Ateneo de Zamboanga University

College of Law
Course Outline
Tax I

INCOME TAX


1. Definitions

Section 22 (A) to (I), (Z), (GG), and (HH), Tax Code
Sections 25 (A)(1), 31, 35 (B), and 39 (A), Tax Code

Resident citizens and resident aliens
Garrison vs. Court of Appeals (July 19, 1990)
Non-resident citizens
RR 1-79 (January 8, 1979) (Section 2 only)
RR 5-01 (July 31, 2001)
BIR Ruling 33-00 (September 5, 2000)
BIR Ruling DA 095-05 (March 29, 2005)
Non-resident aliens engaged in business in the Philippines
Sec. 5 & 6, RR 2
Corporations
AFISCO Insurance Corporation vs. Court of Appeals (January 25, 1999)
Pascual vs. Commissioner of Internal Revenue (October 18, 1988)
Obillos vs. Commissioner of Internal Revenue (October 29, 1985)
Oa vs. Commissioner of Internal Revenue (May 25, 1972)

RR 10-2012 (June 1, 2012)
BIR Ruling 108-2010 (October 19, 2010)

2. Income

In general

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-
appellants,
vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO
CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees.

Doctrine: The essential difference between capital and income is that capital is a fund;
income is a flow.
Facts: Madrigal and Paterno were legally married under conjugal partnerships (sociedad de
gananciales). On February 1915, Madrigal filed sworn declaration with the Collector of
Internal Revenue, showing, his total net income for the year 1914. Subsequently Madrigal
submitted the claim that the net income did not represent his income for the year 1914, but
was in fact the income of the conjugal partnership, and that in computing and assessing the
additional income tax, the income declared by Vicente Madrigal should be divided into two
equal parts.The Attorney-General of the Philippine Islands held with the petitioner Madrigal.
The United States Commissioner of Internal Revenue reversed. After payment under
protest, action was begun by Madrigal and Susana Paterno in the Court of First Instance of
the city of Manila for the recovery of the sum alleged to have been wrongfully and illegally
collected by the defendants from the plaintiff, Madrigal. The dispute between the plaintiffs
and the defendants concerned the additional tax provided for in the Income Tax Law. The
trial court found in favor of defendants.
Issue: Difference of income and capital.

Ruling:
The essential difference between capital and income is that capital is a fund; income is a
flow. A fund of property existing at an instant of time is called capital. A flow of services
rendered by that capital by the payment of money from it or any other benefit rendered by a
fund of capital in relation to such fund through a period of time is called an income. Capital
is wealth, while income is the service of wealth.

Other Doctrines:

MADRIGALS CONTENTION IS ERRONEOUS: Paterno has an inchoate right in the
property of Madrigal during the life of the conjugal partnership, an interest in the ultimate
property rights and in the ultimate ownership of property acquired as income after such
income has become capital. Paterno has no absolute right to one-half the income of the
conjugal partnership; hence, she cannot make a separate return in order to receive the
benefit of the exemption which would arise by reason of the additional tax. Moreover, the
Income Tax Law does not look on the spouses as individual partners in an ordinary
partnership. The aims and purposes of the Income Tax Law must be given effect.

FREDERICK C. FISHER, plaintiff-appellant,
vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.

Doctrine: Stock dividends are not income to stockholders.

Facts: Fisher was a stockholder in Philippine American Drug Company. The
corporationdeclared a "stock dividend" from which Fisher received stock divided of
P24,800. Thereafter, Fisher, upon demand of the appellee, paid under protest, income tax on
said stock dividend. The present action was instituted to recover said amount. Fisher claims
that stock dividends represent capital and not income which can be subjected to income
tax.The appellee argues that Act No. 2833 which impose tax on the stock dividend does not
violate the provisions of the Jones Law (equivalent of Constitution on that time).

Issue: W/N stock dividends are income, hence subject to income tax.

Ruling: Stock dividends represent undistributed increase in the capital of corporations for a
particular period which show the increased interest or proportional shares in the capital of
each stockholder. Additional stock is issued showing the increase in the actual capital, or
property, or assets of the corporation. The stockholder who receives a stock dividend has
received nothing but a representation of his increased interest in the capital of the
corporation. All the property or capital of the corporation still belongs to the corporation.
There has been no separation of the interest of the stockholder from the general capital of
the corporation. The stockholder, by virtue of the stock dividend, has no separate or
individual control over the interest represented. The receipt of a stock dividend do not
increase the money received of a stockholder nor his cash account. It simply shows that
there has been an increase in the amount of the capital of the corporation during the period.
Income taxation intended to tax only the "income" of corporations, firms or individuals
meaning money received for services, interest, or profit from investments. The essential
and controlling fact is that the stockholder has received nothing out of the
company's assets for his separate use and benefit; on the contrary, every dollar of his
original investment, together with whatever accretions and accumulations resulting from
employment of his money and that of the other stockholders in the business of the
company, still remains the property of the company.

LIMPAN INVESTMENT CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.

Doctrine: Basically, when income should be declared (see Ruling)

Facts: Limpan Investment Corporation is engaged in the business of leasing real properties.
It filed its 1956 and 1957 income tax returns, and paid the corresponding taxes therefor. The
examiners of the Bureau of Internal Revenue conducted an investigation of the income tax
returns and discovered underdeclared rental incomes and excessive depreciation of its
buildings. Commissioner of Internal Revenue issued its letter-assessment and demand for
payment of deficiency income tax and surcharge against corporation. Petitioner corporation
reconsideration but the latter denied; hence, the corporation filed its petition for review
before the Tax Appeals court. It disclaimed having received or collected the alleged
unreported rental income because (1) the previous owners of the leased building has to
collect part of the total rentals in 1956 to apply to their payment of rental in the land and (2)
its president who collected and received the rentals did not turn the same over to petitioner
corporation in 1957 but so only in 1959 and (3) that a tenant deposited in court his rentals
over which the corporation had no actual or constructive control and (4) that a sub-tenant
paid an amount which ought not be declared as rental income. Petitioner also claimed that
the rates of depreciation in the assessment are unfair and inaccurate. Tax Court upheld the
Commissioner.

Issue: W/N there are undeclared rental income.

Ruling: YES. The appeal is without merit. Petitioner admitted that it had undeclared income
found by the BIR examiners as unreported rental income for the year 1956 and 1957,
contrary to its original claim. The excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de
Lim retained ownership of the lands and only later transferred or disposed of the ownership
of the buildings existing thereon to petitioner corporation, and the alleged verbal agreement
to turn over to petitioner corporation six percent (6%) of the value of its properties to be
applied to the rentals of the land and in exchange for whatever rentals they may collect from
the tenants is unusual and uncorroborated by the alleged transferors, or by any document or
unbiased evidence. Petitioner's denial and explanation of the non-receipt of the unreported
income is not substantiated satisfactorily. Isabelo P. Lim was not presented as witness. The
withdrawal in 1958 of the deposits in court pertaining to the rental income is no sufficient
justification for the non-declaration, since the deposit was because of the refusal of
petitioner to accept the same; hence, petitioner is deemed to have constructively received
such rentals. The payment by the sub-tenant should have been reported as rental income,
since it is income regardless of its source.
Conwi vs. Court of Tax Appeals ( August 31, 1992) JOSH
Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (March 28, 1955)JOSH
Murphy vs. Internal Revenue Service 493 F3rd 170 US Court of Appeals, District of Columbia
Circuit (July 3, 2007)JOSH

Statutory inclusions


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Section 32 (A), Tax Code KHA
SEC. 32. Gross Income. -
(A) General Definition. - Except when otherwise provided in this Title, gross income means all
income derived from whatever source, including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a
profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional
partnership.


Compensation for services
Old Colony Trust Co. vs. Commissioner of Internal Revenue, 279 US 716 (June 3, 1929)KHA

Brief Fact Summary. Wood was president of the American Woolen Company. The company adopted a resolution
wherein they would pay the tax obligations of Wood and other officers.
Synopsis of Rule of Law. The discharge of a taxpayers obligation by a third party is equivalent to direct receipt by the taxpayer.



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Facts. William Wood was president of the American Woolen Company for the years 1918 through 1920. The company instated a
policy for 1919 and 1920 wherein the company would pay the taxes of the president and other company officers. The company paid
$681,169.88 for 1918 and $351,179.27 for 1919 on behalf of Wood. The Board of Tax Appeals held that these amounts paid were
income of Wood.

Issue. Were the taxes paid by the company additional income of Wood?

Held. The Supreme Court of the United States affirmed the lower court and holding that
the taxes paid were income to Wood.The Court notes that Wood and other employees
received a direct benefit when their tax obligation was discharged by the company.
Wood received a benefit in exchange for his services to the company. This was clearly
a taxable gain.

Rents
Helvering vs. Bruun, 309 US 461 (March 25, 1940)KHA
Facts: A landlord repossessed land from a tenant who had defaulted in the eighteenth
year of a 99-year lease. During the course of the lease, the tenant had torn down an old building (in which
the landlords adjusted basis was now $12,811.43) and built a new one (whose value was now
$64,245.68). The lease had specified that the landlord was not required to compensate the tenant for
these improvements. Thus, the government argued that upon repossession the landlord realized a gain of
$51,434.25. The landlord argued that there was no realization of the property because no transaction had
occurred, and because the improvement of the property that created the gain was not "severable" from
the landlord's original capital.
Issue: Whether a landlord does realize a taxable gain when he repossesses property improved by a
tenant.
Held:The court held for the government: the value of the improvements was realized by the taxpayer in
the year in which the forfeiture occurred. The improvements, the Court observed, were received by the
taxpayer "as a result of a business transaction," namely, the leasing of the taxpayer's land. It was not
necessary to the recognition of gain that the improvements be severable from the land; all that had to be
shown was that the taxpayer had acquired valuable assets from his lease in exchange for the use of his
property. The medium of exchangewhether cash or kind, and whether separately disposable or
"affixed"--was immaterial as far as the realization criterion was concerned. In effect, the improvements
represented rent, or rather a payment in lieu of rent, which was taxable to the landlord regardless of the
form in which it was received. "Severance" is not necessary for realization.It is not necessary to
recognition of taxable gain that he should be able to sever the improvement begetting the gain from his
original capital. If that were necessary, no income could arise from the exchange of property, whereas
such gain has always been recognized as realized taxable gain."The Court added that, while not all
economic gain is "realized" for taxation purposes, realization does not require that the economic gain be
in "cash derived from the sale of an asset". Realization can also arise from property exchange; relief of
indebtedness; or other transactions yielding profite.g. by receiving an asset with enhanced value in a
transaction, even where severance does not occur (i.e. even where "the gain is a portion of the value of
property received by the taxpayer in the transaction").


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Dividends


SECTION 73. Distribution of Dividends or Assets by Corporations. -

"(A) Definition of Dividends. - The term 'dividends' when used in this Title means any distribution
made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders,
whether in money or in other property.

"Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a
deductible loss, as the case may be.

Commissioner of Internal Revenue vs. Court of Appeals (January 20, 1999)ALMAN

Facts: Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States,
formed the corporation A. Soriano Y Cia, predecessor of ANSCOR with a 1,000,000.00 capitalization
divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled
by the family of Don Andres, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963
shares of the 5,000 shares originally issued.

On September 12, 1945, ANSCORs authorized capital stock was increased to P2,500,000.00
divided into 25,000 common shares with the same par value. Of the additional 15,000 shares, only 10,000
was issued which were all subscribed by Don Andres, after the other stockholders waived in favor of the
former their pre-emptive rights to subscribe to the new issues. This increased his subscription to 14,963
common shares. A month later, Don Andres transferred 1,250 shares each to his two sons, Jose and Andres
Jr., as their initial investments in ANSCOR. Both sons are foreigners.

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made
between 1949 and December 20, 1963. On December 30, 1964 Don Andres died. As of that date, the


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records revealed that he has a total shareholdings of 185,154 shares. 50,495 of which are original issues
and the balance of 134,659 shares as stock dividend declarations. Correspondingly, one-half of that
shareholdings or 92,577 shares were transferred to his wife, Doa Carmen Soriano, as her conjugal share.
The offer half formed part of his estate.

A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further
increased it to P30M. In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares
were respectively received by the Don Andres estate and Doa Carmen from ANSCOR. Hence, increasing
their accumulated shareholdings to 138,867 and 138,864 common shares each.

On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue
Service (IRS), inquiring if an exchange of common with preferred shares may be considered as a tax
avoidance scheme. By January 2, 1968, ANSCOR reclassified its existing 300,000 common shares into
150,000 common and 150,000 preferred shares.

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization
scheme and not tax avoidance. Consequently, on March 31, 1968 Doa Carmen exchanged her whole
138,864 common shares for 138,860 of the preferred shares. The estate of Don Andres in turn exchanged
11,140 of its common shares for the remaining 11,140 preferred shares.

In 1973, after examining ANSCORs books of account and record Revenue examiners issued a
report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, for the year 1968 and
the 2nd quarter of 1969 based on the transaction of exchange and redemption of stocks. BIR made the
corresponding assessments. ANSCORs subsequent protest on the assessments was denied in 1983 by
petitioner. ANSCOR filed a petition for review with the CTA, the Tax Court reversed petitioners ruling. CA
affirmed the ruling of the CTA. Hence this position.


Issue: Whether or not a person assessed for deficiency withholding tax under Sec. 53 and 54 of the
Tax Code is being held liable in its capacity as a withholding agent.




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Held: An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed
by petitioner for deficiency withholding tax, as such, it is being held liable in its capacity as a withholding
agent and not in its personality as taxpayer. A withholding agent, A. Soriano Corp. in this case, cannot be
deemed a taxpayer for it to avail of a tax amnesty under a Presidential decree that condones the collection
of all internal revenue taxes including the increments or penalties on account of non-payment as well as all
civil, criminal, or administrative liabilities arising from or incident to voluntary disclosures under the NIRC of
previously untaxed income and/or wealth realized here or abroad by any taxpayer, natural or juridical. The
Court explains: The withholding agent is not a taxpayer, he is a mere tax collector. Under the withholding
system, however, the agent-payer becomes a payee by fiction of law. His liability is direct and independent
from the taxpayer, because the income tax is still imposed and due from the latter. The agent is not liable for
the tax as no wealth flowed into him, he earned no income.

Wise & Co., Inc. vs. Meer (June 30, 1947)ALMAN

FACTS: Wise & Co., Inc. et. al (Plaintiff-appellants) were stockholders of Manila Wine
Merchants, Ltd., a foreign corporation duly authorized to do business in the Philippines. The
Board of Directors of Manila Wine Merchants, Ltd., (HK Co.), recommended to the stockholders
that they adopt resolutions necessary to sell its business and assets to Manila Wine Merchants,
Inc., a Philippine corporation, (PH Co.), for the sum of P400,000. The HK Co. made a distribution
from its earnings for the year 1937 to its stockholders. As a result of the sale of its business and
assets to PH Co., a surplus was realized and the HK Co. distributed this surplus to the
shareholders (Appellants included).
Philippine income tax had been paid by HK Co. on the said surplus from which the said
distributions were made. At a special general meeting of the shareholders of the HK Co., the
stockholders by resolution directed that the company be voluntarily liquidated and its capital
distributed among the stockholders. The Appellants duly filed Income Tax Returns, on which the
defendant, Meer (CIR) made deficiency assessments. Plantiffs paid under written protest and
sought recovery. CFI ruled in favor of CIR hence the appeal.

