporations, ?BO
or more of the gross income of which for the >-
year period preceding the declaration of dividends
(or for such part of such period as the corporation
has been in existence was derived from foreign
sources
,. ompensation for labor or personal services performed
outside the 5hils.
>. )entals or royalties from property located outside the 5hils.
or from any interest in such property including rentals or
royalties for the use of or for the privilege of using outside
the 5hils., patents, etc.
8. ;ains, profits and income from the sale of real property
located outside the 5hils.
?. ;ains, profits and income from the sale of personal property
located outside the 5hils., and
/. Income derived from the purchase of personal property
within and its sale outside the 5hils. (Sec. 8,, <I)3
Gross Inco$e fro$ sources part!# ithin and part!#
outside the Phi!s.
Special rules are provided by the )egulations on the
following classes of income which are treated as derived
from sources partly within and partly outside the 5hils.
13 Income from transportation such as foreign
steamship companies whose vessel touch the 5hil.
ports (Sec. 1/>, )egulations3 and other services
rendered partly within and partly outside the 5hils.
such as foreign corporations carrying on the
business of transmission of telegraph and cable
messages between points outside the 5hils. (Sec.
1/8, )egulations3
,3 Income from the sale of personal property
pro,uce, in whole or in part by the taxpayer within
an, sol, outsi,e the Phils.C or pro,uce, in whole
or in part by the taxpayer outsi,e an, sol, within
the Phils.
GENERAL PRINCIPLES &9
PLILIPPINE INC&:E
TAKATI&N
I. CLASSI9ICATI&N &9
TAKPAOERS
Ta%!e /. Genera! ;ie
Source
s of
Taxa%!e
Inco$e
A.J Indi(idua!s
I/J CITIPEN
a. )esident iti#en
()3
$ithin
and
without
net income
if engaged in trade,
business or
profession
b. <on-)esident
citi#en (<)3
$ithin net income
c. 9$ L Seamen $ithin net income
(0J ALIEN 1
9&REIGNERS
a. )esident aliens
()*3
$ithin net income if
engaged in trade,
business or
profession
b. <on-)esident
alien (<)*3
1. <on )esident
*lien 6ngaged in
Trade or Iusiness
(<)*6TI3
$ithin net income
,. <on )esident
*lien <ot 6ngaged
in Trade or
Iusiness
(<)*<6TI3
within gross income
I3J SPECIAL
ALIENS
a. 6mployed by
)egional L area
headAuarters
()*%M3
within gross income
b. 6mployed by
)egional
9perating
%eadAuarters
()9%M3
within gross income
c. 6mployed by
9ffshore Ianking
Nnits (9INs3
within gross income
d. 6mployed by
petroleum service
contractors and
subcontractors
within gross income
..J Corporations
(13 K9=6STI within
and
without
net income
a. 5roprietary
6ducational
Institution X
%ospital
within
and
without
net income
b. ;9 except
;SIS, SSS, 5%I,
5S9 and
5*;9)
within
and
without
net income
(,J 9&REIGN
(a3 )esident $ithin gross income
(engaged in trade
or business3
1. International.
carrier
$ithin gross 5hil. billing
,.)emittance
Iranch 9ffice
$ithin *mount applied for to
be remitted
>. 9IN $ithin gross income
8. )*%M
?. )9%M within
(b3 <on-resident within gross income
1.
inematographic
0ilm owner, lessor
or Kistributor
within gross income
,. 9wner L+essor
of aircraft,
machineries and
other eAuipment
within gross rentalsL fees
>. 9wner L lessor
of vessels
chartered by 5hil.
nationals.
within gross rentals
(>3 6ST*T6
N<K6) ENKII*+
S6TT+6=6<T
within X
without
net income
(83
I))6H9*I+6
T)NST
within
and
without
net income
II. TAK &N INDI;IDBALS
A.& Classification of In,ivi,ual
2axpayer
1. iti#ens of the
5hilippines may be
classified intoC
(a3
)esident iti#ens ()3
-[ those residing
in the 5hils.
(b3
<on-resident iti#ens
-[ those not
residing in the
5hils.
* 0non4
resi,ent
citi'ens1
means (sec.
,, (63
<ational
Internal
)evenue
ode (<I)3
1. 9ne who
establishes to the
satisfaction of the
ommissioner of
Internal )evenue
(I)3 the fact of his
physical presence
abroad with a
definite intention to
reside therein.
,. * citi#en of the
5hils. who leaves
the country during
the taxable year to
reside abroad,
either as immigrant
or for employment
or on permanent
basis.
>. * citi#en of the
5hils. who works
and derive from
abroad and whose
employment
thereat reAuires
him to be
physically present
abroad most of the
time during the
taxable year.
8. * citi#en who has
been previously
considered as non-
resident citi#en and
who arrives in the
5hils. at any time
during the taxable
year to reside
permanently in the
country. (%e shall
be considered a
<) for the
taxable year in
which he arrives in
the 5hils. with
respect to his
income derived
from sources
abroad until the
date of his arrival
in the 5hils.3
Re(. Re+u!ations.
No. G">3, No(e$%er 06, /G>3 "
The continuity of residence
abroad is not essential. If
physical presence is
established, such physical
presence for the calendar year
is not interrupted by reasons of
travels to the 5hils.
,. *liens L 0oreigners
(a.3
)esident aliens ()*3 -[
those residing in
the 5hilippines
though not a
citi#en thereof.
(b.3
<on resident aliens
(<)*3 -[ those
not residing in the
5hils.
1.3 Those
engaged in
trade or
business in
the 5hils.
(<)*6TI3
,.3 Those not
engaged in
trade L
business in
the 5hils.
(<)*<6TI3
.
* "non4resi,ent
alien' individual who came to
the 5hils. and stayed therein
for an aggregate period of
more than 1-B days during
any calendar year shall be
deemed a <)* doing
business in the 5hils.
The term
"en3a3e, in tra,e N business'
denotes habitually or
sustained activity.
0esi,ent aliens1
are those who are actually
present in the 5hils. and who
are not mere transients or
sojourners. 0or tax purposes
a resident alien isC
1.3 *n alien who lives
in the 5hils. with
no definite
intention to stay as
a resident.
,.3 9ne who comes in
the 5hils. for
definite purposes
which in its very
nature would
reAuire on
extended stay and
to that end, makes
his home
temporarily in the
5hils.
>.3 *n alien who stay
within the 5hils. for
more than 1,
months from the
date of his arrival
in the 5hils.
9.& Personal an, A,,itional
>xemptions
Nature R
Purpose! 5ersonal and
additional exemptions are
fixed amounts which are in
the nature of deduction and
are intended to substitute for
the disallowance of personal
or living expenses as
deductible items.
Ta%!e 0: 5ersons entitled to
personal and additional
exemption
Taxpayer 5 6 * 6
1.)esident
citi#en
\
,.<on-
resident
(<)3
\ (for
income
derived
wLin3
\ (income
from wLin3
>. )esident
alien ()*3
\ (wLin3
\ (income
from wLin3
8. <)*6TI \ (by way
of
reciprocity3
?. <)*<6IT P
/. 6state \ (only up
to 5,Bk3
2. Trust \ (only up
to 5,Bk3
Reciprocit# means
that the foreign country
where the nonresident
alien is a citi#en or
subject grants
exemption to 0ilipinos
not residing there but
doing trade or
business, or exercising
profession therein.
The extent of
personal exemptions
allowed to such non-
resident alien shall be
in the amount eAual to
the exemptions
allowed in the income
tax law in the country
of which he is a
subject or citi#en, to
citi#ens of the 5hils.
not resident in such
country not to exceed
the amount fixed
under our laws. (Sec.
>/ 4K7, <I)3.
Ta%!e 3 : Iasic 5ersonal
6xemptions for ), <), and
)*
Taxpayer 6xemption (amount3
1. Single person
including a married
person judicially
decreed as legally
separated
,. 6ach married person
>. %ead of family
D>A: O7 7A/I+C [ is one
who is unmarried or legally
separated man or woman
withC
(13 9ne or both parents @
(a3 +iving with the
taxpayer.
(b3 Kependent upon the
taxpayer for their chief
support.
one or more brothers -
(a3 +iving with the taxpayer
(b3 Kependent upon the T for chief support
(c3 <ot more than ,1 yrs. of
age
(d3 <ot married
(e3 <ot gainfully employed
(>3 one or more legitimate
recogni#ed natural L legally
adopted children.
living with the Taxpayer
dependent upon the
Taxpayer for chief support
not more than ,1 yrs. of
age
not married
not gainfully employed
)egardless of age,
such children, brothers or
sisters Aualify a Taxpayer
as head of family is they
are incapable of self-
support because of mental
or physical defect.
>C<E.
S=PPO!T1 -[ means
principal or main support.
=ore than fifty percent
(?BO3 being provided to
certain dependents is
enough. This phrase does
not necessarily mean that
the dependent derives no
name at all, he may still
derive income but the
same is insufficient to
support him.
>0%N1 @T<F -[
reAuires the Taxpayer and
his dependent to actually
be residing together but
temporary absence from
their common residence
brought by face of
circumstances such as!
(a3 The Taxpayer is away
on business
(b3 The dependent who
may be boarding
elsewhere is in pursuit
of education.
>1$N.=00G
EMP0OGE"' means that
the dependent will only
Aualify as such if he derives
no income for himself, or he
is employed but his income
is not sufficient to support
him independently outside
of the principalLchief
support afforded to him by
the taxpayer.
RA >430 in re!ation
to exe$ptions
)* 28>,
(approved *pril ,>, 1..,3
expressly allows a
Aualified senior citi#ens to
be claimed as dependents
by those who care for
them hether a re!ati(e
or not.
Additiona! Exe$ption
uleF *n additional
exemption of 5-,BBB
is granted to Taxpayer
for each, but not
exceeding four (83 of
his !
(a3 +egitimate,
illegitimate
andLor legally
adopted children
(b3 +iving with the
Taxpayer
(c3 hiefly
dependent upon
him for support
(d3 <ot more than
,1 yrs. old
(e3 Nnmarried
(f3 <ot gainfully
employed.
Take note of the
following rules!
1. 5ersonal
exemption of married
persons!
a. If not legally
separated,
each spouse is
entitled to 5>,k
as personal
exemption.
b. If legally
separated,
each is entitled
to 5,Bk as a
single individual
unless Aualifies
as head of
family.
c. $here only one
(13 of the
spouses is
deriving
income, only
such spouse
shall be
allowed the
personal
exemption.
,. 0or additional exemption
a. 0or married
individuals can
be claimed by
only 1 of the
spouses.
b. 0or legally
separated
spouses, it can
be claimed only
by the spouse
who has
custody of the
childrenC but
the amount
claimed by both
shall not
exceed the
maximum
allowed.
c. *dditional
exemption can
be claimed only
by the
"husband'
unless!
i. he waives his
right in favor of
his wife
ii. the husband is
working abroad
iii. the wife is the on
deriving income.
>. The law reAuires that
married individuals, the
husband and wife although
reAuired to file one (13
income tax return, should
nevertheless compute their
individual income
separately. If any income
of the spouses can not be
definitely attributable to or
identifiable as income
exclusively earned as
reali#ed by either of the
spouses, the same shall be
divided eAually between the
spouses.
Ru!es on chan+e of
Status
These are!
1.3 If the
taxpayer
marries or
should
have
additional
dependent(
s3 during
the taxable
year, the
taxpayer
may claim
the
correspondi
ng
additional
exemption,
as the case
may be, in
full for such
year.
,.3 If the
taxpayer
dies during
the taxable
year, his
estate may
still claim
the
personal
and
additional
exemption
for himself
and his
dependents
as if he
died at the
close of
such year.
>.3 If the
spouse or
any of the
dependents
dies or if
any of such
dependents
marries,
becomes
twenty-one
(,13 years
old or
becomes
gainfully
employed
during the
taxable
year, the
taxpayer
may still
claim the
same
exemptions
as if the
spouse or
any of the
dependents
died, or as
if such
dependents
married,
became
twenty-one
(,13 years
old or
become
gainfully
employed
at the close
of such
year.
Ta%!e 4. ates of 2ax on
Certain Passive Income of
In,ivi,ual 2axpayer
5assive Income
(Subject to 0inal Tax3
ITIJ6< X
)*
1. )oyalties
except!
(a3 Iooks, literacy
works
(b3 musical
compositions
,BO
1BO
1BO
,. 5ri#es (exceeding
51Bk3 X other
winnings (except!
5S9 X +9TT9
winnings3
,BO
>. Interest on bank
deposits
,BO
8. Interest under
6xpanded foreign
currency deposit
system
2.?O
?. Interest on long-term
deposits
[ ? yrs.
] > yrs.
> to ] 8 yrs.
exempt
,BO
1,O
/. Kividend from
Komestic corporation,
joint stock company
insurance or mutual
fund comp. and
)9%Ms of
=ultinational comp.
1BO
2. apital gains from the
sale of real property
located in the 5hils.
/O (;S5L
0=H,
whichever is
higher3
-. Sales of Shares of
Stocks not traded in
local exchange
?O - not
exceeding
51BBk
1BO -
amount in
excess of
51BBk
.. ash andL or
property dividends
beginning
Ean. 1..-
beginning
Ean. 1...
beginning
Ean. ,BBB
/O
-O
1BO
*ny income or gain derived
in which a final tax is
imposed shall no longer be
included in the taxable net
income of the taxpayer
(applicable only to citi#ens
and aliens3
0inal tax is imposed
without deduction. <either
is the provision on personal
additional applicable.
*liens employed by
)*%Ms X )9%Ms, 9INs,
5etroleum service
contractor X subcontractor
of a multinational
corporations are entitled to
1?O tax, only on those!
Sa
lari
es,
wa
ge
s,
an
nui
tie
s,
ho
no
rar
ia
an
d
the
lik
e
as
rec
eiv
ed
fro
m
su
ch
)*
%
Ms
or
)
9
%
Ms
.
5r
ovi
de
d
tha
t
the
sa
me
tax
tre
at
me
nt
is
ext
en
de
d
to
0ili
pin
o
em
plo
ye
es
ha
vin
g
the
sa
me
po
siti
on
in
su
ch
ent
itie
s.
III. TAK &N
C&RP&RATI&N
S IC&RP&RATE
TAKPAOERSJ
COPOA2IO8 :>7I8>:
(Sec. ,8(b3 Tax ode3 - The
term shall include partnership,
no matter how created or
organi#ed, joint stock
companies, joint accounts, 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 operating
or consortium agreement under
a service contract with the
government.
G>8>A+ PO7>##IO8A+
PA28>#DIP (GPPJ " are
formed by persons for the role
purpose of exercising their
common profession, no part of
the income of which is derived
from engaging in any trade X
business.
COPOA2IO8# A>
C+A##I7I>: I82O 2EO
C+A##># 8A/>+C:
(13 :omestic -[
those created or
organi#ed in the
5hils. or under its
laws.
(,3 7orei3n -[
those created
organi#ed or
existing under
any laws other
than those of
the 5hils. and
they are
eitherC
)esi
dent
forei
gn
R
thos
e
forei
gn
corp
orati
on
eng
age
d in
trad
e or
busi
ness
withi
n
the
5hils
.
<on-
resid
ent
R
thos
e
forei
gn
corp
orati
on
not
eng
age
d in
trad
e or
busi
ness
withi
n
the
5hils
.
0:OI8G O >8GAGI8G I81 or
02A8#AC2I8G 9=#I8>##1
-[ The term implies a continuity
of commercial dealings and
arrangements and contemplates
to that extent, the performance
of acts or works or the exercise
of some of the functions
normally insistent to and in the
progressive prosecution of
commercial gain or for the
purpose and the object of the
business organi#ation (Comm.
vs. 9ritish Overseas Airways
Corporation M 9OAC case !.*
# "*%&
Ta%!e 5 ates an, 2ax base
on Corporate 2axpayers in
General 2axpayers
Taxes Imposed (Tax )ates and Tax Iase3
Taxes Imposed
Komestic
orp.
<et
income
1.3 <ormal orporate
Income Tax (<IT3
>,O (Ean.
1, ,BBB3
,.3 =inimum orporate
Income Tax (=IT3
,O
>.3 Iranch )emittance
Tax
8.3 Improperly
*ccumulated 6arning
Tax (I*6T3
1BO
?.3 5assive Incomes
(0inal tax3
a. Interest
5eso bank
deposits
- 0oreign
urrency Keposit
Nnits
b. )oyalties
c. apital gains from
sales of share of stock
not traded in the stock
] 51BBk
[ 5 1BBk
d. Income of a
depository bank under
0oreign urrency
Keposit Nnits
e. apital gains from
sale of real property
situated in the 5hils.
(capital assets3
,BO
2.?O
,BO
?O
6xempt
()* .,.83
1BO
/O
f. Interest on foreign
loan
1BO
g. Intercorporate
dividends
exempt
A. Tax &n Do$estic
Corporation ISec. 0>
of NIRCJ
6xcept as otherwise
provided in the Tax ode,
Komestic corporations duly
organi#ed and existing under the
5hilippine laws shall be subject
to the following tax rates based
on their gross income derived
from sources within or without
the 5hils.
>?O - for 1..2 and
prior years
>8O - effective
Eanuary B1, 1..-
>>O - effective
Eanuary B1, 1...
>,O - effective
Eanuary B1, ,BBB
(13 Proprietary >,ucational
Institutions N non4profit
hospitals - 6xcept those
income subject to final tax,
proprietary educational
institutionsL non-profit are
taxable with the tax rate of
!5P on their gross income.
Proprietary
Edu&ational
nstitution means
any private school
maintained and
administered by
private individuals
or groups within an
issued permit from
the K6S, %6K
or T6SK*.
Predominan&e
Test -
Preponderan&e
Test means that if
the gross income
from unrelated
trade, business or
other activity
exceeds ?BO of the
total gross income
derived by any
educational
institution or
hospital from all
sources the normal
tax shall be
imposed on the
entire taxable
income.
>=nrelated trade4
/usiness or other
a&tivityF 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.
*rticle PIH Sec. 8
(>3 of the
onstitution
provides that "all
revenues and
assets of non-stock
and non-profit
educational
institution used
actually, directly
and exclusively for
educational
purposes are
exempt from taxes
and duties.
(,3 Government owne, or
controlle, corporations
(GOCCs& @ ;9s,
agencies or its
instrumentality shall pay
applicable corporate
income tax rates except!
;SIS, SSS, 5%I, 5S9
and 5*;9).
.. Tax I$posed on Do$estic
corporations
I/.J Nor$a! Corporate
Inco$e Tax INCITJ -[
the tax rate of >,O (as
of Ean. 1, ,BBB3 is
imposed on any income
derived, within and
without the 5hils. 6xcept
on those passive income
(#ection ($ (A& 8IC&
I0.J Gross Inco$e Tax
&ption -[ The 5resident
upon the
recommendation of the
Secretary of 0inance
may, effective Eanuary 1,
,BBB, allow corporations
the option to be taxed at
fifteen percent (!%P& of
gross income provided
that the following
conditions are met
therein!
a. a tax effort ratio of ,BO
of ;<5
b. a ratio of 8BO of income
tax collection to total
tax revenues
c. a H*T effort of 8O of
;<5 and
d. a B..O ratio of the
onsolidated 5ublic
Sector 0inal 5osition
(5S053 to ;ross
<ational 5roduct
(;<53
The option to be
taxed based on
gross income shall
be available only to
firms whose ratio of
cost of sales to
gross sales or
receipts from all
sources does not
exceed fifty-five
percent (??O3.
The election of the
gross income tax
option shall be
irrevocable for
three (>3
consecutive taxable
years during which
the corporation is
Aualified under the
scheme.
Definition of Ter$s
a. >1ross n&omeF
derived from
business shall be
eAuivalent to gross
sales returns,
discounts and
allowance and cost
of goods.
b. >Cost of goods
soldF shall include
all business
expenses directly
incurred to produce
the merchandi#e to
bring them to their
present location
and use.
c. 0or trading and
merchandising
concern, >Cost of
goods soldF 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.
d. 0or manufacturing
concern, >Cost of
goods
manufa&tured and
soldF 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.
e. In sale of service,
"gross income'
means gross
receipt less sales
returns, allowance
and discounts.
I3.J :ini$u$ Corporate
Inco$e Tax I:CITJ -[ a
tax rate of (P is
imposed on the gross
income of domestic
corporations and
resident foreign
corporations.
ationaleF =IT is
designed to
forestall the
prevailing
practice of
corporation or
over-claiming
deductions in
order to
reduce their
income tax
payments.
eAuisitesF
a. It is imposed
beginning the
fourth (8
th
3
taxable year
immediately
following the
taxable yr. in
which such
corporation
starts its
business
operation.
b. It is imposable
only if such
corporation
has #ero or
negative
taxable
income or
whenever the
amount of
=IT is
greater than
the <ormal
orporate
Income Tax
(<IT3 due
from such
corporation.
Carr# 9orard of
Excess :ini$u$
Tax
-[ any excess of
the minimum
corporate income
tax (=IT3 over the
normal income tax
shall be carried
forward on an
annual basis and
credited against the
normal income tax
for the three (>3
immediately
succeeding taxable
yrs.
Instances hen :CIT
$a# %e suspended %# the
Secretar# of 9inance
-[ The Sec. of
0inance, upon
recommendation of
the ommissioner
may suspend the
imposition of =IT,
upon showing that
the corporation
suffers losses due
to any of the
following causes!
a. 5rolonged
labor dispute
(e.g. strikes for
more than /
months3
b. +egitimate
business
reverses (e.g.
theft3
c. 0orce majeure
(e.g. war3
I4.J 9ina! tax on certain
Passi(e Inco$e
-[ refer to previous note
The following corporations
are not subject to =IT
(1.3 5roprietary
6ducational
Institution if
enjoys
preferential tax
rate
(,.3 <on-profit
hospitals
(>.3 Kepository
banks under
expended 0KN
(8.3 International
carriers
(?.3 9ffshore
Ianking Nnits
(/.3 )9%Ms of
resident foreign
corp.
(2.3 9ther
corporations not
subject to the
normal tax rate
.. TAK &N 9&REIGN
C&RP&RATI&NS ISec. 0?
of NIRCJ
#*.) !esident .oreign
Corporation Engaged
in Trade or /usiness in
the Phils. #!.C) ?
0oreign orporation
shall be taxed on income
derived from sources
"within' the 5hilippines.
Tax mposed on !esident
.oreign Corporation #!.C)
(1.3 NCIT -[ >,O effective Ean.
B1, ,BBB
and
thereafter
(,.3 Gross Inco$e Tax &ption
-[ 1?O tax
rate on
gross
income of
)0 is also
applicable.
(>.3 :ini$u$ Corporate
Inco$e
Tax I:CIT3
-[ ,O
based on
gross
income is
also
applicable
(8.3 Tax on .ranch Profits
Re$ittance
s -[
subject to
1?O based
on the "total
profits'
applied or
earmarked
for
remittance
wLo any
deduction
for the tax
component
thereof!
except ! Those
activities
registered
wL the
56J*C
interests
dividends,
rents and
royaltiesC
remuneratio
n for
technical
services,
salaries,
and wagesC
premiums,
annuities,
emolument
sC capital
gains, profit
and
income.
(?.3 9ina! tax on certain
Passi(e Inco$e - the
same tax rates as imposed
to domestic corporation R
is also applicable to )0
except! the imposition of
capital gain tax (/O3 on
sale of real property
(capital asset3 located in
the 5hils.