SC HELD: CFI judgment affirmed. (Subsequent Motion for Reconsideration by Wise, et. al.
denied)

ISSUES and RULINGS:
1.) Appellants contend that the amounts received by them and on which the taxes in question
were assessed and collected were ordinary dividends; CIR contends that they were liquidating
dividends.


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SC: The distributions under consideration were not ordinary dividends. Therefore, they are
taxable as liquidating dividends. It was stipulated in the deed of sale that the sale and transfer of
the HK Co. shall take effect on June 1, 1937. Distribution took place on June 8. They could not
consistently deem all the business and assets of the corporation sold as of June 1, 1937, and still
say that said corporation, as a going concern, distributed ordinary dividends to them thereafter.

2.) Are such liquidating dividends taxable income?
SC: Income tax law states that Where a corporation, partnership, association, joint-account, or
insurance company distributes all of its assets in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder, whether individual or corporation, is a taxable
income or a deductible loss as the case may be.
Appellants received the distributions in question in exchange for the surrender and relinquishment
by them of their stock in the HK Co. which was dissolved and in process of complete liquidation.
That money in the hands of the corporation formed a part of its income and was properly taxable
to it under the Income Tax Law. When the corporation was dissolved and in process of complete
liquidation and its shareholders surrendered their stock to it and it paid the sums in question to
them in exchange, a transaction took place. The shareholder who received the consideration for
the stock earned that much money as income of his own, which again was properly taxable to
him under the Income Tax Law.

3.) Non-resident alien individual appellants contend that if the distributions received by them were
to be considered as a sale of their stock to the HK Co., the profit realized by them does not
constitute income from Philippine sources and is not subject to Philippine taxes, "since all steps in
the carrying out of this so-called sale took place outside the Philippines."
SC: This contention is untenable. The HK Co. was at the time of the sale of its business in the
Philippines, and the PH Co. was a domestic corporation domiciled and doing business also in the
Philippines. The HK Co. was incorporated for the purpose of carrying on in the Philippine
Islands the business of wine, beer, and spirit merchants and the other objects set out in its
memorandum of association. Hence, its earnings, profits, and assets, including those from whose
proceeds the distributions in question were made, the major part of which consisted in the
purchase price of the business, had been earned and acquired in the Philippines. As such, it is
clear that said distributions were income "from Philippine sources."

Sections 250-254, and 256, RR 2 PHY

BIR Ruling 322-87 (October 19, 1987)PHY


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BIR Ruling 479-11 (December 5, 2011)PHY
BIR Ruling 039-02 (November 11, 2002) MEGAN
DOCUMENTARY STAMP TAX; gain or loss in partial or complete liquidation of a corporation -
The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale
of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation.
Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its
shareholders pursuant to a complete or partial liquidation.

No Documentary Stamp Tax (DST) is due on the surrender and cancellation of shares since the
surrender does not constitute a sale, assignment or transfer because the liquidating corporation is not taking
title to the surrendered shares and the shares are retired and not retained as treasury shares.

A distribution in liquidation, without consideration, of the assets of a corporation consisting of real
estate is not subject to DST under Section 196 of the Tax Code of 1997. A corporation that distributes its
assets to its shareholders as liquidating dividends is not deemed to be selling such assets to the latter.
However, the notarial certification on the deeds of assignment is subject to DST of P15.00 under Section 188
of the Tax Code of 1997. (BIR Ruling No. 039-2002 dated November 11, 2002)

From whatever source
Section 34 (C)(1), Tax CodeMEGAN
(C) Taxes. - (1) In General. - Taxes paid or incurred within the taxable year in connection
with the taxpayer's profession, trade or business, shall be allowed as deduction, except:

(a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any
foreign country; but this deduction shall be allowed in the case of a taxpayer who does not
signify in his return his desire to have to any extent the benefits of paragraph (3) of this
subsection (relating to credits for taxes of foreign countries); (c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall
be included as part of gross income in the year of receipt to the extent of the income tax
benefit of said deduction.


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James vs. United States, 366 US 213 (May 15, 1961)MEGAN
Doctrine: Embezzled money is taxable income of the embezzler in the year of the embezzlement under 22
(a) of the Internal Revenue Code of 1939, which defines "gross income" as including "gains or profits and income
derived from any source whatever," and under 61 (a) of the Internal Revenue Code of 1954, which defines "gross
income" as "all income from whatever source derived."

Facts:
The petitioner is a union official who, with another person, embezzled in excess of $738,000 during the years 1951
through 1954 from his employer union and from an insurance company with which the union was doing
business. Petitioner failed to report these amounts in his gross income in those years and was convicted for
willfully attempting to evade the federal income tax due for each of the years 1951 through 1954 in violation of
the Internal Revenue Code of 1939 and Internal Revenue Code of 1954. He was sentenced to a total of three
years' imprisonment.

Issue:
Whether embezzled funds are to be included in the "gross income" of the embezzler in the year in which the funds
are misappropriated.

HELD:
It had been a well-established principle that unlawful, as well as lawful, gains are comprehended within the term
"gross income." Section II B of the Income Tax Act of 1913 provided that "the net income of a taxable person shall
include gains, profits, and income . . . from . . . the transaction of any lawful business carried on for gain or profit,
or gains or profits and income derived from any source whatever . . . ." (Emphasis supplied.) 38 Stat. 167. When
the statute was amended in 1916, the one word "lawful" was omitted. This revealed, we think, the obvious intent
of that Congress to tax income derived from both legal and illegal sources, to remove the incongruity of having the
gains of the honest laborer taxed and the gains of the dishonest immune. The Court held that gains from illicit
traffic in liquor are includible within "gross income." And, the Court has pointed out, with approval, that there "has
been a widespread and settled administrative and judicial recognition of the taxability of unlawful gains of many
kinds," These include protection payments made to racketeers, ransom payments paid to kidnappers, bribes,
money derived from the sale of unlawful insurance policies, graft, black market gains, funds obtained from the
operation of lotteries, income from race track bookmaking and illegal prize fight pictures. The language of 22 (a) of
the 1939 Code, "gains or profits and income derived from any source whatever," and the more simplified language
of 61 (a) of the 1954 Code, "all income from whatever source derived," have been held to encompass all
"accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." A gain "constitutes


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taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable
economic value from it."

RMC 16-2013 (February 8, 2013)
Notes on RMC 16-2013
On treatment of Cash Deposits or Advances (or simply payment in advance):

Side of the Seller: They are considered as Gross Receipts.
Obligation to issue an official receipt

Side of the Buyer: They are considered as Expenses.
Upon payment, the buyer/customer shall withhold tax.
To be remitted at the 10th day of the following month.
To be considered as expense, the official receipts shall substantiate the report.

COMMENT: For accounting/business graduates, the method to be followed in recording
is the Expense/Revenue method not the Asset/Liability Method.

SECTION 50 RR 2
Section 50. Allocation of Income and Deductions. - In the case of two or more
organizations, trades or businesses (whether or not incorporated and whether or not
organized in the Philippines) owned or controlled directly or indirectly by the same
interests, the Commissioner is authorized to distribute, apportion or allocate gross
income or deductions between or among such organization, trade or business, if he
determined that such distribution, apportionment or allocation is necessary in order to
prevent evasion of taxes or clearly to reflect the income of any such organization, trade
or business.



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RMC 88-2012
Tax Implications of Stock Options to Employees
As to ordinary employees BIR Ruling No. 119-2012 rules that the exercise is
considered as additional compensation subject to Income Tax, and consequently, to
withholding taxes on compensation.

As to managerial and supervisory employees It shall be considered as fringe benefits
subject to fringe taxes benefit taxes.

The valuation shall be based on book value or fair market value of the shares,
whichever is higher, at the time of exercise of stock option and the price fixed on the
grant date.

If exercised and the stocks come from the unissued shares of stock of the issuing
corporation, the original issuance is subject to Documentary Stamp Tax.

Tax Implications if the option is sold by the Employee
As to shares not traded in the stock exchange (domestic corporation) Capital Gains
Tax, also Documentary Stamp Tax upon execution of the deed transferring ownership
or rights thereto, or upon delivery, assignment or indorsement of such shares in favor of
another.

As to shares traded in the Local Stock Exchange Stock transaction tax

As to shares of stock in a foreign corporation Income tax

Inventories
Section 41, Tax Code CHE


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SEC. 41. Inventories. - Whenever in the judgment of the Commissioner, the use of
inventories is necessary in order to determine clearly the income of any taxpayer,
inventories shall be taken by such taxpayer upon such basis as the Secretary of
Finance, upon recommendation of the Commissioner, may, by rules and regulations,
prescribe as conforming as nearly as may be to the best accounting practice in the trade
or business and as most clearly reflecting the income.
If a taxpayer, after having complied with the terms and a conditions prescribed by
the Commissioner, uses a particular method of valuing its inventory for any taxable
year, then such method shall be used in all subsequent taxable years unless:
(i) with the approval of the Commissioner, a change to a different
method is authorized; or (ii) the Commissioner finds that the nature of the
stock on hand (e.g., its scarcity, liquidity, marketability and price movements) is
such that inventory gains should be considered realized for tax purposes and,
therefore, it is necessary to modify the valuation method for purposes of
ascertaining the income, profit, or loss in a more realistic manner: Provided,
however, That the Commissioner shall not exercise his authority to require a
change in inventory method more often than once every three (3)
years: Provided, further, That any change in an inventory valuation method must
be subject to approval by the Secretary of Finance.

BIR Ruling DA 128-08 (August 11, 2008)CHE
BIR Ruling DA 12-08 talks about the CIRs approval of Shell PHs application to change
inventory costing method from Weighted Average Method (WAVE) to First-In-First-Out(FIFO) due to
the implementation of a new computerized accounting system( Global Systems Application Product
Data Processing or GSAP) which is used by its Ultimate Parent. Royal Dutch Shell Plc (RSD) and
all its other affiliates. The approval was based on Sec 41 of the Tax Code and Section 2 of RR 3-80
(Requiring a change from LIFO (Last-In-First-Out to WAVE and any change must be approved by
the CIR or when required by the CIR) and the CIRs recognition that the purpose of Shells change
in its inventory method will best conform to its accounting practice as said valuation will clearly
reflect the income of said companies.

Exclusions

Section 32 (B), Tax Code CHE


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(B) Exclusions from Gross Income. - The following items shall not be included in
gross income and shall be exempt from taxation under this title:
(1) Life Insurance - The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if
such amounts are held by the insurer under an agreement to pay interest thereon, the
interest payments shall be included in gross income.
(2) Amount Received by Insured as Return of Premium - The amount received
by the insured, as a return of premiums paid by him under life insurance, endowment,
or annuity contracts, either during the term or at the maturity of the term mentioned
in the contract or upon surrender of the contract.
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift,
bequest, devise, or descent: Provided, however, That income from such property, as well
as gift, bequest, devise or descent of income from any property, in cases of transfers of
divided interest, shall be included in gross income.
(4) Compensation for Injuries or Sickness - amounts received, through
Accident or Health Insurance or under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus the amounts of any damages
received, whether by suit or agreement, on account of such injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required
by any treaty obligation binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc. -
(a) Retirement benefits received under Republic Act No. 7641 and
those received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan maintained by
the employer: Provided, That the retiring official or employee has been in the
service of the same employer for at least ten (10) years and is not less than
fifty (50) years of age at the time of his retirement: Provided, further, That the
benefits granted under this subparagraph shall be availed of by an official or
employee only once.
For purposes of this Subsection, the term 'reasonable private benefit
plan' means a pension, gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit of some or all of his officials or
employees, wherein contributions are made by such employer for the
officials or employees, or both, for the purpose of distributing to such
officials and employees the earnings and principal of the fund thus
accumulated, and wherein its is provided in said plan that at no time shall


20
any part of the corpus or income of the fund be used for, or be diverted to,
any purpose other than for the exclusive benefit of the said officials and
employees.
(b) Any amount received by an official or employee or by his heirs from
the employer as a consequence of separation of such official or employee
from the service of the employer because of death sickness or other
physical disability or for any cause beyond the control of the said official or
employee.
(c) The provisions of any existing law to the contrary notwithstanding,
social security benefits, retirement gratuities, pensions and other similar
benefits received by resident or nonresident citizens of the Philippines or
aliens who come to reside permanently in the Philippines from foreign
government agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing
in the Philippines under the laws of the United States administered by the
United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System
in accordance with the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291,
including retirement gratuity received by government officials and
employees.
(7) Miscellaneous Items.
(a) Income Derived by Foreign Government - Income derived from
investments in the Philippines in loans, stocks, bonds or other domestic
securities, or from interest on deposits in banks in the Philippines BY (i)
foreign governments, (ii) financing institutions owned, controlled, or
enjoying refinancing from foreign governments, and (iii) international or
regional financial institutions established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. -
Income derived from any public utility or from the exercise of any essential
governmental function accruing to the Government of the Philippines or to
any political subdivision thereof.
(c) Prizes and Awards - Prizes and awards made primarily in
recognition of religious, charitable, scientific, educational, artistic, literary,


21
or civic achievement but only if: (i) The recipient was selected without any
action on his part to enter the contest or proceeding; and (ii) The recipient is
not required to render substantial future services as a condition to
receiving the prize or award.
(d) Prizes and Awards in Sports Competition. - All prizes and awards
granted to athletes in local and international sports competitions and
tournaments whether held in the Philippines or abroad and sanctioned by
their national sports associations.
(e) 13
th
Month Pay and Other Benefits. - Gross benefits received by
officials and employees of public and private entities: Provided, however, That the
total exclusion under this subparagraph shall not exceed Thirty thousand
pesos (P30,000) which shall cover: (i) Benefits received by officials and
employees of the national and local government pursuant to Republic Act No.
6686(Christmas Bonus); (ii) Benefits received by employees pursuant to
Presidential Decree No. 851(13
th
Month Pay), as amended by Memorandum
Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and
employees not covered by Presidential decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits
such as productivity incentives and Christmas bonus:Provided, further, That
the ceiling of Thirty thousand pesos (P30,000) may be increased through rules
and regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the same of the
inflation rate at the end of the taxable year.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS,
Medicare and Pag-ibig contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of
Indebtedness. - Gains realized from the same or exchange or retirement of
bonds, debentures or other certificate of indebtedness with a maturity of more
than five (5) years.
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by
the investor upon redemption of shares of stock in a mutual fund company as
defined in Section 22 (BB) (an open-end and close-end investment company as defined
under the Investment Company Act) of this Code.

Retirement benefits, etc.