* different tax rate is
imposed on the
following )0s
-[ , ZO on ;ross 5hilippine Iilling
Int&l air carrier R
>1ross Philippine
;illingsF refer to the
amount of gross
revenue from (a3
carriage of persons,
excess baggage cargo
and mail originating
from the 5hils. in a (b3
continuous and
uninterrupted flight,
irrespective of the place
of sale or issue and the
place of payment of the
ticket or passage
document.
2aHe noteF 0or a flight
wLc originates from the
5hils. but
transshipment of
passenger takes place
at any port outside the
5hils., only the aliAuot
portion of the cost of
the ticket
corresponding to the
leg flow from the 5hils.
to the point of
transshipment shall
form part of the ;5I.
In International
shippin3, >1ross Phil.
;illingF means gross
revenue whether for
passenger, cargo or
mail originating from
the 5hils. up to the final
destination, regardless
of the place of sale or
payments of the
passage or freight
documents.
(b3 e3ional N Area
Dea,Auarters
(AD;s& -[ tax
exempt
-[ These are
branches established
in the 5hils. by a
multinational
companies but they
do not earn or derive
income here and their
functions are limited
to being a supervisory
communication and
coordinating center for
their affiliates.
(c.3 e3ional Operatin3
Dea,Auarters
(OD;s& -[ subject
to 1BO tax.
-[ these are
branches established
in the country by
multinational
companies which are
engaged in any of the
following!
general
administra
tion X
planningC
business
planning
business
developm
ent (and
the like3
(d.3 Offshore 9anHin3
=nits authori'e, by
9an3Ho #entral n3
Pilipinas
E2CEPT: !$ +'+7.
(,.3 Non?!esident .oreign
Corporations
#N!.CNET;) ? are
subject to >,O tax rate
(effective Ean. 1, ,BBB
and thereafter3 on all
income derived from
sources within the 5hils.
except on certain
passive income (refer to
Table ^13.
<)0s are not entitled
to deduction as well as
exemption (personal
and additional
exemption3
TAK SPARING RBLE 1
CREDIT
-[ provides that a final
withholding tax at the
rate of 1?O shall be
imposed for the amount
of cash and Lor property
dividends received from
a domestic corporation
by non-resident 0oreign
corporation subject to
the condition that the
country in which the
<)0 is domiciled shall
allow a credit against the
tax due from <)0
taxes deemed to have
been paid in the 5hils.
eAuivalent to 12O which
represents the difference
between the regular
income tax rate of >,O
and the usual corporate
rate of 1?O.
2aHe noteF
Tax sparing credit
applies only when the
conditions for its
availment are clearly
established by the
taxpayer. Since the
concession is in the
nature of a tax
exemption.
The 1?O reduced tax
must actually be paid
and the 12O must be
deemed paid tax.
The 1?O tax on
dividends is applicable
if the country where the
recipient <)6 is
domiciled does not
imposed any tax on
dividend received by
said recipient foreign
corporation (II)
)uling, =arch >B,
1.223
I:PR&PERLO
ACCB:BLATED
EARNINGS TAK IIAETJ
(Sec. ,. <I)3
Nature and Purpose:
The improperly
accumulated earning
tax of 1BO in addition
to the regular corporate
income tax shall apply
to every corporation
formed or availed for
the purpose of avoiding
of any other corporation
by permitting earnings
and profit to
accumulate instead of
being divided or
distributed.
The term >mproperly
a&&umulated taxa/le
in&omeF means
taxable income
adjusted by!
(13 Income exempt
from tax
(,3 Income excluded
from gross
income
(>3 Income subject
to final tax
(83 The amount of
<9+9
deducted and
reduced by the
sum of!
a. Kividends
actually or
constructive
ly paid and
b. Income tax
paid for the
Taxable
year.
9or$u!a: Taxable income
add! Income
exempt from tax
Income
subject to final tax
Income
exclud
ed
from
gross
incom
e
*mount of
<9+9 deducted
+ess! Kividends
actually or
constructiv
ely paid
Income tax
paid for the yr.
Improperly
accumulated Taxable
Inc
ome
Improperly
Accumulate, >arnin3s
2ax ,oes not apply to
the followin3F
(1.3 Ianks and other
non-banks
financial
intermediaries
(,.3 5ublicly held
corporations
(>.3 Insurance
companies
Presumptions of
Improper
accumulations - There
is a "prima facie'
evidence of a purpose
by a corporation to
avoid the tax upon its
shareholders or
members!
(13 $here the corporation
is a mere holding
company.
(,3 $here the corporation
is an investment
company where more
than ?BO of its
outstanding stock is
owned directlyL
indirectly by one
person during the
taxable year.
(>3 $here the corporation
permits its earnings or
profits to be
accumulated "beyond
the reasonable needs
of the business'.
>!easona/le needs of
the /usinessF includes
the reasonably
anticipated needs of the
business e.g.
investment of
corporation&s profits in a
business related to
taxpayer&s business.
PurposeF To compel
the corporations to
distribute dividends to
the stockholders
(subject to dividend tax3
Instances of
easonable
AccumulationsF
(13 It is retained for
working capital needed
by the business
(,3 It is invested in addition
to plant property and
eAuipment reasonably
by the business
(>3 In accordance with
contract obligations, it
is placed to the credit
of a sinking fund for the
purposes of retiring
bonds issued by the
corporation.
EKE:PTI&NS 9R&:
TAKES &N
C&RP&RATI&NS ISec. 3D
of NIRCJ: The following
shall not be taxed in
respect to income received
by them!
(a.3 +abor, agricultural
or horticultural
organi#ation not
organi#ed
principally for profit.
(b.3 =utual savings
bank not having a
capital stock
represented by
shares and
cooperative banks
wLo capital stock
organi#ed and
operated for mutual
purposes and
without profit.
(c.3 * beneficiary
society or
association
operating for
exclusive benefit of
the members or a
mutual aid
association or non-
stock corporation
organi#ed by
employees
providing benefits
exclusively to its
members or their
dependents.
(d.3 emetery company
owned and
operated for the
exclusive benefits
of its member
(e.3 <on-stock
corporation or
association
organi#ed and
operated
exclusively for
religious, scientific,
athletic, or cultural
purposes, or for the
rehabilitation of
veterans, no part of
it net income or
asset shall belong
to or inure to the
benefit of any
member, organi#er,
or officer or any
specific person
(f.3 Iusiness league
chamber of
commerce, or
board of trade not
organi#ed for profit
and no part of the
net income of which
inures to the benefit
of any private
stockholder or
individual
(g.3 ivic league or
association not
organi#ed for profit
but operated
exclusively for the
promotion of social
welfare
(h.3 * non-stock and
non-profit
educational
institution.
NOTE: Refer to
Artic!e KI;
Section 4I3J, /G?>
Constitution.
(i.3 0armers& fruit
growers or like
organi#ation
organi#ed and
operated as sales
agent for the
purpose of
marketing the
products of its
member.
(j.3 0armers& or other
mutual typhoon or
fire insurance
company or like
organi#ation of a
purely local
character, the
income of which
consists solely of
assessment, dues
and fees collected
from members for
the sole purpose of
meeting its
expenses.
(k.3 ;overnment
educational
institution
Income of whatever
kind and character of the
foregoing organi#ations 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.
I;. TAK &N
PARTNERSLIP
AND C&"
&*NERSLIP
PARTNERSLIP is a contract
whereby two or more persons
bind themselves to contribute
money, property, or industry to a
common fund with the intention
of dividing the profits among
themselves.
0or income tax
purposes, partnership
may be classified as
follows!
(1.3 5artnership not
su%'ect to
income tax,
which include the
followingC
a. ;eneral
5rofessiona
l
partnership
b. Eoint
venture or
consortium
agreement
formed for
the purpose
of
undertaking
constr
uction
project
s or
engagi
ng in
petrole
um,
coal,
geothe
rmal
and
other
energy
operati
ons
pursua
nt to
an
operati
ng or
consor
tium
agree
ment
under
a
servic
e
contra
ct with
the
govern
ment.
(,.3 5artnership
su%'ect to
income tax L
Iusiness
5artnership
-[ *ll other
partnership
except ;55 and
Eoint Henture, no
matter how
created or
organi#ed are
considered
corporation
subject to
corporate
income tax.
2able -. 2ax liability of
Partnerships an, the
Partners 2axpayers.
Tax +iability ;55 (5artnership
not subject to tax3
5artnership itself - The entity itself
is not taxable
5artners - The partners
share in the net
income of the
partnership
shall be taxable
to the partners
whether
distributed or
not.
5artners share in
the net loss of the
partnership
- may be claimed
by the partner
as a deductible
expense in his
personal
income tax
retain
5ayment made by a
partner to a partner
for services
rendered
- considered as
additional share
in the net
income of the
partner @
(ordinary
business
income3
0iling of return - 5artnership
should file an
"annual
information
return'
)eason! To furnish
the II) of
information as
to the share of
each partner
shall be part
and include in
his personal
income tax
return
5artner&s
distributive share in
the net income of
the partnership
- subject to
graduated income
tax rates
.IR RBLING No. /60
8une //, /G?>
* partner&s
contribution of real
property to the
partnership fund is not
subject to income tax.
CO?O@NE!S<P -[ it is
created whenever the ownership
of an undivided thing or right
belongs to different persons.
G>8. =+>F o-ownership is
exempt from income tax
because the activities of the co-
owners are usually limited to the
"preservation' of the properties
owned in common and the
collection of the income
therefrom.
>?C>P2IO8#F ($hen co-
ownership is subject to tax3.
(13 $hen the income
of the co-ownership is invested
by the co-owners in other
income-producing properties or
income-producing activities, and
(,3 $hen there is no
attempt to divide inherited
property for more than ten (1B3
years and the said property was
not under any administration
proceedings nor held in trust, an
unregistered partnership is
deemed to exist.
2ax liability of co4
owners -[ The co-
owners in exempt
co-ownership shall
be viable for
income tax only in
their separate and
individual capacity.
7ilin3 of return -[ The
owners shall report
and include in their
respective personal
income tax returns
their shares of the
net income of the
co-ownership.
H. TAK &N
ESTATES AND
TRBSTS ISec.
6D. NIRCJ
Estate is the mass of property,
rights and obligations left behind
by the decedent upon his death.
6states may be
classified as follows!
1. 6states not under
judicial settlement - are
subject to income tax
generally as mere co-
ownership.
- The tax liability on
income of the co-
ownership levied
directly on the co-
owners. Thus, the
heirs shall include in
their respective returns
their distributive shares
of the net income of the
estate.
,. 6states under
judicial settlement -
are subject to income
tax in the same
manner as individual.
- Income received
during the settlement of
the estate is taxable to
the fiduciary (guardian,
executor, trustee, and
administrator3.
- The return should be
filed by executor or
administrator of the
trust.
Trust is an arrangement created
by will or co-agreement under
which title to property is passed
to another for conservation or
investment with the income
therefrom and ultimately the
corpus (principal3 to be
distributed in accordance with
the directions of the creator as
expressed in the governing
instrument.
0 Cinds of
Trust :
1. Irrevocable Trust -[ is
considered as a separate
taxpayer.
,. )evocable Trust -[
is one where at anytime the
power to revest the title to any
part of the corpus of the trust
is vested!
(a.3 in the grantor (creator
of the trust3 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 therefromC
or
(b.3 in any person not
having a substantial
adverse interest in
the disposition of
such part of the
corpus or the
income therefrom.
<9T6! The tax shall be
imposed on taxable
income of the
grantor.
@arious trusts subBect
to income tax.
(1.3 Trust where income
is accumulated for
the benefit of certain
or uncertain persons
or persons with
contingent interest.
(,.3 Trust where income
is accumulated or
held for future
distribution under the
terms of the will or
trust.
(>.3 Trust where income
is to be distributed
currently by the
fiduciary to the
beneficiaries.
(8.3 Trust where income
collected by a
guardian of an infant
is held or distributed
as the court may
direct.
(?.3 Trust where income
in the discretion of
the fiduciary may be
either distributed to
the beneficiaries or
accumulated.
Exe$pt Trust -
The tax imposed on
estate and trust does
not apply to
E:PL&OERHS
TRBST provided that
the following
conditions are
satisfied!
(1.3 The employee&s trust
forms part of a
pensions, stocks,
bonus or profit
sharing plan of an
employer for the
benefit of some or
all of its
employees.
(,.3 ontributions 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
trust and
accumulated by
the trust in
accordance with
such plan.
(>.3 <o part of the corpus
or income shall be
used for or
diverted to,
purpose other than
for the exclusive
benefit of his
employees.
Consoli,ation of
income in trusts
(1.3 If there are two or
more trusts created
(,.3 The same are created
by the same person
(grantor3
(>.3 and the beneficiary of
such is the same
person in each
instance.
2aHe note! )ules applicable in
the computation of the tax on
estates and trusts!
(1.3 The same rules in the
determination of
gross income for
individuals are
applicable.
(,.3 The same deductions
allowed to an
individual taxpayer
are also allowed, in
addition of the
following
deductions!
(a.3 amount
of its
income
which is
to be
distribute
d
currently
to the
beneficia
ries, and
(b.3 *mounts
of its
income
for the
taxable
year
which is
properly
paid or
credited
during
such
year to
any heir,
legatee,
or
beneficia
ry, but
the
amount
so
allowed
as a
deductio
n shall
be
included
in
computin
g the
taxable
income
of the
heir,
legatee,
or
beneficia
ry.
(>.3 5ersonal 6xemption
of 5,Bk is also
applicable
(8.3 The graduated rates
of tax used for
individuals
taxpayers are also
applicable
The deductions
mentioned are not
available to T)NSTS
administered in foreign
country.
TRANS9ER TAKES
Transfer Taxes Defined
*re those imposed
upon the gratuitous
disposition of private
property.
Nnder our law, they
are taxes levied on
the transmission of
private properties
from a prior decedent
to his heirs in the
case of estate tax, or
from a donor to a
donee in the case of
donor&s tax.

Qin,s of 2ransfer 2axes
/. Death taxes or duties
*re those levied on
the gratuitous
transfers of property
upon one&s death,
formerly comprised of
the estate and
inheritance taxes!
Ioth taxes are now
integrated into one
estate tax.
0. Gift Taxes
*re imposed on the
gratuitous transfers of
property during one&s
lifetime, formerly
comprised of the
donor&s and donee&s
gift taxesC both taxes
are now integrated
into a donor&s tax.
Estate Tax
Estate tax defined
Is a graduated tax
imposed on the
privilege of the
decedent to transmit
property at death and
is based on the entire
net estate, regardless
of the number of heirs
and relations to the
decedent.
It is a "transfer' tax
not a property tax.
The tax on the right to
transmit property at
death and on certain
transfers which are
made by the statute
the eAuivalent of
testamentary
dispositions.
Nature of Estate Tax
It is not a direct tax
on property nor is it a
capitation tax, that is,
the tax is laid neither
on the property, nor
on the transferee or
transferor, but on the
right of the decedent
to transmit his estate.
It is not a property tax
but an excise tax.
Purpose and 'ustification of
estate tax:
The following theories
have been advanced to
justify death taxation!
(I)*53
a.3 .enefit"
Recei(ed Theor#
0or the performance
of services rendered
by the government in
the distribution of the
estate of the
decedent and other
benefits that accrue
to the estate and the
heirs, the state
collects the tax.
%.J Redistri%ution of *ea!th
Theor#
Is a contributing
factor to the
ineAualities in wealth
and income. The
imposition of death
tax reduces the
property received by
the successor
bringing about a more
eAuitable distribution
of wealth in society.
c.J A%i!it#"to pa#" theor#
The receipt of
inheritance places
assets in the hands of
the heirs and
beneficiaries thereby
creating an ability to
pay the tax and thus
to contribute to
governmental
incomeC and
d.J Pri(i!e+e theor# or State
Partnership theor#
Inheritance is not a
right but a privilege
granted by the state
and large estates
have been acAuired
only with the
protection of the
state. The State, as
a "passive and silent
partner' in the
accumulation of
property has the right
to collect the share
which is properly due
to it.