22
Commissioner of Internal Revenue vs. Court of Appeals (March 23, 1992) ELKIE
Commissioner of Internal Revenue vs. Court of Appeals (October 17, 1991)ELKIE
Re: Request of Atty. Bernardo Zialcita (October 18, 1990)ELKIE
Intercontinental Broadcasting Corporation vs. Amarilla (October 27, 2006) BONG

RMC 27-2011 (July 1, 2011)BONG

Income derived by foreign government
Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation (January 22, 1990)BONG

De minimis/ PERA
Republic Act 9505 JUVERT

RR 8-00 (August 21, 2000)JUVERT
RR 5-2011 (March 16, 2011) JUVERT
RR 17-2011 (October 27, 2011) VAR
RR 8-2012 (May 11, 2012) VAR

3. General Principles

Section 23, Tax CodeVAR

4. Source of Income Rules

Section 42, Tax Code JOSH


23

Gross income from sources within Phils.
Commissioner of Internal Revenue vs. Marubeni Corporation (December 18, 2001)JOSH
Commissioner of Internal Revenue vs. BOAC (April 30, 1987)JOSH
Commissioner v. CTA and Smith Kline & French Overseas (January 17, 1984)KHA
Facts: This case is about the refund of a 1971 income tax amounting to P324,255. In its 1971 original
income tax return, Smith Kline declared a net taxable income of P1,489,277 and paid P511,247 as tax
due. Among the deductions claimed from gross income was P501,040 as its share of the head office
overhead expenses. However, in its amended return filed on March 1, 1973, there was an overpayment
of P324,255 "arising from underdeduction of home office overhead". It made a formal claim for the refund
of the alleged overpayment. It appears that sometime in October, 1972, Smith Kline received from its
international independent auditors, Peat, Marwick, Mitchell and Company, an authenticated certification to
the effect that the Philippine share in the unallocated overhead expenses of the main office for the year
ended December 31, 1971 was actually P1,427,484. It further stated in the certification that the allocation
was made on the basis of the percentage of gross income in the Philippines to gross income of the
corporation as a whole. By reason of the new adjustment, Smith Kline's tax liability was greatly reduced
from P511,247 to P186,992 resulting in an overpayment of P324,255. On April 2, 1974, without awaiting
the action of the Commissioner of Internal Revenue on its claim Smith Kline filed a petition for review with
the Court of Tax Appeals. In 1980, the Tax Court ordered the Commissioner to refund the overpayment or
grant a tax credit to Smith Kline. The Commissioner appealed to this Court.
Issue: Whether or not the claim for refund is in order.
Held: Yes. The governing law is found in section 37 of the old National Internal Revenue Code,
Commonwealth Act No. 466, which is reproduced in Presidential Decree No. 1158, the National Internal
Revenue Code of 1977 and which reads:
SEC. 37. Income form sources within the Philippines.
(b) Net income from sources in the Philippines. From the items of gross income specified in subsection
(a) of this section there shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which
cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be
included in full as net income from sources within the Philippines.
Revenue Regulations No. 2 of the Department of Finance contains the following provisions on the
deductions to be made to determine the net income from Philippine sources:
SEC. 160. Apportionment of deductions. From the items specified in section 37(a), as being derived
specifically from sources within the Philippines there shall be deducted the expenses, losses, and other
deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses or
deductions which can not definitely be allocated to some item or class of gross income. The remainder
shall be included in full as net income from sources within the Philippines. The ratable part is based upon
the ratio of gross income from sources within the Philippines to the total gross income.
From the foregoing provisions, it is manifest that where an expense is clearly related to the production of
Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office
building in the Philippines), that expense can be deducted from the gross income acquired in the
Philippines without resorting to apportionment. The overhead expenses incurred by the parent company
in connection with finance, administration, and research and development, all of which direct benefit its
branches all over the world, including the Philippines, fall under a different category however. These are
items which cannot be definitely allocated or Identified with the operations of the Philippine branch. For
1971, the parent company of Smith Kline spent $1,077,739. Under section 37(b) of the Revenue Code


24
and section 160 of the regulations, Smith Kline can claim as its deductible share a ratable part of such
expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of
the multinational corporation.

Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue (April 30, 1965)KHA
FACTS: The petitioner Philippine Guaranty Co., Inc., a domestic insurance company, entered into
reinsurance contracts with foreign insurance companies not doing business in the country, thereby ceding
to foreign reinsurers a portion of the premiums on insurance it has originally underwritten in the
Philippines. The premiums paid by such companies were excluded by the petitioner from its gross income
when it file its income tax returnsfor 1953 and 1954. Furthermore, it did not withhold or pay tax on them.
Consequently, the CIR assessed againstthe petitioner withholding taxes on the ceded reinsurance
premiums to which the latter protested the assessment on the ground that the premiums are not subject
to tax for the premiums did not constitute income from sources within the Philippines because the foreign
reinsurers did not engage in business in the Philippines, and CIR's previous rulings did not require
insurance companies to withhold income tax due from foreign companies.

ISSUE: 1 Are insurance companies not required to withhold tax on reinsurance premiums ceded to
foreign insurance companies, which deprives the government from collecting the tax due from them?
2. Whether or not REINSURANCE PREMIUMS CEDED TO FOREIGN REINSURERS are CONSIDERED
INCOME FROM PHILIPPINE SOURCES.

HELD: No. The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a
necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist
an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public
improvement designed for the enjoyment of the citizenry and those which come within the State's territory,
and facilities and protection which a government is supposed to provide. Considering that the reinsurance
premiums in question were afforded protection by the government and the recipient foreign reinsurers
exercised rights and privileges guaranteed by our laws, such reinsurance premiums and reinsurers
should share the burden of maintaining the state. The petitioner's defense of reliance of good faith on
rulings of the CIR requiring no withholding of tax due onreinsurance premiums may free the taxpayer from
the payment of surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it
certainly would not exculpate it from liability to pay such withholding tax. The Government is not estopped
from collecting taxes by the mistakes or errors of its agents.
2. Where the reinsurance contracts show that the activities that constituted the undertaking to reinsure a
domestic insurer against losses arising from the original insurances in the Philippines were performed in
the Philippines, the reinsurance premiums are considered as coming from sources within the Philippines
and are subject to Philippine Income Tax.

Howden & Co., Ltd. Vs. Collector of Internal Revenue (April 14, 1965)KHA



25
FACTS:1. In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into reinsurance
contracts with 32 Britishinsurance companies not engaged in trade or business in the Philippines,
whereby the former agreed to cede to them aportion of the premiums on insurances on fire, marine and
other risks it has underwritten in the Philippines.2. The reinsurance contracts were prepared and signed
by the foreign reinsurers in England and sent to Manila where Commonwealth Insurance Co. signed
them.3. Alexander Howden & Co., Ltd., also a British corporation, represented the British insurance
companies.4. Pursuant to the contracts, Commonwealth Insurance Co remitted P798,297.47
to Alexander Howden & Co., Ltd., asreinsurance premiums.5. In behalf of Alexander Howden & Co., Ltd.,
Commonwealth Insurance Co. filed an income tax return declaring the sum of P798,297.47, with accrued
interest in the amount of P4,985.77, as Alexander Howden & Co., Ltd.'s gross income for calendar year
1951.It also paid the BIR P66,112.00 income tax. 6. On May 12, 1954, Alexander Howden & Co.,
Ltd. filed with the BIR a claim for refund of the P66,112.00, later reduced toP65,115.00, because it
agreed to the payment of P977.00 as income tax on the P4,985.77 accrued interest.7. A ruling of the
CIR was invoked, stating that it exempted from withholding tax reinsurance premiums received from
domesticinsurance companies by foreign insurance companies not authorized to do business in the
Philippines.8. Subsequently, petitioner. instituted an action in the CFI of Manila for the recovery of the
amount claimed. Tax Court denied theclaim.

ISSUE: Are portions of premiums earned from insurances locally underwritten by a domestic corporation,
ceded to and received bynon-resident foreign reinsurance companies subject to income tax or not?

HELD: YES. Section 24 of the National Internal Revenue Code subjects to tax a non-resident foreign
corporation's income fromsources within the Philippines.Appellants contends that the reinsurance
premiums came from sources outside the Philippines, for these reasons: (1) Thecontracts of reinsurance,
out of which the reinsurance premiums were earned, were prepared and signed abroad (2) Thereinsurers,
not being engaged in business in the Philippines, received the reinsurance premiums as income from
their business conducted in England and, as such, taxable in England; and, (3) Section 37 of the Tax
Code, enumerating what areincome from sources within the Philippines, does not include reinsurance
premiums.The source of an income is the property, activity or service that produced the income The
reinsurance premiums remitted toappellants by virtue of the reinsurance contracts, had for their source
the undertaking to indemnify Commonwealth InsuranceCo. against liability. Said undertaking is the
activity that produced the reinsurance premiums, and the same took placein the Philippines. In the
first place, the reinsured, the liabilities insured and the risks originally underwritten by
CommonwealthInsurance Co., upon which the reinsurance premiums and indemnity were based,
were all situated in thePhilippines. Secondly, contrary to appellants' view, the insurance contracts were
perfected in the Philippines for Commonwealth Insurance Co. signed them last in Manila. Thirdly, the
parties to the reinsurance contracts in question evidently intended Philippine law to govern. Section 24 of
the Tax Code does not require a foreign corporation to be engaged in business in the Philippines in order
for its income from sources within the Philippines to be taxable. It subjects foreign corporations not doing


26
business in the Philippines to tax for income from sources within the Philippines. If by source of income
is meant the business of the taxpayer, foreigncorporations not engaged in business in the Philippines
would be exempt from taxation on their income from sources withinthe Philippines.

Philippine American Life Insurance Company, Inc. vs. Court of Tax Appeals CA-GR Sp. No. 31283 (April 25,
1995)ALMAN
Facts: PHILAMLIFE, a domestic corporation entered into a Management Services Agreement with American
International Reinsurance Co., Inc. (AIRCO) or American International Group Inc (AIGI) after their merger, a non-resident
foreign corporation with principal place of business in Pembroke, Bermuda, for a fee of not exceeding $250,000.00 per
annum. AIGI gave advisory services admittedly performed abroad by the personnel of a non-resident foreign corporation
not doing business in the Philippines (AIGI). The CTA held that they are subject to Philippines withholding income tax.
Issue: Are they subject to income tax despite being an NRFC?
Held: Yes. Petitioners insist that there is no legal nor factual bias for the respondent court to conclude that the
compensation paid for advisory services rendered outside the Philippines to petitioner AIGI, a non-resident foreign
corporation not engaged in trade or business in the Philippines, is considered "rentals and royalties from properties
located in the Philippines" pursuant to Section 37 (a) (4) of the National Internal Revenue Code. Petitioners contend that
petitioner AIGI is not covered by the above provision of the Tax Code considering that it has no properties located in the
Philippines from which rentals and royalties can be derived.
After a careful perusal of the facts and law of the case, we agree with respondent court's ruling which comprehensively
discusses the above issue, to wit:
Under the law:
Section 37. Income from Services within the Philippines, (a) Gross income from sources within the Philippines the
following items of gross income shall be treated as gross income from source within the Philippines.
-Rentals and royalties Rentals and royalties from properties located in the Philippines or from any interest in such
property, including rentals or royalties for
-The supply of scientific, technical, industrial or commercial knowledge or informations;
-The supply of any assistance that is auxiliary and subsidiary to, and is furnished as a means of enabling the application
or enjoyment of, any property, or right as is mentioned in paragraph (a), any such equipment as is mentioned in
paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); or
-Technical advice, assistance or services rendered in connection with the technical management and administration of
any scientific, industrial or commercial undertaking, venture, project of scheme; and



27
AIGI being a non-resident foreign corporation not engaged in trade or business in the Philippines 'shall pay a tax equal to
thirty-five (35%) percent of the gross income received during each taxable year from all sources within the Philippines as
interest, dividends, rents, royalties (including remuneration for technical services), salaries, premiums, annuities,
emoluments or other fixed or determinable annual, periodical or casual gains, profits and income and capital gains: . . .
(Section 12(6) (I) of the National Internal Revenue Code. (Underscoring for emphasis).
Thus, this Court rules that while it is true petitioner AIGI has no properties in the Philippines, agreement with petitioner
PHILAMLIFE necessary for the latter company's efficient operation and growth, with petitioner AIGI deriving income form
said agreement, petitioner AIGI is well-within the ambit of Section 37 (a)(7) of the Tax Code.
In our jurisprudence, the test of taxability is the 'source', and the source of an income is "that activity . . . which produced
the income". It is not the presence of any property from which one derives rentals and royalties that is controlling, but
rather as expressed under the expanded meaning of "royalties", it includes " royalties for the supply of scientific, technical,
industrial, or commercial knowledge or informations; and the technical advice, assistance or services rendered in
connection with the technical management and administration of any scientific, industrial or commercial undertaking,
venture, project or scheme", and others (Section 37 (a) (7) as amended by P.D. 1457).
WHEREFORE, the instant petition for review is DISMISSED by the Court for lack of merit. The respondent court's
decision dated March 10, 1993 and order dated May 19, 1993 in C.T.A. Cases Nos. 3504 and 3943 are hereby Affirmed.
Costs against petitioners.

Commissioner of Internal Revenue vs. Baier-Nickel (August 29, 2006)ALMANA
Facts: CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the CTA. Juliane
Baier-Nickel, a non-resident German, is the president of Jubanitex, a domestic corporation engaged in the manufacturing,
marketing and selling of embroidered textile products. Through Jubanitexs general manager, Marina Guzman, the
company appointed respondent as commission agent with 10% sales commission on all sales actually concluded and
collected through her efforts.

In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the 10% withholding tax
of P170, 777.26 and remitted to BIR. Respondent filed her income tax return but then claimed a refund from BIR for the
P170K, alleging this was mistakenly withheld by Jubanitex and that her sales commission income was compensation for
services rendered in Germany not Philippines and thus not taxable here.

She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but decision was reversed by
CA on appeal, holding that the commission was received as sales agent not as President and that the source of income
arose from marketing activities in Germany.
Issue: W/N respondent is entitled to refund


28
Held: No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to
the Philippine income taxation on their income received from all sources in the Philippines. In determining the meaning of
source, the Court resorted to origin of Act 2833 (the first Philippine income tax law), the US Revenue Law of 1916, as
amended in 1917.
US SC has said that income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the
sale of capital assets. If the income is from labor, the place where the labor is done should be decisive; if it is done in this
country, the income should be from sources within the United States. If the income is from capital, the place where the
capital is employed should be decisive; if it is employed in this country, the income should be from sources within the
United States. If the income is from the sale of capital assets, the place where the sale is made should be likewise
decisive. Source is not a place, it is an activity or property. As such, it has a situs or location, and if that situs or location
is within the United States the resulting income is taxable to nonresident aliens and foreign corporations.
The source of an income is the property, activity or service that produced the income. For the source of income to be
considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines.
The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the
taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually
exempt from taxation.
In the instant case, respondent failed to give substantial evidence to prove that she performed the incoming producing
service in Germany, which would have entitled her to a tax exemption for income from sources outside the Philippines.
Petition granted.
A. Soriano Y Cia vs. Collector of Internal Revenue (August 31, 1955)ALMANA
TAXATION; BROKERS PERCENTAGE TAX; AUTHORITY OF COLLECTOR OF INTERNAL REVENUE TO COLLECT
THE TAX; CASE AT BAR.Brokerage is subject to two different taxesone for the business itself, which is a specific
amount fixed by Section 193 ofthe Tax Code, and another is imposed by section 195 of the same Code, which is 6 per
cent of the gross compensation to be received on account of the brokerage. The latter form of tax is not an exaction on
the business, nor on the business transaction, but on the compensation resulting from said transaction. In the case at bar,
as the compensation received by petitioner partook of the nature of brokerage commission, the respondent Collector of
Internal Revenue has authority to collect 6 per cent thereof as broker's percentage tax, for the right of receiving
compensation for the exercise of an occupation recognized by Philippine laws. Said tax is not a levy on the brokerage
transactions effected outside of the Philippines, but on the compensation received by petitioner as a broker from another
domestic corporation, in virtue of a contract executed in the Philippines. The parties, in executing the same, subjected
themselves to the taxing jurisdiction of this country. [A. Soriano y Ca. vs. Collector of Internal Revenue, 101 Phil.
504(1957)]
Facts: Petitioner was engaged in the business of selling surplus goods acquired from the Foreign Liquidation Commission
pursuant to an agreement with the United States Government whereby petitioner undertook to rehabilitate the Veterans
Administration Building (formerly Heacock Building) for and in consideration of over a million pesos worth of surplus goods.
Part of the surplus goods consisted of tractors which were then in the various U. S. military bases or depots in the
Philippines. The United Africa Co., Ltd. sent its representative, Hugh Gibson, to the Philippines to look into the availability
of tractors for sale in the Philippines. Gibson learned of the petitioner's business and contracted to buy tractors from the