Incidence or %urden of estate
of tax
Three views on who
is the taxpayer in estate
taxation!
1. 5)6K66SS9) @
the object of the tax is
the property which
has been held or
accumulated by the
deceased and the tax
has fallen upon him in
the sense it has
affected the amount
of the property which
he could dispose.
,. SN6SS9) @ the
tax is not paid by the
predecessor who has
no liability till he dies
and who is free to
ignore the duty if he
wishes, while the
successor comes into
less than he would
have, and has no
kind of redress.
>. <9 56)S9<*+
I<IK6<6-
8. the estate tax has no
personal incidence at
all, merely falling
upon the estate as
such.
La app!ica%!e!
6state taxation is
governed by the statute in force
at the time of the death of the
decedent.
:eanin+ of Gross Estate:
1ross estate
Is the total value of all
property, whether real
or personal, tangible
or intangible
belonging to the
decedent at the time
of his death, situated
within or outside the
5hilippines, where
such decedent was a
resident or citi#en of
the 5hilippines. In the
case of a nonresident
alien decedent, it
shall include only
property situated in
the 5hilippines.

5roperty Included in the ;ross
6state!
In case of resi,ent citi'ens,
nonresi,ent citi'ens an,
resi,ent aliens!
1. )eal 5roperty within
and without the 5hilippinesC
,. Tangible personal
property within and without the
5hilippinesC and
>. Intangible personal
property within and without the
5hilippines.
In cases of nonresi,ent aliensF
1. )eal property within
the 5hilippinesC
,. Tangible personal
property within the
5hilippines andC
>. Intangible personal
property within the
5hilippines, unless
there is reciprocity in
which case, it is not
taxable.
:eanin+ of RECIPR&CITON
2here is reciprocity if
the forei3n country of which the
,ece,ent was a citi'en or
resi,ent at the time of his
,eathF
!.& Kid not impose an
estate taxC or
,.3 allowed a similar
exemption from estate tax with
respect to intangible personal
property owned by 0ilipino
citi#ens not residing in that
foreign country.
Note!
!. eciprocity applies only
whenF
A.& 2he property is an
intan3ible< an,
9.& 2he ,ece,ent is a
nonresi,ent alien
(. 2he followin3
intan3ibles are ,eeme, locate,
in the PhilippinesF
1.3 0ranchises which must
be exercised in the 5hilippinesC
,.3 Shares, obligations or
bonds issued by any
corporation or sociedad
anonima organi#ed or
constituted in the
5hilippines in accordance
with its lawsC
>.3 Shares, obligations or
bonds issued by any
foreign corporation -?O of
the business of which is
located in the 5hilippinesC
8.3 Shares, obligations or
bonds issued by any
foreign corporation if such
shares obligations or
bonds have acAuired a
business situs in the
5hilippinesC and
?.3 Shares or rights in any
partnership, business, or
industry established in the
5hilippines.
Inter ;i(os Transfers Su%'ect
to Estate Tax
The gross estate
extends to gratuitous
transfers made by the
decedent during his
lifetime which are treated
by the law as substitutes
for testamentary
dispositions. They are
transfers inter vivos in
form but mortis causa in
substance.
Rationa!e for taxa%i!it#!
To reach such
transfers which are really
substitutes for
testamentary dispositions
and thus to prevent the
evasion of the estate tax.
These transfers are!
a.3 transfers in
contemplation of
death (sec.-? b3C
b.3 transfers with
retention or
reservation of
certain rights
(sec.-? b3C
c.3 revocable transfers
(sec.-? c3
d.3 transfers of
property arising
under a general
power of
appointment
( sec.-? d3C and
e.3 transfers for
insufficient
consideration
(sec.-? g3
Note:
Transfers by virtue of
a bonafide sale of property
for an adeAuate and full
consideration in money or
money&s worth are
excluded and not taxable.

n&lusions in the 1ross
Estate ICR
0
IG DIP3
*) Transfer in
&ontemplation of
death
* transfer with the
thought of death. The
term "in
contemplation of
death' means that the
impelling or
controlling motive is
the thought of death,
regardless of whether
the transferor is near
the possibility of
death or not, which
induces the
disposition of the
property for the
purpose of avoiding
the tax. 6xample!
donation was made
concurrently with the
execution of a will
(Hidal de )oces
vs.5osadas, ?- 5hil
1B-3
The following
circumstances are
taken into account in
determining in
whether the transfer
was made in
contemplation of
death!
*.3 *ge and
state of health of
the decedent at
the time of the
giftC
I.3 +ength of
time between
the gift and the
date of deathC
and
.3 oncurrent
making of a will
or making a will
within a short
time after the
transfer.
The following are
examples of motives
precluding the
category of a transfer
in contemplation of
death!
a.3 To relieve
the donor
from the
burden of
manageme
ntC
b.3 To save
income or
property
taxesC
c.3 To settle
family
litigated
and
unlitigated
disputesC
d.3 To provide
independe
nt income
for
dependent
sC
e.3 To see the
children
enjoy the
property
while the
donor is
alive.
f.3 To protect
the family
from
ha#ards of
business
operationsC
and
g.3 To reward
services
rendered.
Note:
The
TLREE I3J OEAR
PRESB:PTI&N provides that
any transfer of a material part
of his property in the nature of a
final disposition or distribution
thereof made by the decedent
within three years prior to his
death without such adeAuate
and full consideration shall ,
unless shown to the contrary,
be deemed to be have been
made in contemplation of
death.
This provision,
however, has been already
deleted in Sec. 1BB (b3 now
sec. -? (I3 of the Tax ode by
5K <o. 12B?.
Nnder II) )uling <o.
,/1 September ,, 1.-2, the
law does not specify the
number of years prior to a
decedent&s death within which a
transfer can be considered in
contemplation of death.
,.3 Transfer with
retention or reservation
of &ertain rights
This contemplates
the instances where
the owner transfers
his property during
life but still retains
economic benefits
(the possession or
enjoyment of the
property or the power
to designate the
person who may
exercise such rights3.
It includes!
*. Transfer without
retention of interest
but intended to take
effect at or after the
decedents death.
6xample! donations
mortis causa.
I. Transfer with
retention of interest in
respect to!
The possession or
enjoyment of or the
right to the income
from the propertyC or
The right either alone
or in conjunction with
any person, to
designate the person
who shall possess or
enjoy the property or
the income therefrom.
*nd such interest is
retained by the
decedent for his life
or for any period
which does not in fact
end before his death.
. Transfer with
reversionary interest,
wherein there is a
possibility that the
transferred property
may return to the
decedent or his
estate or that it may
become subject to a
power of disposition
by the decedent.
Illustration!
* transfers his
property to I in
naked ownership and
to in usufruct
throughout &s
lifetime subject to the
condition that if
predeceases *, the
property shall return
to *. If * dies during
&s lifetime, the value
of the reversionary
interest of * at death
is included in his
gross estate.

E.) !evo&a/le transfer
* transfer where!
a.3 The decedent or in
conjunction with any
other person has
reserved the right to
alter, amend, revoke,
or terminateC or
b.3 *ny such power is
relinAuished in
contemplation of the
decedent&s death.
The power
to alter, amend or
revoke shall be
considered to exist on
the date of the
decedent&s death
even though!
a.3 the
exercise of
the power
is subject
to a
precedent
giving of
noticeC or
b.3 The
alteration,
amendmen
t or
revocation
takes effect
only upon
the
expiration
of a stated
period after
the
exercise of
the power.
If
the notice
has not
been given
or the
power has
not been
exercised
on or
before the
decedent&s
death, such
notice or
the power
shall be
considered
to have
been given
or
exercised
on the date
of the
decedent&s
death.
(sec.-?
.,3 <I)
7.) Transfer of property
under a general
power of
appointment
* transfer where the
donor of the power of
appointment
authori#es the donee
of such power to
designate any person
he chooses to be
given the right over
the appointed
property.
Genera! poer of
appoint$ent (s. specia!
poer of appoint$ent:
*.3 * power is +enera!,
when it authori#es
the donee of the
power to appoint any
person he pleases
including himself,
thus having a full
dominion over the
property as if he
owned it.
I.3 It is specia! when,
the donee can
appoint only among a
restricted or
designated class of
persons other than
himself.
Note:
If the power of
appointment is general, it
makes the appointed
property a part of the
donee&s property.
=n,er a general
power of appointment,
title to the property is
le3ally transferre, to the
,onee. 2herefore the
property shall form part of
the 3ross estate of the
,onee.
5.J Transfer for
insufficient
consideration
* transfer that is not
a bona fide sale of
property for an
adeAuate and full
consideration in
money or money&s
worth. The excess of
the fair market value
at the time of death
over the value of the
consideration
received by the
decedent shall form
part of his gross
estate. (Sec. -?,
<I)3
%owever, if the
purported absolute
sale inter vivos by the
decedent is shown to
be fictitious, then the
total value of the
property transferred
is subject to inclusion
in the taxable estate.
6.J Proceeds of !ife
insurance
5roceeds of life
insurance taken by
the decedent on his
own life shall be
included in the gross
estate if the
beneficiary!
*.3 Is the estate of
the decedent, his
executor, or administrator
(regardless whether the
designation is revocable or
irrevocable3C or
I.3 Third person other
than the estate, executor,
administrator but the
designation of the
beneficiary is revocable.
>.J Prior Interest
6xcept as otherwise
specifically provided
therein, subsections
(I3, (3, (63 of section
-? referring to
transfer in
contemplation of
death, revocable
transfer and proceeds
of life insurance
respectively shall
apply to the transfers,
trusts, estates,
interests, rights,
powers and
relinAuishment of
powers as severally
enumerated and
described therein,
whether made,
created, arising,
existing, exercised or
relinAuished before or
after the effectivity of
the T)5.
N&TE:
In most of these
transfers the property
remains substantially that
of the transferor during his
lifetime notwithstanding
the transfer since he still
retain either the "beneficial
ownership' or "naked title'
to the property.
?.J DecedentHs Interest
To the
extent of
the interest
therein of
the
decedent at
the time of
his death.
(Sec. -? *3
<I)
Exc!usions fro$ Gross
Estate
The following properties
are ex&luded from gross
estate:
13 *mount receivable by
any beneficiary
irrevocably
designated in the
policy of insurance by
the insured.
,3 5roceeds of a group
insurance policy
taken out by a
company for its
employees.
>3 5roceeds of
insurance policies
issued by the ;SIS to
government officials
and employees.
83 Ienefits accruing
under the Social
Security *ct.
?3 5roceeds of life
insurance payable to
the heirs of deceased
members of the
military personnel of
the Nnited States
*rmy or 5hilippine
*rmy under laws
administered by the
Nnited State veterans
*dministration.
/3 *ccident insurance
proceeds.
Note: Items 1 @ / are
proceeds of insurance not
includible in the gross
estate of the decedent.
23 Separate property of
the surviving spouse.
Note!
In the determination
of the gross estate, the
nature of the property,
whether common property
of the spouses, separate
or exclusive property
either of the deceased or
of the surviving spouse,
becomes of vital
importance. $hat regime
of property relations shall
govern the spouses_
Nnder the ivil ode,
the husband and wife who
got married before *ugust
>, 1.-- are governed by
the onjugal 5artnership
of ;ains, while those who
got married on or after
*ugust >, 1.-- are
governed by the *bsolute
ommunity of 5roperty,
unless a different regime
was agreed upon in the
marriage settlement.
Exe$ption fro$ Estate Tax
A. The first 5,BB, BBB.BB value
of the estate (sec. -8 <I)3
.. The merger of the usufruct in
the owner of the naked title.
C. The transmission from the
first heir, legatee, or donee in
favor of another beneficiary in
accordance with the desire of
the predecessor.
D. *ll beAuest, devises,
legacies or transfers to social
welfare, cultural and charitable
institutions, no part of the net
income of which inured to the
benefit of any individual and
provided that not more than
>BO of the said beAuest, etc
shall be used by such institution
for administration purposes.
E. Intangible personal property
of non-resident aliens under the
principle of reciprocity.
9. )etirement benefits of
employees of private firms from
private pension plans approved
by the II).
G. *mount received for war
damages.
L. ;rants and donations to the
Intramuros administration.
A!!oa%!e Deductions fro$
the Gross Estate
The following are the
expenses, losses,
indebtedness and taxes that
may be allowed as deductions
from the gross estate!
A.J If decedent is a resident
decedent:
&RDINARO
DEDBCTI&NS:
/J 9unera! Expenses
The amount
deductible is eAual to
?O of the gross
estate or the amount
of the actual funeral
expenses whichever
is lower, but in no
case to exceed
5,BB, BBBC
"*ctual funeral
expenses' are those
which were actually
incurred in
connection with the
interment or burial of
the deceased and
paid for from the
estate of said
deceased.
0uneral expenses
include!
a3 osts of coffin,
tombstone,
mausoleum, and
burial lotC
b3 0uneral parlor
feesC
c3 =ourning
clothing of the
surviving spouse
and the
unmarried minor
childrenC
d3 osts of obituary
noticesC and
e3 6xpenses during
the wake.
The following cannot
be deducted under
funeral expenses!
a3 ash
advances
of the
surviving
spouse
and the
heirsC
b3 6xpense
s paid by
the
relatives
and
friendsC
and
c3 6xpense
s after
the
burial.


0J :edica! expenses
5rovided, that the
following reAuisites
are met!
a. =ust be incurred
by the decedent
within one (13
year prior to his
death
b. =ust be duly
substantiated by
receiptsC and
c. =ust not exceed
5?BB, BBB.BB.
3J 8udicia! expenses
of the
testa$entar# or
intestate
proceedin+s
Include
"administration
expenses' to those
actually incurred in
the administration of
the estate.
6xamples!
a3 fees of the
executor or
administratorC
b3 attorney&s feesC
c3 accountant&s
feesC
d3 court feesC
e3 salaries of
employeesC and
f3 *ll other
expense related
to the
administration of
the estate.
Note:
6xpenses not
essential to the proper
settlement of the estate
but incurred for the
individual benefit of the
heirs, legatees, or
devisees are not allowed
as deductions.
7) Claims against
the de&edentBs
estate
:ebts or
obli3ations of the
,ece,ent that is
enforceable a3ainst
the estate provi,e,
that the followin3
reAuisites are metF
a.& 2hey were
contracte, in 3oo,
faith an, for an
a,eAuate an, full
consi,eration in
money or moneys
worth.
b.3They must be
existing against the
estate.
c.3 They must be
legally enforceable
obligations of the
decedent and ought
to be enforced by the
claimants.
d.3They must be
reasonably certain in
amountC andC
e.3*t the time the
indebtedness was
incurred, the debt
instrument was duly
notari#ed and if the
loan was contracted
within three (>3 years
before the death of
the decedent, the
administrator or
executor shall submit
a statement showing
the disposition of the
proceeds of the loan.
5J C!ai$s a+ainst
the inso!(ent persons
!e5uisites for
dedu&ti/ility:
*. The amount of
said claims has
been initially
included as part
of the gross
estateC and
I. The incapacity of
the debtors to
pay their
obligations is
proven and not
merely alleged.
6J Bnpaid
$ort+a+es inde%tedness
!e5uisites for
dedu&ti/ility:
*. The fair market value
of the property
mortgaged without
deducting the
mortgage
indebtedness has
been initially included
as part of his gross
estateC and
I. The mortgage
indebtedness was
contracted in good
faith and for an
adeAuate and full
consideration in
money or money&s
worth.
>J Casua!t# Losses
They
include all
losses
incurred
during the
settlement
of the
estate
arising from
fires,
storms,
shipwreck
or other
casualties
or from
robbery,
theft or
embe##lem
ent.
5rovided, that the
following reAuisites are
metF
a.& +osses not
compensated by an
insurance or otherwiseC
b.3 +osses not have
been claimed as a
deduction for income tax
purposesC and
c.3 +osses incurred
not later than the last day
for payment of the estate
tax (/ months from death3.
?J Bnpaid Taxes
Nnpaid
income tax
on income
due or
received
before
death of the
decedent,
and real
property
taxes,
which have
accrued
prior to the
death of the
decedent
(real
property
taxes
accrued at
the
beginning
of the year
but may be
paid before
or at the
end of each
Auarter3 are
deductible.
Income
taxes upon
income
received
after the
death of the
decedent,
or property
taxes not
accrued
before his
death, or
any estate
tax cannot
be
deducted
because
they are
chargeable
to the
income of
the estate.
GJ ;anishin+
deduction Ipropert# )
pre(ious!# taxedJ
Is an amount allowed
to reduce the taxable
estate of a decedent
where the property!
a. received by
him from prior
decedent by gift,
beAuest, devise
or inheritance, or
b. transferred to
him by gift, has
been the object
of previous
transfer
deduction.
It is so-called a
vanishing deduction
because the rate of
deduction gradually
diminishes and
entirely vanishes
depending upon the
time interval between
the two (,3
successive transfers.
There are two (,3
factors necessary in
vanishing deduction,
these areC
a. There are two
(,3 deceased
persons and the
first is the
transferor or
there is
donation and
the donee
subseAuently
diesC
b. The second
decedent dies
within five (?3
years after the
death of the
prior decedent
or in the case of
gifts the
decedent @
donee dies
within the same
period after the
date of the gift.
Rationa!e!
The
deduction operates to
ease the harshness
of successive
taxation of the same
property within a
relatively short period
of time.

Re,uisites for
deducti%i!it#:
!. 2he present ,ece,ent must
have acAuire, the property by
inheritance or by ,onation.
,. The property must have
been acAuired within five (?3
years prior to the death of the
present decedent
>. The property must have
formed part of the gross estate
of the prior decedent if acAuired
by inheritance, or the taxable
gift of the donor if acAuired by
donation.
8. The estate tax or the donor&s
tax, as the case may be, must
have been paid on the previous
transfer.
?. The property must be
identified as the one received
from the prior decedent or from
the donor, as the case may beC
and
/. The estate of the prior
decedent must not have
previously availed of the
vanishing deduction on the
subject property.
Procedure in
co$putin+ (anishin+
deductions:
1. Halue taken of property
previously taxed
+ess!=ortgage paid by the
present decedent on
property previously
mortgaged by prior
decedent L donor, if any (Ist
deduction3
R Initial basis
,. Initial basis P 6xpenses,
etc and transfer for public
purpose
value of the gross estate of
present decedent

O(
n,
,e,uction
>. Initial Iasis
+ess! ,
nd
deduction
0inal Iasis
=ultiplied by rate deduction
(sec.-/ (*.,3, <I)3
H*<IS%I<; K6KNTI9<
/DJ Transfer for
pu%!ic use
Re,uisites:
1. The disposition must
be testamentary in character.
,. To take effect after
death.
>. In favor of the
government of the 5hilippines,
or any political subdivision
thereof.
1. 6xclusively for public
purpose.
//J 9a$i!# ho$e
)efers to the dwelling
house, including the
land on which it is
situate,, where the
husban, an, wife, or
an unmarrie, person
who is the hea, of
the family an,
members of their
imme,iate family
resi,es as certifie,
by the 9aran3ay
Captain of the
locality.
0or the purpose of
availing of a family
home deduction to
the extent provided
by law, a person may
constitute only one
family home.
The amount
deductible is
eAuivalent to the
current fair market
value of the
decedent&s family
home if said current
fair market value
exceeds P/,
DDD,DDD.DD., the
excess shall be
subject to estate tax.

Re,uisites to %e
deducti%!e:
a. The family home
must be the actual residential
home of the decedent and his
family at the time of his death
as certified by the barangay
aptain of the locality where
the family is situated.
b. The total value of
the family home must be
included in the gross estate of
the decedent.
c. The allowable
deduction must be in an
amount eAuivalent to the
current fair market value of the
family home as declared or
included in the gross estate not
exceeding 51, BBB,BBB.BB.