29
latter, to be delivered f.a.s. (free alongside ship), Manila, in good working condition and capable of running off lighters
under their own power. A tractor expert, Mr. Tex Taylor, was employed by the foreign company to select, inspect and test
the tractors before delivery. virtual law library
Tex Taylor went to the different military bases, took the serial numbers of the tractors which he wanted, and gave the list
thereof to the petitioner, who then secured from the Foreign Liquidation Commission the purchase invoices and other
documents for the immediate release of the tractors. The tractors were then removed by petitioner to its Pieco Yard,
where they were tested by Tex Taylor. Those found to be in good condition were approved by Taylor, wherefore petitioner
presented to him the sales invoices for his signature, stamping his approval thereon. Twenty-four of the tractors were
found defective and so were brought to petitioner's Sta. Mesa Yard for reconditioning. Upon approval of each invoice, the
same was presented by petitioner to the Philippine Refining Company, Inc., an affiliate of the foreign buyer, for payment of
the purchase price. The Philippine Refining Co. would in turn notify the National City Bank of New York and the Hongkong
and Shanghai Banking Corporation, Manila, where the United Africa Co. had dollar deposits, to make payment of
petitioner's invoices. The tractors were delivered by petitioner to the pier in Manila by means of barges as soon as notice
was received from the representative of its foreign buyer that a carrying vessel was ready. On June 24 and August 26,
1947, the Philippine Refining Co., Inc. shipped the 57 tractors acquired from petitioner from the port of Manila to United
Africa Co., Ltd. at Dares Salaem, East Africa. The total value of the tractors was P757,000. However, due to certain
defects of some of them upon reaching Africa, the sum of P4,959.19 was reimbursed by petitioner to its foreign buyer by
credit memo.
Issue: Whether or petitioner is liable for the payment of percentage or sales tax on its gross sales of the 57
Held: Yes. Under the above provisions, petitioner's liability would thus depend on first, whether or not it was an importer of
the 57 tractors in question, and second, whether it made an original sale thereof in the Philippines. The theory of the
Bureau of Internal Revenue, affirmed by the defunct Board of Tax Appeals, is that petitioner imported the tractors from the
army bases; that they were subsequently sold to its foreign buyer within the Philippines; and that title passed upon
delivery to the carrier f.a.s. Manila. This Court has already held that one who acquires title to surplus equipment found in U.
S. army bases or installations within the Philippines by purchase, and then brings them out of those bases or depots, is an
importer, and sales made by him by such surplus goods to the general public are taxable under sections 185 and 186 of
the Tax Code.
Quill Corp. vs. North Dakota, 504 US 298 (May 26, 1992) PHY
Vodafone International Holdings B.V. vs. Union of India & Anr. (Supreme Court of India, Civil Appeal No.
733 of 2012; January 20, 2012)PHY


RAMO 1-95 (March 21, 1995) PHY
RAMO 4-86 (April 5, 1986) MEG



30
5. Deductions

Sections 34-36, Tax CodeMEG

Business expenses
Republic Act 10028 (Sections 3 & 14 only)MEG
Section 3. Section 3 of Republic Act No. 7600 is hereby amended to read as follows:
"Sec. 3. Definition of Terms. - For purposes of this Act, the following definitions are adopted:
"a) Age of gestation - the length of time the fetus is inside the mother's womb.
"b) Bottlefeeding - the method of feeding an infant using a bottle with artificial nipples, the contents of which
can be any type of fluid.
"c) Breastfeeding - the method of feeding an infant directly from the human breast.
"d) Breastmilk - the human milk from a mother.
"e) Breastmilk substitute - any food being marketed or otherwise represented as partial or total replacement
of breastmilk whether or not suitable for that purpose.
"f) Donor milk - the human milk from a non-biological mother.
"g) Expressed breastmilk - the human milk which has been extracted from the breast by hand or by breast
pump. It can be fed to an infant using a dropper, a nasogastric tube, a cup and spoon, or a bottle.
"h) Expressing milk - the act of extracting human milk from the breast by hand or by pump into a container.
"i) Formula feeding - the feeding of a newborn with infant formula usually by bottle feeding. It is also called
artificial feeding.
"j) Health institutions - are hospitals, health infirmaries, health centers, lying-in centers, or puericulture
centers with obstetrical and pediatric services.
"k) Health personnel - are professionals and workers who manage and/or administer the entire operations of
health institutions and/or who are involved in providing maternal and child health services.
"l) Health workers - all persons who are engaged in health and health-related work, and all persons
employed in all hospitals, sanitaria, health infirmaries, health centers, rural health units, barangay health
stations, clinics and other health-related establishments, whether government or private, and shall include
medical, allied health professional, administrative and support personnel employed regardless of their
employment status.
"m) Infant - a child within zero (0) to twelve (12) months of age.
"n) Infant formula - the breastmilk substitute formulated industrially in accordance with applicable Codex
Alimentarius standards, to satisfy the normal nutritional requirements of infants up to six (6) months of age,
and adopted to their physiological characteristics.
"o) Lactation management - the general care of a mother-infant nursing couple during the mother's prenatal,
immediate postpartum and postnatal periods. It deals with educating and providing knowledge and
information to pregnant and lactating mothers on the advantages of breastfeeding, the risks associated with
breastmilk substitutes and milk products not suitable as breastmilk substitutes such as, but not limited to,
condensed milk and evaporated milk, the monitoring of breastfeeding mothers by health workers and
breastfeeding peer counselors for service patients to ensure compliance with the Department of Health,
World Health Organization (WHO) and the United Nations Children's Fund (UNICEF) on the implementation
of breastfeeding policies, the physiology of lactation, the establishment and maintenance of lactation, the
proper care of the breasts and nipples, and such other matters that would contribute to successful
breastfeeding.
"p) Lactation stations - private, clean, sanitary, and well-ventilated rooms or areas in the workplace or public
places where nursing mothers can wash up, breastfeed or express their milk comfortably and store this
afterward.
"q) Low birth weight infant - a newborn weighing less than two thousand five hundred (2,500) grams at birth.


31
"r) Nursing employee - any female worker, regardless of employment status, who is breastfeeding her infant
and/or young child.
"s) Mother's milk - the breastmilk from the newborn's own mother.
"t) Non-health facilities, establishment or institution - public places and working places, as defined in
subparagraphs (u) and (y), respectively.
"u) Public place - enclosed or confined areas such as schools, public transportation terminals, shopping
malls, and the like.
"v) Rooming-in - the practice of placing the newborn in the same room as the mother right after delivery up
to discharge to facilitate mother-infant bonding and to initiate breastfeeding. The infant may either share the
mother's bed or be placed in a crib beside the mother.
"w) Seriously ill mothers - are those who are: with severe infections; in shock, in severe cardiac or
respiratory distress; or dying; or those with other conditions that may be determined by the attending
physician as serious.
"x) Wet-nursing - the feeding of a newborn from another mother's breast when his/her own mother cannot
breastfeed.
"y) Workplace - work premises, whether private enterprises or government agencies, including their
subdivisions, instrumentalities and government-owned and -controlled corporations.
"z) Young child - a child from the age of twelve (12) months and one (1) day up to thirty-six (36) moths.
Section 14. Section 13 of Republic Act No. 7600 is hereby renumbered and amended to read as follows:
"Sec. 19. Incentives. - The expenses incurred by a private health and non-health facility, establishment or institution,
in complying with the provisions of this Act, shall be deductible expenses for income tax purposes up to twice the
actual amount incurred: Provided, That the deduction shall apply for the taxable period when the expenses were
incurred: Provided, further, That all health and non-health facilities, establishments and institutions shall comply with
the provisions of this Act within six (6) months after its approval: Provided, finally, That such facilities, establishments
or institutions shall secure a "Working Mother-Baby-Friendly Certificate" from the Department of Health to be filed
with the Bureau of Internal Revenue, before they can avail of the incentive.
"Government facilities, establishments or institutions shall receive an additional appropriation equivalent to the
savings they may derive as a result of complying with the provisions of this Act. The additional appropriation shall be
included in their budget for the next fiscal year."

Republic Act 8502 BENN
Republic Act 8525 (Sections 1 to 5 only) BENN
Republic Act 9999 BENN

Commissioner of Internal Revenue vs. Isabela Cultural Corporation CHE
FACTS: Isabela Cultural Corporation (ICC), a domestic corporation received an
assessment notice for deficiency income tax and expanded withholding tax from BIR. It
arose from the disallowance of ICCs claimed expense for professional (1) auditing
services by SGV & Co. 2) legal services Bengzon law office) and security services paid
by ICC; as well as the alleged understatement of interest income on the three promissory
notes due from Realty Investment Inc. The deficiency expanded withholding tax was
allegedly due to the failure of ICC to withhold 1% e-withholding tax on its claimed
deduction for security services.
ICC sought a reconsideration of the assessments. Having received a final notice
of assessment, it brought the case to CTA, which held that it is unappealable, since the
final notice is not a decision. CTAs ruling was reversed by CA, which was sustained by


32
SC, and case was remanded to CTA. CTA rendered a decision in favor of ICC. It ruled
that the deductions for professional and security services were properly claimed, it said
that even if services were rendered in 1984 or 1985, the amount is not yet determined at
that time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR which
overstate the interest income, when it applied compounding absent any stipulation.

Petitioner appealed to CA, which affirmed CTA, hence the petition.

ISSUE: W/N the aforementioned may be deducted

HELD: for the auditing and legal services NO but for the security services YES
The requisites for deductibility of ordinary and necessary trade, business or
professional expenses, like expenses paid for legal and auditing services are: a) the
expense must be ordinary and necessary; b) it must have been paid or incurred during
the taxable year; c) it must have been paid or incurred in carrying on the trade or
business of the taxpayer and d) it must be supported by receipts, records and other
pertinent papers.
The requisite that it must have been paid or incurred during the taxable year is
qualified by Sec. 45 of NIRC which states that the deduction provide for in this title shall
be taken for the taxable year in which paid or incurred dependent upon the method of
accounting upon the basis of which the net income is computed x x x.
ICC uses the accrual method. RAM No. 1-2000 provides that under the accrual
method, expenses not claimed as deductions in the current year when they are incurred
CANNOT be claimed as deduction from income for the succeeding year. The accrual
method relies upon the taxpayers right to receive amount or its obligation to pay them
NOT the actual receipt or payment. Amounts of income accrue where the right to receive
them become fixed, where there is created an enforceable liability. Liabilities are accrued
when fixed and determinable in amount.
The accrual of income and expense is permitted when the ALL-EVENTS TEST
has been met. The test requires that: 1) fixing of a right to income or liability to pay and 2)
the availability of the reasonable accurate determination of such income or liability. It
does not require that the amount be absolutely known only that the taxpayer has
information necessary to compute the amount with reasonable accuracy. The test is
satisfied where computation remains uncertain if its basis is unchangeable. The amount
of liability does not have to be determined exactly, it must be determined with reasonable
accuracy.
In the case at bar, the expenses for legal services pertain to the years 1984 and
1985. The firm has been retained since 1960. From the nature of the claimed deduction
and the span of time during which the firm was retained, ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as compensation for its
services. Exercising due diligence, they could have inquired into the amount of their


33
obligation. It could have reasonably determined the amount of legal and retainer fees
owing to their familiarity with the rates charged.
The professional fees of SGV cannot be validly claimed as deductions in 1986.
ICC failed to present evidence showing that even with only reasonable accuracy, it
cannot determine the professional fees which the company would charge.

Commissioner of Internal Revenue vs. General Foods (Phils.) Inc. (April 24, 2003)
Facts:
Issue: Whether or not inordinately large advertising expenditures can be claimed as
deduction in one single taxable year.
Held: - NO
Advertising expenses should be qualified as to the specifics in which these were
incurred, to determine when these should be claimed as income tax deduction. Normally,
advertising expenses which are incurred to stimulate current sales are considered as
business expenses. As such, these could be claimed as income tax deduction in the
period when they are actually incurred.
However, if these are incurred to stimulate future sales and the amount
involved is inordinately large, these would be considered as a capital expenditure
to be spread over a reasonable period of time. This was the Supreme Courts holding
in Commissioner of Internal Revenue vs. General Foods (Phils.), Inc. (G.R. No. 143672
dated April 24, 2003). If these are incurred to stimulate future sales, it connotes
expenditures to create or maintain some form of goodwill or protection of the brand
franchise.
Also, inordinately large expenses are not considered ordinary expenses since it
will appear that these are not normally incurred every year. In the General Foods case,
the Supreme Court held that the amount of media advertising expense spent for the
promotion of a single product, which accounts for one-half of the petitioners entire claim
for marketing expenses for the year under review, is unreasonable based on the
circumstance. Though the Court decision provided that these advertising expenses are
considered as capital expenditures, it did not specifically rule on how long these
expenses should be amortized. Still, the reasonable period of time may appear to be the
number of years when the company will benefit from the expense.
One area of concern is that there are no clear-cut criteria or fixed tests to
determine the reasonableness of an advertising expense. Since there is no hard and fast
rule on the matter, the Supreme Court provided guidance in the General Foods case that
the right to a deduction depends on a number of factors such as but not limited to:
the type and size of business in which the taxpayer is engaged; the volume and
amount of its net earnings; the nature of the expenditure itself; the intention of the
taxpayer and the general economic conditions. It is the interplay of these, among
other factors, and properly weighed, that will yield a proper evaluation.

Aguinaldo Industries Corporation vs. Commissioner of Internal Revenue (February
25, 1982) CHE


34
FACTS: Aguinaldo Industries Corporation (AIC) is a domestic corporation engaged in the
manufacture of fishing nets, a tax-exempt industry and the manufacture of furniture. For
accounting purposes, each division is provided with separate books of accounts. Previously,
AIC acquired a parcel of land in Muntinlupa, Rizal, as site of the fishing net factory. Later, it
sold the Muntinlupa property. AIC derived profit from this sale which was entered in the
books of the Fish Nets Division as miscellaneous income to distinguish it from its tax-exempt
income.
For the year 1957, AIC filed two separate income tax returns for each division. After
investigation, the examiners of the BIR found that the Fish Nets Division deducted from its
gross income for that year the amount of P61,187.48 as additional remuneration paid to the
officers of AIC. This amount was taken from the net profit of an isolated transaction (sale of
Muntinlupa land) not in the course of or carrying on of AIC's trade or business, and was
reported as part of the selling expenses of the Muntinlupa land. Upon recommendation of the
examiner that the said sum of P61,187.48 be disallowed as deduction from gross income,
petitioner asserted in its letter of February 19, 1958, that said amount should be allowed as
deduction because it was paid to its officers as allowance or bonus pursuant to its by-laws.