/0J Standard
deduction
e,ui(a!ent to P/,
DDD,DDD.DD (does
not include the 5
,BB,BBB.BB
exemption3.
/3J A$ounts
recei(ed %# heirs
under RA N&.4G/>
fro$ the decedentHs
e$p!o#er as a
conse,uence of the
death of the
decedent )
e$p!o#ee pro(ided
that such a$ount is
inc!uded in the
+ross estate of the
decedent.
/4J Net share of
the sur(i(in+ spouse in the
con'u+a! 1 co$$unit#
propert#.
/5J Tax credit for
estate tax paid to a forei+n
countr#.
..J If decedent is a non )
resident a!ien.
The deductions
allowed to citi#ens or residents
of the 5hilippines are also
extended to a non-resident
alien decedent with respect to
his estates situated in the
5hilippines at the time of his
death.
In case of deductions
for expenses, losses,
indebtedness and taxes, the
amount of the allowable
deduction is limited only to the
proportion of such deductions
with the value of such part of
his gross estate which at the
time of his death, is situated in
the 5hilippines, bears to the
value of his entire gross estate
wherever situated. (Sec. -/ (I33
9or$u!a:
Phi!ippine Gross Estate x
Deductions
C!ai$ed
Entire Gross estate
R allowable deduction of non-
resident estate
*s a prereAuisite to
the deduction, it must be
included in the return reAuired
to be filed the value at the time
of his death, of that part of the
gross estate of the non-resident
not situated in the 5hilippines,
to determine the ratable portion
of the deduction for expenses
allowable.
Tax Credit
The estate tax
imposed by the tax code shall
be credited with the amount of
any estate tax paid to a foreign
country.
Li$itations on credit!
*.3The tax credit limit
for estate taxes paid to one
foreign country is determined
by the following!
Kecedent&s <et 6state situated
in a foreign country x 5hil.
6state tax
6ntire net estate
R T*P )6KIT +I=IT
I.3 The tax credit limit
for estate taxes paid to two or
more countries is determined
as follows!
Kecedent&s net estate situated
outside of the 5hil P 5hil.
6state tax
6ntire net 6state
RTax redit limit
Note:
1.3 Nnder limitation * the
allowable tax credit is the lower
amount between the tax cre,it
limit an, the estate tax pai, to
the forei3n country.
,.3 under limitation I the
allowable tax credit is the lower
amount between the tax cre,it
limit compute, un,er (A& an,
that compute, un,er (9&
;a!uation of Propert#
The estate shall be
appraised at its 9AIR :ARCET
;ALBE AT TLE TI:E &9
DEATL of the decedent
(sec.--, <I)3
This is regardless of
any subseAuent contingency
affecting the estate. (+oren'o
vs. Posa,as, -. Phil. "%"&
Transfers Exe$pt fro$
Estate Tax
1.3 The merger or
usufruct in the owner
of the naked title.
,.3 The transmission or
delivery of the
inheritance or legacy
of the fiduciary heir or
legatee to the
feideicomissary.
>.3 The transmission
from the first heir,
legatee or donee in
favor of another
beneficiary, in
accordance with the
will of the
predecessor.
8.3 *ll beAuests, devices,
legacies or transfer to
social welfare,
cultural and
charitable institutions
no part of the net
income pf which
inures to the benefit
of any individual.
5rovided, that
not more than >BO of
the said beAuests,
legacies or transfers
shall be used by such
institutions for
administration
purposes.
9i!in+ of Notice of Death
$here the gross
value of the estate exceeds
twenty thousand pesos (5
,B,BBB.BB3 although exempt,
the executor, administrator, or
any of the legal heirs shall give,
within two (,3 months after the
decedent&s death or within like
period after the executor or
administrator Aualifies as such,
a written notice thereof, to the
ommissioner of Internal
)evenue.(sec. -., <I)3

9i!in+ of Return and Pa#$ent
of Tax
!.& 9y whomR
*n estate tax return
under oath is reAuired
by law to be filed by
the executor,
administrator, or any
of the legal heirsC
a.3 $here the
gross value
of the
estate
exceeds
p,BB,
BBB.BB
though
exempt
from the
estate taxC
or
b.3 )egardless
of the gross
value of the
estate,
where the
said estate
consists of
registered
or
registrable
real
property,
such as
real
property,
motor
vehicle,
shares of
stock or
other
similar
property for
which a
clearance
from the
Iureau of
Internal
)evenue is
reAuired as
a condition
precedent
for the
transfer of
ownership
thereof in
the name of
the
transferee.
(.& Ehen to fileR
The return shall
be filed within six
(/3 months from
the decedent&s
death.
The
ommissioner
shall have the
authority to
grant, in
meritorious
cases, a
reasonable
extension not
exceeding thirty
(>B3 days for
filing the return.
The executor or
the
administrator, or
any of the legal
heirs, as the
case may be, is
reAuired to give
a written notice
of death to the
commissioner
within two (,3
months after the
decedent&s
death or after
Aualifying as
such executor or
administrator.
>.3 Ehere to fileR
6xcept in cases
where the ommissioner
of the Internal )evenue
otherwise permits, the
return shall be filed with an
authori#ed agent bank or
the )evenue Kistrict
9fficer, )evenue
ollection 9fficer, or duly
authori#ed treasurer of the
city or municipality where
the decedent was
domiciled at the time of his
death, or if there be no
legal residence in the
5hilippines, with the 9ffice
of the ommissioner of
Internal )evenue.
..&CopiesF
The return shall be
filed in triplicate, two (,3 for
the II) and one (13 copy
for the taxpayer.
Lia%i!it# for Pa#$ent of
Estate Tax
The estate tax
shall be paid by
the executor or
administrator
who is primarily
liable to pay it.
(Commissioner
vs. Gon'ales, !)
#CA $%$&
before delivery
to any
beneficiary of his
distributive
shares. (sec. .1
(c3, <I)3.
*fter due
payment, the
executor or
administrator
shall be
discharged from
personal liability.
(Collector vs. /c
Grath ! #CA
-")&
The beneficiary
shall, to the
extent of his
distributive
share, be
subsidiarily liable
for the portion of
the estate tax as
his distributive
share bears to
the value of the
total net estate.
(sec..1 (c3,
<I)3
:easures to Insure Pa#$ent
of Estate Tax
a. In judicial
settlement of estates, the court
is reAuired to furnish the
commissioner of Internal
)evenue a certified copy of the
schedule of participation and
the court order approving the
same within >B days after its
promulgation. (sec. .1(b33C
b. The estate tax
shall be paid by the executor or
administrator before delivery to
any beneficiary his distributive
share of the estate (sec. .1
(c33. %e may be discharged
from personal liability for
deficiency in the estate tax only
after written application to the
commissioner and upon
determination that no such
deficiency appears. (sec. .,3
c. <o judge shall
authori#e the executor or
judicial administrator to deliver
a distributive share to any party
interested in the estate unless a
certification from the
ommissioner that the estate
tax has been paid as shown.
(sec..83
d. )egisters of Keeds
shall not register in the )egistry
of property any document
transferring real property any
document transferring real
property or real right therein or
any chattel mortgage, by way of
gift inter vivos or mortis causa,
legacy or inheritance, unless
certification from the
commissioner that the tax has
been paid and the y shall
immediately notify the
ommissioner, )egional
Kirector, )evenue Kistrict
9fficer, or )evenue collection
9fficer or treasurer of the city or
municipality where their officer
are located, of the non-payment
of the tax discovered by them.
e. *ny lawyer notary
public, or any ;overnment
9fficer who, by reason of his
official duties, intervenes in the
preparation or
acknowledgement of
documents regarding partition
or disposal of donation inter
vivos or mortis causa, legacy or
inheritance, shall have the duty
of furnishing the ommissioner,
etc., with copies of such
documents and any information
whatsoever, which may
facilitate the collection of the
aforementioned tax.
f .<either shall a
debtor of a deceased pay his
debts to the heirs, legatees,
executor or administrator of his
creditor, unless a certification of
the ommissioner that the tax
fixed has been paid is shownC
but he may pay the executor or
judicial administrator without
said certification if the credit is
included in the inventory of the
estate of the deceased.
g. orporations,
sociedad anonima,
partnerships, business or
industry organi#ed in the
5hilippines shall not transfer in
their books any shares
obligations, bonds or rights by
way of gift inter vivos or mortis
causa, legacy or inheritance to
the new owner unless a
certification from the
ommissioner that the taxes
fixed and due thereon have
been is shownC and
h. If a bank has
knowledge of the death of a
person who maintained a bank
deposit account alone or jointly
with another, it shall not allow
any withdrawal from the said
joint deposit account unless the
ommissioner has certified that
the estate taxes imposed
thereon have been paid.
%owever, the administrator of
the estate or any of the heirs of
the decedent may, upon
authori#ation by the
ommissioner of Internal
)evenue withdraw an amount
not exceeding twenty thousand
pesos (5 ,B,BB.BB3 without the
said certification . 0or this
purpose, all withdrawal slips
shall contain a statement to the
effect that all of the joint
depositors are still living at the
time of withdrawal by any on e
of the joint depositors and such
statement shall be under oath.
i. The estate tax
together with interest, penalties,
and costs that may accrue in
addition thereto constitutes a
lien upon all property and rights
to property belonging to the
taxpayer. The lien attaches
when the taxpayer neglects or
refuses to pay after demand.
(sec. ,1.3
Procedure for Co$putin+ Net
Estate and Estate Tax
9&R:BLA!
;ross 6state
+6SS! *llowable deductions
6state after allowable
deductions
+6SS! Z net share of surviving
spouse on conjugal or
community property (if
applicable3
0amily home
allowance (if
applicable3
R <et estate of decedent
+6SS! 5,BB, BBB.BB
exemptions
R Taxable net estate P Tax
)ate in section -8
R *mount of estate tax due
*LEN TLE GR&SS ESTATE
EKCEEDS P 0,DDD,DDD.DD,
TLE ESTATE TAK RETBRN
SLALL .E ACC&:PANIED
.O A STATE:ENT, *LICL IS
CERTI9IED .O AN
INDEPENDENT PB.LIC
ACC&BNTANT STATING:
1. The itemi#ed
assets of the
decedent with its
corresponding
gross value at the
time of his death or
in the case of a
non-resident, not
citi#en of the
5hilippines that part
of his gross estate
situated in the
5hilippines.
,. The itemi#ed
deductions from the
gross estate.
>. The amount of
tax due, whether
paid or still due and
outstanding.
Pa#$ent of the Estate Tax:
The estate tax shall
be paid at the time when the
estate tax return is filed.
$hen the
ommissioner finds that the
payment of the estate tax on
the due date would impose
undue hardships upon the
estate, or any heirC
*.3The payment of
the estate tax may be extended
for a period not to exceed five
years, if there is a judicial
settlement of the estateC or
b.3 The payment of
the estate tax may be extended
for a period not to exceed two
years if there is an extra-judicial
settlement of the estate.
Conditions for
Extension of Ti$e Pa#$ent:
*.3 The taxpayer is not guilty of
negligence, intentional
disregard of rules and
regulations, or fraudC otherwise,
no extension maybe grantedC
and
I.3 The executor, administrator,
or beneficiary may be reAuired
to furnish a performance bond
in an amount not exceeding
double the amount of the tax
due.