ISSUE/HELD: W/N the bonus given to the officers of the petitioner upon the sale of its
Muntinlupa land is an ordinary and necessary business expense deductible for income tax
purposes

HELD: NO. Sec. 30 (a) (1) of the Tax Code provides that in computing net income, there
shall be allowed as deductions Expenses, including all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for personal services actually rendered.
The bonus given to the officers of the petitioner as their share of the profit
realized from the sale of petitioner's Muntinglupa land cannot be deemed a deductible
expense for tax purposes, even if the aforesaid sale could be considered as a
transaction for carrying on the trade or business of the petitioner and the grant of the
bonus to the corporate officers pursuant to petitioner's by-laws could, as an intra-
corporate matter, be sustained. The records show that the sale was effected through a
broker who was paid by petitioner a commission of P51,723.72 for his services. On the other
hand, there is absolutely no evidence of any service actually rendered by petitioner's
officers which could be the basis of a grant to them of a bonus out of the profit
derived from the sale. This being so, the payment of a bonus to them out of the gain
realized from the sale cannot be considered as a selling expense; nor can it be
deemed reasonable and necessary so as to make it deductible for tax purposes. The
extraordinary and unusual amounts paid by petitioner to these directors in the guise and
form of compensation for their supposed services as such, without any relation to the
measure of their actual services, cannot be regarded as ordinary and necessary
expenses within the meaning of the law. This is in line with the doctrine in the law of
taxation that the taxpayer must show that its claimed deductions clearly come within the
language of the law since allowances, like exemptions, are matters of legislative grace.



35
Atlas Consolidated Mining & Development Corporation vs. Commissioner of Internal Revenue
(January 27, 1981) ELKIE
Zamora vs. Collector of Internal Revenue (May 31, 1963) ELKIE
C.M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue (November 28, 1969) ELKIE
Calanoc vs. Collector of Internal Revenue (November 29, 1961) BONG
Kuenzle & Streiff, Inc. vs. Collector of Internal Revenue (October 20, 1959) BONG

RR 10-2002 (July 10, 2002) BONG
RR 1-2009 (December 9, 2008) JUVER
RR 7-2010 (July 20, 2010) JUVERT

Interest (as amended by Republic Act 9337)
Paper Industries Corporation of the Philippines vs. Court of Appeals (December 1, 1995) JUVERT
Commissioner of Internal Revenue vs. Vda. de Prieto (September 30, 1960) VAR

RR 13-2000 (November 20, 2000) VAR

Interest arbitrage

BIR Ruling No. 006-00 (January 5, 2000) VAR

Taxes
Commissioner of Internal Revenue vs. Lednicky (July 31, 1964) JOSH

Losses


36

Section 38, Tax Code JOSH

RR 12-77 (October 6, 1977) JOSH
RMO 31-2009 (October 16, 2009) KHA


Forex losses
BIR Ruling 206-90 (October 30, 1990) KHA
This refers to your letter dated June 25, 1990 requesting in behalf of your client, PorcelanaMariwasa, Inc.
(PMI), a ruling confirming your opinion that the foreign exchange lossincurred by PMI is a deductible loss
in 1990.It is represented that PMI is a corporation established and organized under Philippine laws. In
reply, please be informed that the annual increase in value of an asset is not taxableincome because
such increase has not yet been realized. The increase in value i.e., thegain, could only be taxed when a
disposition of the property occurred which was of such anature as to constitute a realization of such gain,
that is, a severance of the gain from theoriginal capital invested in the property. The same conclusion
obtains as to losses. Theannual decline in the value of property is not normally allowable as a deduction.
Hence, tobe allowable the loss must be realized. When foreign currency acquired in connection with a
transaction in the regular course ofbusiness is disposed ordinary gain or loss results from the fluctuations.
The loss is deductible only for the year it is actually sustained. It is sustained during the year in which the
loss occurs as evidenced by the completed transaction and as fixed by identifiable occurring in that year.
Closed transaction is a taxable event which has been consummated. No taxation event has as yet been
consummated prior tothe remittance of the scheduled amortization. Accordingly, your request for
confirmation ofyour aforesaid opinion is hereby denied considering that foreign exchange losses
sustainedas a result of conversion or devaluation of the peso vis-a-vis the foreign currency or USdollar
and vice versa but which remittance of scheduled amortization consisting of principaland interests
payment on a foreign loan has not actually been made are not deductible fromgross income for income
tax purposes.

BIR Ruling No. 144-85 (August 26, 1985) KHA
This refers to your letter dated July 1, 1985 requesting a ruling as to whether foreign
exchange losses which have accrued byreason of devaluation are deductible for income tax purposes.
The losses arose from matured but unremitted principal repayments onloans affected by the debt
restructuring program in the Philippines.In reply thereto, I have the honor to inform you that annual


37
increase in value of an asset is not taxable income because suchincrease has not yet been realized. The
increase in value, i.e., the gain, could only be taxed when a disposition of the property occurredwhich was
of such a nature as to constitute a realization of such gain, that is, a severance of the gain from the
original capital investedin the property. The same conclusion obtains as to losses. The annual decrease
in the value of property is not normally allowable as aloss. Hence, to be allowable the loss must be
realized. When foreign currency acquired in connection with a transaction in the regular course of
business is disposed of ordinary gainor loss results from the fluctuations. The loss is deductible only for
the year it is actuallysustained. It is sustained during the year in which the loss occurs as evidenced by
closed and completed transaction and as fixed byidentifiable events occurring in that year. A closed
transaction is a taxable event which has beenconsummated. No taxable event has as yet been
consummated prior to the remittance of the scheduled amortization. Accordingly, foreign exchange losses
sustained as a result of devaluation of the peso vis-a-vis the foreigncurrency e.g., US dollar, but which
remittance of scheduled amortization consisting of principal and interests payments on a foreign loanhas
not actually been made are not deductible from gross income for income tax purposes

Bad Debts
Philex Mining Corporation vs. Commissioner of Internal Revenue (April 16, 2008) ALMAN

Taxation; Bad Debt Deductions; Deductions for income tax purposes partake of the nature of tax exemptions and are
strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction
claimed.

Facts: Petitioner Philex entered into an agreement with Baguio Gold Mining Corporation for the former to manage the
latters mining claim know as the Sto. Mine. The parties agreement was denominated as Power of Attorney. The
mine suffered continuing losses over the years, which resulted in petitioners withdrawal as manager of the mine. The
parties executed a Compromise Dation in Payment, wherein the debt of Baguio amounted to Php. 112,136,000.00.
Petitioner deducted said amount from its gross income in its annual tax income return as loss on the settlement of
receivables from Baguio Gold against reserves and allowances. BIR disallowed the amount as deduction for bad
debt. Petitioner claims that it entered a contract of agency evidenced by the power of attorney executed by them
and the advances made by petitioners is in the nature of a loan and thus can be deducted from its gross income.
Court of Tax Appeals (CTA) rejected the claim and held that it is a partnership rather than an agency. CA affirmed
CTA

Issue: Whether the bad debts can be valid deductions.



38
Held: The lower courts did not err in treating petitioners advances as investments in a partnership known as the Sto.
Nino mine. The advances were not debts of Baguio Gold to petitioner inasmuch as the latter was under no
unconditional obligation to return the same to the former under the Power of Attorney. As for the amounts that
petitioner paid as guarantor to Baguio Golds creditors, we find no reason to depart from the tax courts factual finding
that Baguio Golds debts were not yet due and demandable at the time that petitioner paidthe same. Verily, petitioner
pre-paid Baguio Golds outstanding loans to its bank creditors and this conclusion is supported by the evidence on
record. In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions for
income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who
must prove by convincing evidence that he is entitled to the deduction claimed. In this case, petitioner failed to
substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its
gross income. Consequently, it could not claim the advances as a valid bad debt deduction.

Philippine Refining Company vs. Court of Appeals (May 8, 1996) ALMAN\
FACTS:
Philippine Refining Corp (PRC) was assessed deficiency tax payments for the year 1985 in the amount of around
1.8M. This figure was computed based on the disallowance of the claim of bad debts by PRC. PRC duly protested
the assessment claiming that under the law, bad debts and interest expense are allowable deductions.
When the BIR subsequently garnished some of PRCs properties, the latter considered the protest as being denied
and filed an appeal to the CTA which set aside the disallowance of the interest expense and modified the
disallowance of the bad debts by allowing 3 accounts to be claimed as deductions. However, 13 supposed bad debts
were disallowed as the CTA claimed that these were not substantiated and did not satisfy the jurisprudential
requirement of worthlessness of a debt The CA denied the petition for review.

ISSUE: Whether or not the CA was correct in disallowing the 13 accounts as bad debts.

RULING:YES.
Both the CTA and CA relied on the case of Collector vs. Goodrich International, which laid down the requisites for
worthlessness of a debt to wit:
In said case, we held that for debts to be considered as "worthless," and thereby qualify as "bad debts" making them
deductible, the taxpayer should show that (1) there is a valid and subsisting debt. (2) the debt must be actually
ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the
taxable year; and (4) the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can
be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future.


39
Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to
collect the debts, viz.: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to
a lawyer for collection; and (4) filing a collection case in court.
PRC only used the testimony of its accountant Ms. Masagana in order to prove that these accounts were bad debts.
This was considered by all 3 courts to be self-serving. The SC said that PRC failed to exercise due diligence in order
to ascertain that these debts were uncollectible. In fact, PRC did not even show the demand letters they allegedly
gave to some of their debtors.

Fernandez Hermanos, Inc. vs. Commissioner of Internal Revenue (September 30, 1969) ALMAN

Doctrine: Taxation; Income tax; Disallowances of losses; Where worthless securities were allowed as losses.There
is adequate basis for writing off as worthless securities the stock of a lumber company which had ceased operations,
even if it still had its sawmill and equipment of some value. Assuming that the company would later somehow realize
some proceeds from its sawmill and equipment and such proceeds would later be distributed to its stockholders, the
amount so received by the taxpayer would then properly be reportable as income of the taxpayer on the year it is
received. In the meantime, it may properly be claimed as loss in its tax return pursuant to Section 30(d) 4(b) or
Section 30(e) (3) of the National Internal Revenue Code.
Same; Same; Disallowances of losses and bad debts; No partial disallowance or deductions allowed.Neither under
Section 30(d) (2) of our Tax Code providing for deduction by corporations of losses actually sustained and charged
off during the taxable year nor under Section 30(e) (1) thereof providing for deduction of bad debts actually
ascertained to be worthless and charged off within the taxable year, can there be a partial writing off of a loss or bad
debt. For such losses or bad debts must be ascertained to be so and written off during the taxable year, are therefore
deductible in full or not at all, in the absence of any express provision in the Tax Code authorizing partial deductions.
Facts:
Fernandez Hermanos is an investment company. The CIR assessed it for alleged deficiency income taxes. It claimed
as deduction, among others, losses in or bad debts of Palawan Manganese Mines Inc. which the CIR disallowed and
was sustained by the CTA.

Issue: W/N disallowance is correct
Held: YES
It was shown that Palawan Manganese Mines sought financial help from Fernandez to resume its mining operations
hence a Memorandum of Agreement (MOA) was executed where Fernandez would give yearly advances to Palawan.
But it still continued to suffer loses and Fernandez realized it could no longer recover the advances hence claimed it
as worthless. Looking at the MOA, Fernandez did not expect to be repaid. The consideration for the advances was 15%


40
of the net profits. If there were no earnings or profits there was no obligation to repay. Voluntary advances without
expectation of repayment do not result in deductible losses. Fernandez cannot even sue for recovery as the
obligation to repay will only arise if there was net profits. No bad debt could arise where there is no valid and
subsisting debt.

Even assuming that there was valid or subsisting debt, the debt was not deductible in 1951 as a worthless debt as
Palawan was still in operation in 1951 and 1952 as Fernandez continued to give advances in those years. It has been
held that if the debtor corporation although losing money or insolvent was still operating at the end of the taxable year,
the debt is not considered worthless and therefore not deductible.

RR 5-99 (March 10, 1999) PHY

Depreciation
Basilan Estates, Inc. vs. Commissioner of Internal Revenue (September 5, 1967) PHY
Limpan Investment Corporation vs. Commissioner of Internal Revenue (July 26, 1966) PHY

RR 12-2012 (October 12, 2012) MEG
REVENUE REGULATIONS NO. 12-2012 issued on October 12, 2012 prescribes the rules on the
deductibility of depreciation expenses as it relates to purchase of vehicles and other expenses
related thereto, and input taxes allowed therefor, to wit:
a. No deduction from gross income for depreciation shall be allowed unless the taxpayer
substantiates the purchase with sufficient evidence, such as official receipts or other
adequate records which contain the following, among others:
i. Specific Motor Vehicle Identification Number, Chassis Number or other
registrable identification number of the vehicle;
ii. The total price of the specific vehicle subject to
depreciation; and
iii. The direct connection of relation f the vehicle to the
development, management, operation and/or conduct of the trade or business
or profession of the taxpayers.


41
b. Only one vehicle for land transport is allowed for the use of an official or employee,
the value of which should not exceed Two Million Four Hundred Thousand Pesos
(Php 2,400,000.00);
c. No depreciation shall be allowed for yachts; helicopters, airplanes and/or aircrafts and
land vehicles which exceed the above threshold amount, unless the taxpayers main
line of business is transport operations or lease of transportation equipment and the
vehicles purchased are used in said operations;
d. All maintenance expenses on the account of the non-depreciable vehicles for taxation
purposes are disallowed in its entirety;
e. The input taxes on the purchase of non-depreciable vehicles and all input taxes on
maintenance expenses incurred thereon are likewise disallowed for taxation purposes/
Depletion
Consolidated Mines, Inc. vs. Court of Tax Appeals (August 29, 1974) MEG

Charitable and other contributions
Republic Act 9500 (Section 25 only) MEG
SEC.25. Tax Exemptions.The provisions of any general or special law to the contrary notwithstanding:
(a) All revenues and assets of the University of the Philippines used for educational purposes or in support thereof
shall be exempt from all taxes and duties;
(b) Gifts and donations of real and personal properties of all kinds shall be exempt from the donors tax and the
same shall be considered as allowable deductions from the gross income of the donor, in accordance with the
provisions of the National Internal Revenue Code of 1997, as amended: Provided, That the allowable deductions
shall be equivalent to 150 percent to the value of such donation. Valuation of assistance other than money shall be
based on the acquisition cost of the property. Such valuation shall take into consideration the depreciated value of
property in case said property has been used;
(c) Importation of economic, technical, vocational, scientific, philosophical, historical and cultural books, supplies
and materials duly certified by the Board, including scientific and educational computer and software equipment, shall
be exempt from customs duties;
Republic Act 9521, Section 3 BENN

BIR Ruling 19-01 (May 10, 2001) BENN GWAPO

Research and Development
3M Philippines, Inc. vs. Commissioner of Internal Revenue (September 26, 1988) BNN



42
Additional requirements for deductibility
RMO 38-83 (November 14, 1983) Guidelines for Allowance of Deductions for Certain Income
Payments Under Section 30 (1) of the Tax Code. CHE
Background and Rationale of Sec 30(Additional requirement for deductibility of certain payments)
is in the Memorandum as attached.
3.1 An amount claimed as deduction on which a tax is supposed to have been withheld under
Sections 54 and 93 shall be allowed if in the course of his audit and/or investigation, the examiner
discovers that:
3.1/1 No withholding of creditable or final tax was made but the
payee reported the income and the withholding agent/taxpayer pays during the
original audit and investigation the surcharges, interest and penalties incident to the
failure to withhold the tax.
3.1/2 No withholding of creditable or final tax was made and the
recipient-payee failed to report the income on due date thereof, but the withholding
agent pays during the original audit and investigation the amount supposed to have
been withheld, inclusive of surcharges, interest and penalties incident to his failure to
withhold.
3.1/3 The withholding agent erroneously underwithheld the tax but
pays during the original audit and investigation the difference in the amount
supposed to have been withheld, inclusive of surcharges, interest and penalties incident to
such error.
3.2Items of deductions disallowed due to non-compliance with Section 30 (1), the deficiency
income tax assessment for which had been issued before the effectivity of this Revenue
Memorandum Order may be allowed upon payment not later than May 15, 1984 of the
withholding tax required and supposed to have been withheld and/or surcharges, interest and
penalties. However, no refund or credit arising from such re-allowance of a previously
disallowed deduction shall be granted.