KISTI<TI9< I6T$66< K9<9)&S T*P *<K 6ST*T6 T*P
K9<9)&S T*P 6ST*T6 T*P
Tax on the privilege to transmit
property during the lifetime of the
donor
Tax on the privilege to transmit
property upon one&s death
Tax rates are lower Tax rates are higher
6xemption is only 5 1BB,BBB.BB Tax exemption is 5,BB,BBB.BB
<otice of donation is not reAuired <otice of death is reAuired
6xtension of payment is not
provided
6xtension of payment may be
granted by the ommissioner of
Internal )evenue
5ayable within >B days from the
date of gift
5ayable within / months from the
date of death
Imposed on the net gift Imposed on the net estate
:eanin+ of donation or +ift.
Is an act of liberality whereby a person disposes gratuitously
of a thing or right in favor of another who accepts it.
0or tax purposes, the term has a much wider meaning, it
includes!
*. any transfer of property by gift, except in forced sales and
in the sale of real property which is a capital asset, for less than
and adeAuate and full consideration in money or money&s worth.
(sec. 1BB3
I. ondonation or remission of debt, where the creditor
merely desires to benefit a debtor and without any consideration
therefore cancels the debt.
PARTIES T& A D&NATI&N !
"onor
The 5erson who disposes of his property or right.
Donee
The 5erson who receives the property or right.
@<$T M$G;E "ON$TE"H
T%I<; or )I;%T
CINDS &9 D&NATI&NS:
Accordin+ to its date of effecti(it#:
/.J Donation nter vivos
If made between living persons to take effect during the
lifetime of the donor.
0.J Donation Mortis Causa
If made in the nature of a testamentary disposition that is it
shall take effect at the time of death of the donor.
D&NATI&NS N&T SB.8ECT T& D&N&RHS TAK
9nly donations inter vivos are subject to donor&s tax.
1. Konations mortis causa
Is subject to estate tax. The laws on succession govern
them.
,. Konation Inter vivos

9f the amount of 51BB, BBB.BB or less and those declared
exempt by the tax code and special laws are also not subject
to Konor&s tax.
:eanin+ of +ift tax
:onors tax is a tax imposed on the transfer without the
consideration of property between two or more persons who are living
at the time the transfer is made.
CINDS &9 GI9T TAKES:
They are!
1.3 Konor&s tax or tax levied on the act of givingC it supplements
the estate taxC and
,.3 Konee&s tax or tax levied on the act of receivingC it was
formerly the counterpart of the inheritance tax, which has
been integrated into an estate tax.
Note: Ioth taxes have been integrated into a donor&s tax.
8A2=> O7 GI72 2A?
It is an excise (privilege3 tax, imposed on the privilege of the
donor to give or on the privilege of the donee to receive. It is
not a tax on the property as such because its imposition
does not rest upon general ownership.
The tax is imposed without reference to the death of the
donor unlike in the case of estate tax.
P=PO#> O7 GI72 2A?
1.3 The gift tax was enacted originally to supplement the estate
and inheritance taxes by preventing their avoidance through
the taxation of gifts inter vivos.
,.3 The donor&s tax is also intended to prevent the avoidance of
income tax through the device of splitting income among
numerousLdifferent donees with the donor thereby escaping
the effect of the progressive rates of income taxation.
PR&PERTO INCLBDED IN TLE TER: >1.TF
IAJ. In the case of resident citi=ens, non"resident citi=ens and
resident a!iens:
1. )eal property within and without the 5hilippines.
,. Tangible personal property within and without the 5hilippinesC
and
>. Intangible personal property within and without the 5hilippines.
I..J In the case of non"resident a!iens!
1. )eal property within the 5hilippines.
,. Tangible personal property within the 5hilippines.
>. Intangible personal property within the 5hilippines, unless there
is reciprocity in which case, it is not taxable!
Note:
The specific items includible in the E+ross estateF are
applicable to and are embraced by the term E+iftF.
TRANS9ERS SB.8ECT T& D&N&RHS TAK:
Konor&s tax shall apply!
*. whether the transfer is in trust or otherwiseC
I. whether the gift is direct or indirect (remissionLcondonation of
debt3
. whether the property is real or personal, tangible or intangible.
Note:
It includes not only the transfer of ownership in the fullest
sense but also the transfer of any right or interest in property but
less than title.
RE2BISITES &9 A TAKA.LE GI9T:
1.3 CAPACITO of the donor to make the donationC
,.3 D&NATI;E INTENT or INTENT on the part of the donor to
make a giftC
>.3 DELI;ERO, whether actual or constructive, of the giftC and
8.3 ACCEPTANCE of the gift by the donee.
Note:
*. the donee, unlike the donor need not be capacitated.
I. donor&s tax applies now to both natural and judicial
persons.
. donative intent must be present in direct gift but with
respect to indirect gift, e.g. transfer of property for less than an
adeAuate and full consideration, donative intent is superfluous.
Thus, donative intent is not always essential to constitute a gift.
LA* APPLICA.LE:
The law in force at the ti$e of the perfection 1 co$p!etion
of the donation shall govern the imposition of donor&s tax.
#2A8G>
* person who is not a brother, sister, spouse, ancestor and
lineal descendant or of a relative by consanguinity in the
collateral within the 8
th
civil degree.
TAK PAOA.LE *LEN TLE D&N&R IS A STRANGER:

$hen the donee is a stranger, the tax payable by the donor
shall be 3DQ of the net gifts.
Note:
If the beneficiary is not a stranger, the applicable rate is that
provided in sec..., <I).

P&LITICAL C&NTRI.BTI&NS
*ny contribution in cash or in kind to any candidate, political
party, or coalition of parties for campaign purposes, shall be
governed by the 6lection code.
:EANING &9 NET GI9T
Net +ift
=eans the total amount of gifts less the allowable deductions
and specific exemptions.
The donor&s tax is computed on the basis of the total net gifts
made during the calendar year.
ALL&*A.LE DEDBCTI&NS:
Gifts :ade %# a Resident!
a.J Kowries or gifts made on account of marriage before its celebration
or within one year thereafter by parents to each of their legitimate,
illegitimate or adopted children to the extent of the first 51B,BBB.BB.
Re,uisites:
1. The donation must be given on account of
marriage.
2. The parent must give it to his child.
3. The child must be either the legitimate, recogni#ed
natural or legally adopted child of the donor, andC
4. It must be given within one year before or after the
celebration of the marriage.
%.J ;ifts made to or for the use of the <ational ;overnment or any of
its agencies which is not conducted for profit, or to any political
subdivision of the said government.
c.J ;ifts in favor of educational, charitable, religious, cultural or social
welfare corporation, institutions, foundations, trust or philanthropic
organi#ation, research institution or organi#ation, or accredited non-
government organi#ation. 5rovided, that no more than >BO of said
gifts shall be used by such donee for administration purposes.
Note:
0or purposes of exemption, a non-profit educational andLor
charitable corporation, institution, accredited non-government
organi#ation, trust or philanthropic organi#ation is defined as!
school, trust or university andL or charitable corporation,
foundation trust or philanthropic organi#ation andL or
research institution or organi#ation incorporated as a non-
stock entity!
paying no dividends.
governed by trustees who receives no compensationC and
devoting all its income to the accomplishment and promotion
of the purposes enumerated in its articles of incorporation.

d.J 6ncumbrances on the property donated if assumed by the doneeC
and
e.J Those specifically provided by the donee as a diminution of the
property donated.
f.J The first 51BB, BBB.BB value of the gift (exemption3.
+.J Tax credit for donor&s tax paid to a foreign country.
1ifts made /y a Non?!esident not a CitiDen of the Philippines
*.3 ;ifts made to or for the use of the <ational ;overnment or any
entity created by of its agencies which is not conducted for
profit, or to any political subdivision of the said government.
I.3 ;ifts in favor of educational, charitable, religious, cultural or
social welfare corporation, institution, foundations trust or
philanthropic organi#ation, research organi#ation or institution or
accredited <;9. 5rovided, that no more than >BO of said gifts
shall be used by such donee for administration purposes.
.3 0irst 51BB, BBB.BB of the gift. (6xemption3
Note:
1. Intangible personal property in the gross gift of a N&N"
RESIDENT ALIEN donor shall be taxable in the 5hilippines, if the
PRINCIPLE &9 RECIPR&CITO is not cogni#able.
,. Intangible personal properties considered situated in the
5hilippines.
0ranchise which must be exercised in the
5hilippines
Shares of stocks issued by any corporation or
sociedad anonima organi#ed or constituted in
the 5hilippines in accordance with its laws.
Shares of stocks issued by any foreign
corporation -?O of the business of which is
situated in the 5hilippines.
Shares of stock issued by a foreign
corporation, if such shares, obligations, or
bonds, have acAuired a business situs in the
5hilippinesC and
Shares or rights in any partnership, business
or industry established in the 5hilippines.
>. ;&ID D&NATI&NS ARE N&T SB.8ECT T& D&N&RHS
TAK
Such as!
Ietween husband and wife, even if the relationship has
not been solemni#ed.
Ietween persons guilty of adultery or concubinage.
Ietween those found guilty of the same criminal
offenses.
Ietween those made to a public officer or his wife,
descendants, ascendants by reason of his office.
8. )enunciation of inheritance in favor of a co-heir is not subject
to donor&s tax but, if it is renounced in favor of a third person it shall be
subject to donor&s tax.
T$2 C!E"T .O! "ONO!BS T$2ES P$" TO $ .O!E1N
CO=NT!G
1.3 Konor was a 0ilipino citi#en or resident alien, at the time of
foreign donation
,.3 Konor&s taxes of any character and description are imposed
and paid by the authority of a foreign country.
Li$itations:
*.3 0or donor&s tax paid to one forei+n countr#N
The amount of tax credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax against
which credit is taken which the net gifts situated within such
country taxable under the <ational Internal )evenue ode bears
to his entire net gift, and
I.3 0or donor&s tax paid to to or $ore forei+n countries:
The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the
donor&s net gift situated outside the 5hilippines taxable under the
<ational Internal )evenue ode bears to his entire net gift.
9&R:BLA:
1. Konor&s Tax 5aid to 1 0oreign ountry
<et gift situated in a foreign country P 5hil. Konor&s Tax R Tax redit
+imit
6ntire net gifts

,. Konor&s Taxes paid to , or more 0oreign ountries
<et gifts outside the 5hilippines P 5hil. Konor&s Tax R Tax redit +imit
6ntire net gifts
Note:
Nnder limitation * the allowable tax credit limit is the
L&*ER A:&BNT between the tax credit limit and the gift
tax paid to the foreign country.
Nnder limitation I the allowable tax credit is the L&*ER
A:&BNT between the tax creditsC limit computed under *
and that computed Nnder I.