RR 12-2013 (July 12, 2013) Amending Section 2.58.8 of RR2-98, as amended, Relative to
Requirements for Deductibility of Certain Income Payments CHE
Disallowance of expenses not subjected to withholding tax
Expenses not properly subjected to withholding taxes shall not be allowed as deductible
expense for income tax purposes. However, if the withholding tax, including interest and
surcharges, is paid at the time of audit and investigation, the deduction may still be allowed
pursuant to Section 2.58.5 of Revenue Regulations No. 2-98.



43
Not anymore.

According to RR 12-2013, no deduction shall be allowed on expenses even if the withholding
tax due on the failure to withhold on the income payment is made during the course of the
BIR examination. Thus, if the BIR discovers upon audit that the required withholding tax on the
income payment made was not paid, the concerned taxpayer shall be liable to pay the deficiency
withholding tax (including interest and surcharge) and the deficiency income tax as a result of
the disallowed deduction.

RR 12-2013 was published on July 13, 2013 and 15 days hence, shall be effective on July 28,
2013.



Optional Standard Deduction
Section 34 (L), Tax Code as amended by Republic Act 9504 CHE
"(L) Optional Standard Deduction. - In lieu of the deductions allowed under the
preceding Subsections, an individual subject to tax under Section 24, other than a
nonresident alien, may elect a standard deduction in an amount not exceeding forty
percent (40%) of his gross SALES or gross RECEIPTS, as the case may be. In the
case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a
standard deduction in an amount not exceeding forty percent (40%) of it gross
INCOME as defined in Section 32 of this Code. Unless the taxpayer signifies in his
return his intention to elect the optional standard deduction, he shall be considered
as having availed himself of the deductions allowed in the preceding Subsections.
Such election when made in the return shall be irrevocable for the taxable year for
which the return is made: Provided, That an individual who is entitled to and claimed for
the optional standard shall not be required to submit with his tax return such
financial statements otherwise required under this Code: Provided, further, That except
when the Commissioner otherwise permits, the said individual shall keep such records
pertaining to his gross sales or gross receipts, or the said corporation shall keep such
records pertaining to his gross income as defined in Section 32 of this Code during the
taxable year, as may be required by the rules and regulations promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.

RR 2-2010 (February 18, 2010) ELKIE
RR 16-2008 (November 26, 2008) (Sections 1 to 7 only) ELKIE



44
NOLCO

Paper Industries Corporation of the Philippines vs. Court of Appeals (December 1, 1995) ELKIE

RR 14-01 (August 27, 2001) BONG
BIR Ruling 30-00 (August 10, 2000) BONG

Premium payments on health and/or hospitalization insurance

Non-deductible expenses
Section 36, Tax Code BONG

Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue (July 7, 1989) JUVER

Section 119-122, RR 2 JUVER

6. Individuals

Sections 24 (as amended by Republic Act 9504) & 25, Tax Code JUVERT

Ordinary Income
Passive Income
Section 22 (T) to (Y), Tax Code VAR

RR 01-2011 (February 24, 2011) VAR


45
RR 14-2012 (November 7, 2012) VAR

Capital Gains Tax
Section 22 (Z) and 39 (B), Tax Code JOSH

Supreme Transliner, Inc. vs. BPI Family Savings Bank, Inc. (February 23, 2011) JOSH

RR 8-98 (August 25, 1998) JOSH
RR 4-99 (March 9, 1999) KHA
REVENUE REGULATIONS NO. 4-99 issued March 16, 1999 further amends Revenue Memorandum
Order No. 6-92 relative to the payment of Capital Gains Tax and Documentary Stamp Tax on extrajudicial
foreclosure sale of capital assets initiated by banks, finance and insurance companies. Where the right of
redemption of the mortgagor exists, the certificate of title of the mortgagor will not be cancelled
yet even if the property had already been subjected to foreclosure sale. Instead, only a brief
memorandum will be annotated at the back of the certificate of title, and the cancellation of the title and
the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the
mortgagor will redeem or not the mortgaged property within one year from the issuance of the certificate
of sale. Thus, no transfer of title to the highest bidder can be effected yet until and after the lapse of the
one-year period from the issuance of the said certificate of sale. In case the mortgagor exercises his right
of redemption within one year from the issuance of the certificate of sale, no Capital Gains Tax will be
imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real
property was realized. In case of non-redemption, the Capital Gains Tax on the foreclosure sale shall
become due based on the bid price of the highest bidder, but only upon the expiration of the one-year
period of redemption, and will be paid within thirty (30) days from the expiration of the said one-year
redemption period. The corresponding Documentary Stamp Tax will be levied, collected and paid by the
person making, signing, issuing, accepting or transferring the real property wherever the document is
made, signed, issued, accepted or transferred where the property is situated in the Philippines.

RR 13-99 (July 26, 1999) KHA
REVENUE REGULATIONS NO. 13-99 issued September 14, 1999 prescribes the regulations for the
exemption of a citizen or a resident alien individual from the payment of the 6% Capital Gains Tax on the
sale, exchange or disposition of his principal residence. In order for a person to be exempted from the
payment of the tax, he should submit, together with the required documents, a Sworn Declaration of his
intent to avail of the tax exemption to the Revenue District Office having jurisdiction over the location of


46
his principal residence within (30) days from the date of the sale, exchange or disposition of the principal
residence. The proceeds from the sale, exchange or disposition of the principal residence must be fully
utilized in acquiring or constructing the new principal residence within eighteen (18) calendar months from
the date of the sale, exchange or disposition. In case the entire proceeds of the sale is not utilized for the
purchase or construction of a new principal residence, the Capital Gains Tax will be computed based on
the formula specified in the Regulations.

If the seller fails to utilize the proceeds of sale or disposition in full or in part within the 18-month
reglementary period, his right of exemption from the Capital Gains Tax did not arise on the extent of the
unutilized amount, in which event, the tax due thereon will immediately become due and demandable on
the 31st day after the date of the sale, exchange or disposition of the principal residence.

If the individual taxpayer's principal residence is disposed in exchange for a condominium unit, the
disposition of the taxpayer's principal residence will not be subjected to the Capital Gains Tax herein
prescribed, provided that the said condominium unit received in the exchange will be used by the
taxpayer-transferor as his new principal residence.


RR 14-2000 (November 20, 2000) KHA
REVENUE REGULATIONS NO. 14-2000 issued December 29, 2000 amends Sections 3(2), 3 and 6 of
RR No. 13-99 relative to the sale, exchange or disposition by a natural person of his "principal residence".

The residential address shown in the latest income tax return filed by the vendor/transferor immediately
preceding the date of sale of said real property shall be treated, for purposes of these Regulations, as a
conclusive presumption about his true residential address, the certification of the Barangay Chairman, or
Building Administrator (in case of condominium unit), to the contrary notwithstanding, in accordance with
the doctrine of admission against interest or the principle of estoppel.

The seller/transferor's compliance with the preliminary conditions for exemption from the 6% capital gains
tax under Sec. 3(1) and (2) of the Regulations will be sufficient basis for the RDO to approve and issue
the Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCC) of the principal
residence sold, exchanged or disposed by the aforesaid taxpayer. Said CAR or TCC shall state that the
said sale, exchange or disposition of the taxpayer's principal residence is exempt from capital gains tax


47
pursuant to Sec. 24 (D)(2) of the Tax Code, but subject to compliance with the post-reporting
requirements imposed under Sec. 3(3) of the Regulations.

In the 15% remittance tax, the law specifies its own tax base to be on the profit remitted abroad. There
is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on
the amount sent abroad, and the law calls for nothing further.

RR 06-2008 (April 22, 2008) ALMAN

RR is too long. Heres the link: ftp://ftp.bir.gov.ph/webadmin1/pdf/39882rr%20no.%206-2008.pdf
RR 06-2013 (April 11, 2013) ALMAN - ftp://ftp.bir.gov.ph/webadmin1/pdf/70201RR%206-2013.pdf
RMC 37-2012 (August 3, 2012) ALMAN -
ftp://ftp.bir.gov.ph/webadmin1/pdf/64652RMC%20No%2037-2012.pdf
BIR Ruling DA 029-08 (January 23, 2008) PHU
BIR Ruling DA 287-07 (May 8, 2007)PHY

OCWs/Senior Citizens/Disabled
M.E. Holdings Corporation vs. CIR & CTA (March 3, 2008) PHY

RR 1-2009 (December 9, 2008) MEG
RR 7-2010 (July 20, 2010) MEG
RR 1-2011 (February 24, 2011) MEG

Personal and additional exemptions/PERA
Section 35 (A), (B), (C), and (D), Tax Code BENN

Republic Act 10165, Sections 3-5 & 22-24 only BENN


48
Republic Act 9504 BENN
Republic Act 9505 - AN ACT ESTABLISHING A PROVIDENT PERSONAL SAVINGS
PLAN, KNOWN AS THE PERSONAL EQUITY AND RETIREMENT ACCOUNT (PERA)
CHE

Pansacola vs. Commissioner of Internal Revenue (November 16, 2006) CHE
Facts: On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax return
for the taxable year 1997 that reflected an overpayment of P5, 950. He claimed the
increased amounts of personal and additional exemptions under Section 35 of the NIRC
and thus prayed for a refund. Both the Bureau of Internal Revenue and Court of Tax
Appeals denied his petition. His motion for reconsideration was also denied. According to
the tax court, it would be absurd for the law to allow the deduction from a taxpayers
gross income earned on a certain year of exemptions availing on a different taxable
year . Petitioner, on the other hand insists that the increased exemptions were already
available on April 15, 1998, the deadline for filing income tax returns for taxable year
1997, because the NIRC was already effective. He reasons that by making the said law
effective on the 1998 tax period would postpone the availability of the increased
exemptions and literally defer the effectivity of the NIRC to January 1, 1999.

Issues:
1 Could exemptions under Sec. 35 of NIRC which took effect on January 1, 1998 be
availed of for taxable year 1997?
2. What is the nature of personal exemptions?

Held:
1. No. What the law considers for the purpose of determining the tax due from an
individual taxpayer is his status and qualified dependents at the close of the taxable
year and not at the time the return is filed and the tax due thereon is paid. The NIRC
took effect on January 1, 1998, hence the increased amounts of personal and additional
exemptions can only be allowed as deductions from the individual taxpayers gross
or net income for the taxable year 1998 to be filed in 1999. The NIRC made no
reference that the increase shall apply on income earned prior to 1998. Nor was there
any provision that the it has a retroactive effect.
The reliance of petitioner on RA 7167 on adjustment of personal and additional
exemptions according to poverty threshold is misplaced. Said law is a social legislation,
unlike the one in the case at bar.



49
2. Personal exemptions are the theoretical personal, living and family expenses of
an individual taxpayer. These are arbitrary amounts which have been calculated by our
lawmakers to be roughly equivalent to the minimum of subsistence, taking into account
the personal status and additional qualified dependents of the taxpayer. Personal and
additional exemptions are considered as deductions from gross income.
Deductions for income tax purposes partake of the nature of tax exemptions, hence
strictly construed against the taxpayer and cannot be allowed unless granted in the
most explicit and categorical language too plain to be mistaken. They cannot be
extended by mere implication or inference. And, where a provision of law speaks
categorically, the need for interpretation is obviated, no plausible pretense being
entertained to justify non-compliance. All that has to be done is to apply it in every case
that falls within its terms.

RR 17-2011 (October 27, 2011) Implementing the Tax Provisions of RA 9505 otherwise known as
the PERSONAL EQUITY AND RETIREMENT ACCOUNT (PERA) Act of 2008 CHE

7. Partnerships

Section 26 & 73 (D), Tax Code ELKIE

RMC 89-2012 (December 27, 2012) ELKIES
RR 2-2010 (February 18, 2010) ELKIE

8. Corporations

Sections 27 (A) & (D), and 28, Tax Code as amended by Republic Act 9294 & Republic Act 9337
BONG

(1) Domestic Corporations



50
Ordinary Income
Passive Income
Capital Gains Tax
RR 4-99 (March 9, 1999)BONG
RR 06-2008 (April 22, 2008) BONG
RMC 55-2010 (June 28, 2010) JUVERT
BIR Ruling DA 455-07 (August 17, 2007) JUVERTY

(2) Resident Foreign Corporations

Section 28 (A), Tax Code as amended by Republic Act 9294 JUVERT

In general
International Carrier

Republic Act No. 10378 (March 7, 2013) VAR

Air New Zealand vs. Commissioner of Internal Revenue (CTA Case, January 30, 2008)
VAR
Commissioner of Internal Revenue vs. BOAC (April 30, 1987) VAR
United Airlines, Inc. vs. Commissioner of Internal Revenue (September 29, 2010) JOSH
RR 15-2002 Sections 1 to 5 only JOSH

OBUs/FCDUs



51
RR 14-2012 (November 7, 2012) JOSH

Branch Profit Remittance Tax
Bank of America NT & SA vs. Court of Appeals (July 21, 1994) KHA
FACTS:. Bank of America is a foreign corporation licensed to engage in business in the Philippines
through a branch in Makati. Bank of America paid 15% branch profit remittance tax amounting to
PhP7.5M from its REGULAR UNIT OPERATIONS and another 405K PhP from its FOREIGN
CURRENCY DEPOSIT OPERATIONS. The tax was based on net profits after income tax without
deducting the amount corresponding to the 15% tax. Bank of America thereafter filed a claim for refund
with the BIR for the portion the corresponds with the 15% branch profit remittance tax. BOAs claim: BIR
should tax us based on the profits actually remitted (45M), and NOT on the amount before profit
remittance tax (53M)... The basis should be the amount actually remitted abroad. CIR contends
otherwise and holds that in computing the 15% remittance tax, the tax should be inclusive of the sum
deemed remitted.
ISSUES: Whether or not the branch profit remittance tax should be base on the amount actually remitted?
HELD: YES. It should be based on the amount actually committed, NOT what was applied for. There is
nothing in Section 24which indicates that the 15% tax/branch profit remittance is on the total amount of
profit; where the law does NOT qualify that the tax is imposed and collected at source, the qualification
should not be read into law.
Rationale of 15%: To equalize/ share the burden of income taxation with foreign corporations.

Compania General de Tabacos de Filipinas vs. Commissioner of Internal Revenue CTA
Case No. 4141 (August 23, 1993) & 4451 (November 17, 1993) KHA
What should apply as the taxable base in computing the 15% branch profit remittance tax is theamount
applied for with the Central Bank as profit to be remitted abroad and not the total amount of branch
profits.

FACTS:Compania General, a foreign corporation duly licensed by the Philippine laws to engage in business through a
branch office, paid 15% branch profit remittance tax for 1985 and 1986.It filed a claim for refund with the Commissioner in
the amount of P539,948.61 for alleged overpaid branch profit remittance tax should be based on the profits actually
remitted abroad,citing Section 24 (b)(2)(ii) of the NIRC whereas the Commissioner opined that the 15% branchprofit
remittance tax is imposed and collected at source. Hence, the tax base should be theamount actually applied for by the
branch in pursuance to RevenueMemorandum No. 8-82.



52
ISSUE:Whether or not the branch profits tax are computed based on the profits actually remitted abroad or on the total
branch profits out of which the remittance was made.

HELD:In view of the fact that the Companias branch profit remittance tax for 1985 to 1986were paid onMay 3, 1988
after the effectivity of Revenue Memorandum Circular No. 8-82, whatshould apply as the taxable base in computing the
15% branch profit remittance tax is the amount applied for with the Central Bank as profit to be remitted abroad and not the
totalamount of branch profits. The case in question Is readily distinguishable from the Burroghs Limited case, where the
Supreme Court upheld the application of BIR Ruling of January 1980 because the branchprofit remittance tax was paid
on March 14, 1979. The High added thatMemorandum CircularNo. 8-82 dated March 17, 1982 cannot be given
retroactive effect in the light of Section 327 of the NIRC.


ITAD BIR Ruling No. 018-09 (June 23, 2009) KHA
The Philippines Norway tax treaty recognizes the Branch Profit Remittance
Tax BPRT and gives way to its imposition as paragraph 7, Article 10 of the tax treaty provides that branch
profits remitted by a branch office ofa Norwegian corporation in the Philippines to its head office in
Norway may be subject to an additional tax like the BPRT at a rate not to exceed 15 percent.
Paragraph 1, Article 25 of the Philippines-Norway tax treaty does not provide a legal basisfor the non-
imposition of the BPRT. The principle of equal treatment intended by this paragraph is limited to nationals
of the Philippines and of Norway who are both residents of the Philippines. While Det Norske is a national
of Norway, it is not, however, a resident of the Philippines under paragraph 1, Article 4 of the
taxtreaty.3. Paragraph 2, Article 25 of the PhilippinesNorway tax treaty lays down a principle of equaltreat
ment between a permanent establishment of a Norwegian enterprise in the Philippines and a domestic
enterprise. Similar with the United States, the Philippines is of the view that as long a the aggregate taxes
imposed by the Philippines on a permanent establishment are not greater than the taxes imposed by the
Philippines on a domestic enterprise, it cannot be considered that the permanent establishment is treated
less favorably in the Philippines than the domestic enterprise. In this connection, while the BPRT is
imposed only on permanent establishments and not on domestic enterprises, the burden of this tax
upon a permanent establishment is, however, mitigated by the current tax regimes which greatly favor the
permanent establishment over the domestic enterprise. In view of the foregoing, your request
for confirmation that the branch profits remitted by DetNorske Philippine Branch (the branch office of Det
Norske in the Philippines) to Det Norske (the Norwegian corporation) is exempt from the 15 percent
BPRT is hereby DENIED for lack of legal basis.



Regional or Area Headquarters and ROHQs
Section 22 (DD) & (EE), Tax Code ALMAN


53
TITLE II
TAX ON INCOME

CHAPTER I
DEFINITIONS
SEC. 22 Definitions - When used in this Title:
(DD) The term "regional or area headquarters" shall mean a branch established in the Philippines by multinational
companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory,
communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and
other foreign markets.
(EE) The term "regional operating headquarters" shall mean a branch established in the Philippines by multinational
companies which are engaged in any of the following services: general administration and planning; business
planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory
services; marketing control and sales promotion; training and personnel management; logistic services; research and
development services and product development; technical support and maintenance; data processing and
communications; and business development.

RR 11-2010 (October 26, 2010) ALMAN - ftp://ftp.bir.gov.ph/webadmin1/pdf/53731RR%2011-2010.pdf

(3) Nonresident Foreign Corporations

Section 28 (B), Tax Code
SEC. 28. Rates of Income Tax on Foreign Corporations. - (b) Income Derived under the Expanded Foreign Currency
Deposit System - Income derived by a depository bank under the expanded foreign currency deposit system from
foreign currency transactions with local commercial banks including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units,
including interest income from foreign currency loans granted by such depository banks under said expanded foreign
currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such
income.
Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the
expanded system shall be exempt from income tax.


54

In general

Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. (June 25, 1999)ALMAN

Facts: Respondent is a domestic corporation organized and operating under the Philippine Laws, entered into a
licensed agreement with the SC Johnson and Son, USA, a non-resident foreign corporation based in the USA
pursuant to which the respondent was granted the right to use the trademark, patents and technology owned by the
later including the right to manufacture, package and distribute the products covered by the Agreement and secure
assistance in management, marketing and production from SC Johnson and Son USA.

For the use of trademark or technology, respondent was obliged to pay SC Johnson and Son, USA royalties based
on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent
paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00.

On October 29, 1993, respondent filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund
of overpaid withholding tax on royalties arguing that, the antecedent facts attending respondents case fall squarely
within the same circumstances under which said MacGeorge and Gillette rulings were issued. Since the agreement
was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the respondent. So,
royalties paid by the respondent to SC Johnson and Son, USA is only subject to 10% withholding tax.

The Commissioner did not act on said claim for refund. Private respondent SC Johnson & Son, Inc. then filed a
petition for review before the CTA, to claim a refund of the overpaid withholding tax on royalty payments from July
1992 to May 1993.

On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and ordered the CIR to issue a tax credit
certificate in the amount of P163,266.00 representing overpaid withholding tax on royalty payments beginning July
1992 to May 1993.

The CIR thus filed a petition for review with the CA which rendered the decision subject of this appeal on November 7,
1996 finding no merit in the petition and affirming in toto the CTA ruling.


55

Issue: Whether or not tax refunds are considered as tax exemptions.

Held: It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as in derogation
of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The
burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the
clearest grant of organic or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax
on royalties; however there is nothing on record to support a claim that the tax on royalties under the RP-US Treaty is
paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

Marubeni Corporation vs. Commissioner of Internal Revenue (September 14, 1989) PHY
N.V. Reederij Amsterdam and Royal InterOcean Lines vs. Commissioner of Internal
Revenue (June 23, 1988) PHY
Special non-resident foreign corporations
Tax on Certain Incomes of Non-resident Foreign Corporations
Interest on foreign loans
Intercorporate dividends
Section 28 (B)(5)(b), Tax Code, as amended by Republic Act 9337 PHY
Commissioner of Internal Revenue vs. Procter & Gamble Philippines MEG
Manufacturing Corp. (December 2, 1991) MEG
Interpublic Group of Companies vs. Commissioner of Internal Revenue (CTA
Case No. 7796, February 21, 2011) MEG
BIR Ruling DA-145-07 (March 8, 2007)BENN
Income covered by Tax Treaties
Mirant (Philippines) Operations Corporation vs. Commissioner of Internal
Revenue (CTA EB Case No. 40, June 7, 2005 as affirmed by SC Minute
Resolution dated February 18, 2008) BENN
Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (August
19, 2013) BENN



56
RMO 072-10 (August 25, 2010) CHE
ITAD Ruling 102-02 (May 28, 2002) CHE
In ITAD RULING 102-02 [MAY 28, 2002], Energizer Philippines claims that its
royalty payments to Eveready Battery are subject to the preferential tax rate of 15%
pursuant to the MFN clause of the RP-US Tax Treaty in relation to the RP-
Netherlands Tax Treaty. The CIR applied the ruling in CIR V. S.C. JOHNSON
AND SONS, INC. [JUNE 25, 1999], where the Supreme Court interpreted the
MFN clause, or the phrase paid under similar circumstances as referring to the
manner of payment of taxes and not the subject matter of the tax which is
royalties. The CIR found that the RP-US and RP-Netherland tax treaties show a
similarity on the manner of payment of taxes, that is, the allowable foreign tax
credit on both treaties is the amount actually paid in the Philippines. Thus, the
royalty payments by Energizer to Eveready are subject to the preferential tax rate
of 15% of the gross amount of royalties pursuant to the "most-favored-nation"
provision of the RP-US tax treaty in relation to the RP-Netherlands tax.

ITAD Ruling 024-13 (February 11, 2013) CHE

9. Withholding Tax

Section 22 (K), Tax Code ELKIE

Final Withholding Tax at Source
Section 57 (A), Tax Code ELKEY
Commissioner of Internal Revenue vs. Smart Communication, Inc. (August 25, 2010) ELKIE
Section 2.57.1., RR 2-98 (April 17, 1998) BONG
Creditable Withholding Tax
Section 57 (B), Tax Code BOGN
Filipinas Synthetic Fiber Corporation vs. Court of Appeals (October 12, 1999) BONG
Section 2.57.2., RR 2-98 (April 17, 1998) JUVER


57
RR 12-98 (August 14, 1998)JUVERT
Return and Payment of Tax
Section 58, Tax Code JUVERT
Withholding on Wages
Section 78 83, Tax Code VAR
Section 2.78, RR 2-98 (April 17, 1998) VAR
RR 1-2006 (December 29, 2005) VAR
RMC 39-2012 (August 3, 2012) JOSH
Withholding Tax by Government Agencies
Section 2.57.2., RR 2-98 (April 17, 1998) JOSH

10. Special Rules

(1) Minimum Corporate Income Tax
Section 27 (E), and 28 (A)(2), Tax Code JOSH

Chamber of Real Estate Builders Association, Inc. vs. Executive Secretary (March 9, 2010) KHA


58
FACTS: CREBA assails the imposition of the minimum corporate income tax (MCIT) as being violative of
the due process clause as it levies income tax even if there is no realized gain. They also
question the creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets stating that (1) they ignore the different treatment of ordinary assets and capital assets; (2)
the use of gross selling price or fair market value as basis for the CWT and the collection of tax
on a per transaction basis (and not on the net income at the end of the year) are inconsistent with
the tax on ordinary real properties; (3) the government collects income tax even when the net
income has not yet been determined; and (4) the CWT is being levied upon real estate
enterprises but not on other enterprises, more particularly those in the manufacturing sector.
ISSUE: Are the impositions of the MCIT on domestic corporations and CWT on income from sales of
real properties classified as ordinary assets unconstitutional?
HELD:NO. MCIT does not tax capital but only taxes income as shown by the fact that the MCIT is arrived
at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods
and other direct expenses from gross sales. Besides, there are sufficient safeguards that exist for
the MCIT: (1) it is only imposed on the 4th year of operations; (2) the law allows the carry forward
of any excess MCIT paid over the normal income tax; and (3) the Secretary of Finance can
suspend the imposition of MCIT in justifiable instances. The regulations on CWT did not shift the
tax base of a real estate business income tax from net income to GSP or FMV of the property
sold since the taxes withheld are in the nature of advance tax payments and they are thus just
installments on the annual tax which may be due at the end of the taxable year. As such the tax
base for the sale of real property classified as ordinary assets remains to be the net taxable
income and the use of the GSP or FMV is because these are the only factors reasonably known
to the buyer in connection with the performance of the duties as a withholding agent.
Neither is there violation of equal protection even if the CWT is levied only on the real industry as
the real estate industry is, by itself, a class on its own and can be validly treated different from
other businesses.

Commissioner of Internal Revenue vs. Philippine Airlines , Inc. (July 7, 2009)KHA
FACTS:PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have been liable for
Minimum Corporate Income Tax based on its gross income. However, PHILIPPINE AIRLINES,
INC. did not pay the Minimum Corporate Income Tax using as basis its franchise which exempts
it from all other taxes upon payment of whichever is lower of either (a) the basic corporate
income tax based on the net taxable income or (b) a franchise tax of 2%.
ISSUE: Is PAL liable for Minimum Corporate Income Tax?
HELD: NO. PHILIPPINE AIRLINES, INC.s franchise clearly refers to "basic corporate income tax" which
refers to the general rate of 35% (now 30%). In addition, there is an apparent distinction under


59
the Tax Code between taxable income, which is the basis for basic corporate income tax under
Sec. 27 (A) and gross income, which is the basis for the Minimum Corporate Income Tax under
Section 27 (E). The two terms have their respective technical meanings and cannot be used
interchangeably. Not being covered by the Charter which makes PAL liable only for basic
corporate income tax, then Minimum Corporate Income Tax is included in "all other taxes" from
which PHILIPPINE AIRLINES, INC. is exempted. The CIR also can not point to the Substitution
Theory which states that Respondent may not invoke the in lieu of all other taxes provision if it
did not pay anything at all as basic corporate income tax or franchise tax. The Court ruled that it
is not the fact tax payment that exempts Respondent but the exercise of its option. The Court
even pointed out the fallacy of the argument in that a measly sum of one peso would suffice to
exempt PAL from other taxes while a zero liability would not and said that there is really no
substantial distinction between a zero tax and a one-peso tax liability. Lastly, the Revenue
Memorandum Circular stating the applicability of the MCIT to PAL does more than just clarify a
previous regulation and goes beyond mere internal administration and thus cannot be given effect
without previous notice or publication to those who will be affected thereby.

RR 9-98 (August 25, 1998) except Sec. 2.28 (E)(7) Accounting treatment as amended by RR 12-2007
(October 10, 2007) KHA

(2) Improperly Accumulated Earnings Tax
Section 29, Tax Code ALMAN

The Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue (February 20, 1984) ALMAN
Commissioner of Internal Revenue vs. Tuason (May 15, 1989) ALMAN
Cyanamid Philippines, Inc. vs. Court of Appeals (January 20, 2000)
RR 2-01 (February 12, 2001) PHY
RMC 35-2011 (March 14, 2011) PHY
BIR Ruling 25-02 (June 25, 2002) PHY

(3) Fringe Benefits Tax
Section 22(AA) and 33, Tax Code MEGAN


60
Section 22 (AA)
(AA) The term "rank and file employees" shall mean all employees who are holding neither managerial nor supervisory position
as defined under existing provisions of the Labor Code of the Philippines, as amended.

Section 33
Special Treatment of Fringe Benefit. -
(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective
January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up
monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by
the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the
trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer).

The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57
(A) of this Code.

The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe
benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight
percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and
taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided,
further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe
benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B),
(C), (D), and (E) of Section 25.

(B) Fringe Benefit defined. - For purposes of this Section, the term "fringe benefit" means any good, service or other benefit
furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined
herein) such as, but not limited to, the following:.
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other
similar organizations;


61
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such rules and
regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into account the peculiar
nature and special need of the trade, business or profession of the employer.

Benaglia vs. Commissioner of Internal Revenue, 36 BTA 838 (November 5, 1937) MEGAN

RR 3-98 (January 1, 1998) MEGAN
RMC 88-2012 (December 27, 2012) BENN

(4) Transfer Pricing
Section 50, Tax Code BENN

Commissioner of Internal Revenue vs. Filinvest Development Corporation (July 19, 2011) BENN
Her Majesty the Queen vs. GlaxoSmithKline Inc., 2012 SCC 52 (Supreme Court of Canada, Court File
33874; October 18, 2012) BENN


62

RR 2-2013 (January 23, 2013) CHE
Lifted from: http://www.sgv.ph/the-new-philippine-transfer-pricing-regulations-by-romulo-s-danao-jr-
first-of-two-parts-february-42013/
RR 2-2013 (more informally called the TP Regs) will take effect after fifteen (15) days following their
publication last January 25, 2013. They prescribe the guidelines in determining the appropriate revenues
and taxable income of the parties in a controlled transaction. The guidelines are largely based on the
Organization for Economic Cooperation and Development (OECD) TP Guidelines, which have served as the
framework for TP regulations around the world.
Coverage
The TP Regs apply to both domestic and cross-border transactions of associated enterprises. The
regulations recognize that, while transfer pricing typically occurs in cross-border transactions, it can also
occur in domestic transactions with the goal of lowering tax obligations. This happens when income is
shifted in favor of a related company enjoying special tax privileges such as the fiscal incentives granted by
the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA); or when expenses of a
related company with such privileges are shifted to a related company subject to regular income taxes.
For example, Company A, a BOI-registered entity enjoying income tax holiday, sells its products at
a high price to its local affiliate, Company B, which is subject to the 30% regular income tax. Company A,
while reporting a higher income, is exempt from income tax while Company B, in claiming the expense, will
be reporting a lower income subject to 30% income tax, resulting in an overall lower tax and higher profit for
the group.
Transfer pricing in domestic transactions may also occur when expenses of a related company
enjoying tax incentives or privileges are shifted to a related company subject to regular income taxes.
For example, Company C, a PEZA-registered entity subject to the 5% Gross Income Tax (GIT), and
Company D, a company subject to normal income tax, are associated enterprises. Both incurred common
administrative expenses, but since these expenses are non-deductible to Company C, Company D takes a
bigger share of the common administrative expenses, and claims the same as deduction from its gross
income. This results in a lower tax for Company D and an overall higher profit for the group.
Arms length principle
RR 2-2013 expressly adopts the arms length principle, which is the internationally accepted standard for
determining the appropriate transfer prices of controlled transactions of associated enterprises. The principle
requires that a transaction with a related party should be made under comparable conditions and
circumstances as a transaction with an independent party. Essentially, a taxpayers income from a related
party transaction must be equivalent to what would be earned by a similarly situated taxpayer from a
transaction with a third party.
In the application of the arms length principle, RR 2-2013 provides for a three-step approach,
namely:
1. Conduct a comparability analysis;
2. Identify the tested party and the appropriate transfer pricing method; and
3. Determine the arms length result.
The regulations adopt the OECD arms length pricing methodologies without any specific
preference for any one method. These include the Comparable Uncontrolled Price Method, Resale Price
Method, Cost Plus Method, Profit Split Method and the Transactional Net Margin Method. In determining the
arms length result, the most appropriate method for a particular case shall be used. This should be the
method that produces the most reliable results, taking into account the quality of available data and degree
of accuracy of adjustments.
Documentation requirement
RR 2-2013 explicitly requires taxpayers to maintain and keep adequate and specific transfer pricing


63
documentation to demonstrate that their transfer prices are consistent with the arms length principle. More
importantly, the documentation must be contemporaneous, i.e., they must exist or are brought into existence
at the time the associated enterprises develop or implement any arrangement that might raise transfer
pricing issues or review these arrangements when preparing tax returns.
The information or details that should be included in the documentation are, but not limited to, the
following: Organizational structure
Nature of the business/industry and market conditions
Controlled transactions
Assumptions, strategies, policies
Cost Contribution Arrangements
Comparability, functional and risk analysis
Selection of the transfer pricing method
Application of the transfer pricing method
Background documents
Index to Documents
While TP documentation does not have to be submitted with the tax returns, these must be retained
by taxpayers and submitted to the BIR when required or requested to do so. Moreover, they must be
retained and preserved within the period specifically provided in the Tax Code as the retention period, which
is three years from the filing of the Annual Income Tax Return. It will, however, be to the best interests of the
taxpayer to maintain documentation for purposes of the Mutual Agreement Procedure (MAP) and possible
TP examination.

RMO 63-99 (July 19, 1999) CHE
RMO 63-99 issued August 13, 1999 prescribes the policies and guidelines on the determination of
taxable income on inter-company loans or advances pursuant to Section 50 of the Tax Code, as amended.
The arm's length bargaining standard will be used as the ultimate test for determining the correct gross
income and deductions between two or more enterprises under common control.
11. Special Entities

(1) Proprietary Educational Institutions and Hospitals

Section 27 (B), Tax Code CHE
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions
and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income
except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated
trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by
such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A)
hereof shall be imposed on the entire taxable income.
For purposes of this Subsection, the term 'unrelated trade, business or other activity'
means any trade, business or other activity, the conduct of which is not substantially related to the


64
exercise or performance by such educational institution or hospital of its primary purpose or
function.
A "Proprietary educational institution" is any private school maintained and administered
by private individuals or groups with an issued permit to operate from the Department of Education,
Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical
Education and Skills Development Authority (TESDA), as the case may be, in accordance with
existing laws and regulations.

Commissioner of Internal Revenue vs. St. Lukes Medical Center, Inc. (September 26, 2012) ELKIE

RMC 67-2012 (October 31, 2012) ELK
RMC 76-03 (November 14, 2003)ELKI

(2) GOCCs

Section 27 (C), Tax Code as amended by Republic Act 9337 BONH

Republic Act 10026 BONG
Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue (March 15, 2011)
BONG

(3) Exempt Corporations

Section 30, Tax Code JUVER

Executive Order 226, Article 39 JUVER
Republic Act 7916, Sections 23 25 JUVER
Republic Act 9178 var


65
Republic Act 9593, Sections 4 & 86-88 VAR
Republic Act 9856 VAR
Republic Act 10165, Sections 3-5 & 22-24 only JOSH

Dumaguete Cathedral Credit Cooperative vs. Commissioner of Internal Revenue (January 22, 2010)
JOSH
Commissioner of Internal Revenue vs. G. Sinco Educational Corp. (October 23, 1956) JOSH

RR 13-2011 (July 25, 2011) KHA

RMC 35-2012 (August 3, 2012) KHA

RMC 9-2013 (January 29, 2013) KHA

(4) Insurance Companies

Section 37, Tax Code ALAMN

12. Capital Gains and Losses

Section 39, Tax Code ALMN

Capital assets/income
Calasanz vs. Commissioner of Internal Revenue (October 9, 1986) ALMAN
Section 132, RR 2 PHY


66
BIR Ruling 27-02 (July 15, 2002) PHY
Ordinary assets/income
Section 22 (Z), Tax CodePHY
Tuason vs. Lingad (July 31, 1974) MEG
Net capital gain, net capital loss
Percentage taken into account
Limitation on capital loss
China Banking Corporation vs. Court of Appeals (July 19, 2000) MEG

13. Determination of Gain or Loss from Sale or Transfer of Property
Section 40, Tax Code MEG

Section 136-143, RR 2 BENN
Computation of gain or loss
Cost or basis for determining gain or los s
Exchange of property (Tax-free exchange)
Definitions
Section 40 (C)(6), Tax Code BENN
Merger or consolidation
Commissioner of Internal Revenue vs. Rufino (February 27, 1987 BENN
Transfer of "substantially all" the assets
Transfer of property for shares of stocks
Commissioner of Internal Revenue vs. Filinvest Development Corporation (July 19, 2011) CHE
Facts:
Filinvest Development Corporation extended advances in favor of its
affiliates and supported the same with instructional letters and cash and journal


67
vouchers. The BIR assessed Filinvest for deficiency income tax by imputing an
arms length interest rate on its advances to affiliates. Filinvest disputed this by
saying that the CIR lacks the authority to impute theoretical interest and that the
rule is that interests cannot be demanded in the absence of a stipulation to the
effect.
ISSUE:Can the CIR impute theoretical interest on the advances made by
Filinvest to its affiliates?
HELD:NO. Despite the seemingly broad power of the CIR to distribute,
apportion and allocate gross income under (now) Section 50 of the Tax Code, the
same does not include the power to impute theoretical interests even with regard
to controlled taxpayers transactions. This is true even if the CIR is able to prove
that interest expense (on its own loans) was in fact claimed by the lending entity.
The term in the definition of gross income that even those income from whatever
source derived is covered still requires that there must be actual or at least
probable receipt or realization of the item of gross income sought to be
apportioned, distributed, or allocated. Finally, the rule under the Civil Code that
no interest shall be due unless expressly stipulated in writing was also applied in
this case. The Court also ruled that the instructional letters, cash and journal
vouchers qualify as loan agreements that are subject to DST.

BIR Ruling No. 274-87 (September 9, 1987) CHE
Facts:
Maray Farms is a domestic corp. In 1987, some of the shareholders transferred their
PERSONAL PROPERTY to the corp in exchange for MORE SHARES of stock in the corp so
that the effect is they gained control of more than 51% of the total voting power of all classes
of stock entitled to vote
Issue: 1. Was this a valid tansaction making it tax-exempt?
Held: YES, No gain or loss is recognized. Maximum of 5 persons may perform the
said transaction. But if they LATER sell their shares of stock, they shall be subject to income
tax on gains derived from such sale or exchange. The COST BASIS of the stock shall be the
same as the original acquisition cost or adjusted cost basis.

Administrative requirements in case of tax-free exchanges
RR 18-01 (November 13, 2001) (only Sections 3 to 6 and 9 to 12) CHE

RMR 1-02 (April 25, 2002) BONG


68
Assumption of liability in tax-free exchanges
Cost or basis in tax-free exchanges
Business Purpose
Gregory vs. Helvering, 293 U.S. 465; 55 S.CT. 266 (January 7, 1935) BONG
Rulings
RMC 40-2012 (August 3, 2012) BONG
Losses from Wash Sales of Stocks or Securities
Section 38, Tax Code ELKIE
Section 131, RR 2 ELKIE

14. Administrative Provisions

(1) Accounting Periods and Methods

Sections 43-50, Tax Code ELKIE
Section 166-177, RR 2 JUVER
Section 51-53, RR 2 JUVERT

Accounting method - cash (actual or constructive) or accrual
Hybrid method
Consolidated Mines, Inc. vs. Court of Tax Appeals (August 29, 1974) JUVERT
Percentage of completion method
Section 48, Tax Code VAR
Section 44, RR 2 VAR
Change of accounting period


69
Installment basis
Bibiano V. Banas, Jr. vs. Court of Appeals (February 10, 2000) VAR
Allocation of income and deductions

(2) Returns and Payment of Taxes

RR 019-11 (December 9, 2011) BONG

Individual Return
Section 51 & 56, Tax Code BONG

Who are required to file
Those not required to file
Where to file
When to file
Where to pay
Capital gains on shares of stocks and real estate
Quarterly declaration of income tax
Section 74, Tax Code BONG

Corporation Returns
Section 52, 53 & 56, Tax Code JOSH
Quarterly Income Tax
Section 75, Tax Code JOSH
Final Adjustment Return


70
Section 76, Tax CodeJOSH
Systra Philippines, Inc. vs. Commissioner of Internal Revenue (September 21, 2007)CHE
Philam Asset Management, Inc. vs. Commissioner of Internal Revenue (December 14,
2005)CHE
Where to file
When to file
Section 77, Tax Code CHE
When to pay
Capital gains on shares of stock
Return of corporations contemplating dissolution/reorganization
Section 52 (C), Tax CodeKHA
SEC. 52. Corporation Returns.
(C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within
thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the
liquidation of the whole or any part of its capital stock, including a corporation which has been notified of
possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization,
render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution
or plan and such other information as the Secretary of Finance, upon recommendation of the
commissioner, shall, by rules and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange
Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a
certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the
Securities and Exchange Commission.


Sec. 244, RR 2 KHA

Bank of the Philippine Islands v. Commissioner of Internal Revenue - CA-GR Sp. No. 38304
(April 14, 2000) KHA
BPI v. CIR
Facts: By virtue of the Articles of Merger approved by the Securities and Exchange Commission on July 1,
1985, petitioner BPI became the successor-in-interest of the Family Bank and Trust Company (FBTC)
whose corporate existence ended on June 30, 1995.


71
From January 1 to June 30, 1985, FBTC earned incomes consisting of rentals from its leased properties
and interest from treasury notes purchased from the Central Bank. Pursuant to the Expanded Withholding
Tax Regulations, the lessees of FBTC withheld 5 percent or P 118,609.17 on said rentals while the
Central Bank withheld 15 percent or 55,456.60 on the interest on the treasury notes. These withheld
income taxes in the total amount of P 174,065.77 were remitted to the Bureau of Internal Revenue.
Moreover, the FBTC had a prior years' excess credit of P 2,146,072.57, This excess credit plus the
withheld income taxes amounted to P2,320,138.34.
On April 10, 1986, the FBTC filed its final income tax return with the BIR showing a net loss of
P64,502,935.00 and a refundable amount of P174,065.77 representing the creditable income tax withheld
at source from January 1 to June 30, 1985. On October 7, 1986, petitioner BPI as successor-in-interest of
FBTC filed a letter claim dated October 10, 1986 (Exhibit B) with the BIR asking for refund of
P2,320,138.34. The BIR however refunded to petitioner BPI only the amount of P2,146,072.57 (prior
years' excess credits).
Since the BIR refused to refund the withheld income taxes on rentals and interests in the amount of
P174,065.77, petitioner BPI filed on December 29, 1987 a petition for review with the Court of Tax
Appeals seeking a reversal of BIR's resolution. After due proceedings, the Court of Tax Appeals rendered
on July 19, 1994 a decision dismissing the petition for review on the ground that the claim for tax refund
had already prescribed citing Sec. 78 of the Tax Code and Sec. 744 of the Income Tax Resolution, the
CTA held that said return should have been filed within 30 days from SEC's approval of the Articles of
Merger on July 1, 1985. Petitioner BPI disagrees and, invoking Sec. 46 (a) and Sec. 70 (B) of the Tax
Code, contends that said return should have been filed on the 15th day of the 4th month following the
close of FBTC's taxable year. A motion for reconsideration was filed but it was denied.
Issue: Whether or not BPIs claim for refund of witheld income taxes had already prescribed.
Held: Yes. To resolve this issue, it is necessary to determine the deadline for the filing by the FBTC of its
final adjustment return.
It should be noted that this case was decided under the Tax Code which has already been amended and
modified by R.A. 8424 otherwise known as the Comprehensive Tax Reform Program which became
effective on January 1, 1998. With the parties invoking different provisions of law and regulations, there is
a need to reproduce them for a better understanding and resolution of issues.
Sec. 78, Tax Code
"Sec. 78. Return of corporation contemplating dissolution. Every corporation shall, within thirty days
after the adoption by the corporation of a resolution or plan for the dissolution of the corporation or for the
liquidation of the whole or any part of its capital stock, render a correct return to the Collector of Internal
Revenue, verified under oath, setting forth the terms of such resolution or plan and such other information
as the Minister of Finance shall by regulations, prescribe."
Sec. 244, Income Tax Regulations
"Sec. 244. Return of corporation contemplating dissolution or retiring from business. All corporations,
partnership, joint accounts and associations, contemplating dissolution, shall within 30 days after the
approval of such resolution authorizing their dissolution, and within the same period after their retirement
from business, file their income tax return covering the profit earned or business done by them from the
beginning of the year up to the date of such dissolution or retirement and pay the corresponding income
tax due thereon upon demand by the Commissioner of Internal Revenue. . . ."
"A closer look of Section 46(a) and Chapter X of Title II showed that it both made specific mention of
"income tax return" and "income tax payments", respectively, Normally, an ongoing corporation files a
Quarterly Corporate Income Tax Return. The final adjustment return therefore aptly refers to the Final
Adjustment Income Tax Return. All references pointed to by petitioner have some relations to income tax
payments and the filing of an accurate Income Tax Return. We cannot deviate from the fact that indeed
'correct return' means 'correct income tax return', the Final Adjustment Income Tax Return.


72
"Moreover, this Court gives more weight to Section 244 of Rev. Regs. No. 2 when it stated 'income tax
return'. As a rule, all regulations promulgated by the Secretary of Finance for the effective enforcement of
the provisions of the National Internal Revenue Code are presumed valid unless they are unreasonable
and contrary to law or the Constitution.
In view of the foregoing, this court, finds no reversible error in the appealed decision.

Philippine Deposit Insurance Corporation vs. Bureau of Internal Revenue (June 13, 2013)
BENN
Returns of GPPs
Section 55, Tax CodeBENN
Returns of Receivers, Trustees in Bankruptcy or Assignees
Section 54, Tax CodeBENN
Others not captured
Section 59, Tax CodeBENN

Other income tax requirements
Section 67-72, Tax Code ALMAN

United Airlines, Inc. vs. Commissioner of Internal Revenue (September 29, 2010) ALMAN