Tax1 LLB404 2012-2013 Midterms Notes

TAXATION 1
AY 2012-13
MIDTERMS
DATE: 06/23/12
As we go along, I would encourage you if you don't understand; I would encourage
you to ask questions. If not, you can ask your seatmate after the class or you can
ask those who already know the subject. Probably there is someone here, there a
few who have undergone the same subject in their pre-law years. So, what are our
rules? This is 3-unit subject meaning to say we will have 3 major exams:
midterm, finals, and pre-. Pre- what? Pre-fi, pre-mid? Our midterm exam in tax
law includes only up to August 7-11. We didn't have class last week. Therefore, we
have fewer meetings left for midterms. I usually give pre-midterm exam rather than
pre-finals but this year, we are going to adjust with the pre-finals because
midterms with be in the 2nd week, August 7. We will have midterms, pre-finals and
finals. Please make sure that once you reach/finish pre-finals, you only have one
chance left. One major exam left. Unlike if it's pre-midterms, midterms. I never give
4 major exams. I don't give 4 major exams. So, every examination, major exam,
because... that's until 2nd semester, right? And, since we are taking it one
semester at a time, you're short-term goal is to make it every semester in order to
graduate in this school. There is a higher chance for you to make it in the bar.
So, hopefully by the time that you take the bar exam, taxation is not going to be
one of the subjects because for the past 7 years, there has been clamor to take off
the subject for the reason that not many of us are appreciative of numbers.
Although I wouldn't be expecting the bar that is difficult as to the real world of
taxation. It's just that, for purposes of discussing in this class, I cannot avoid
making illustrations. So, there will be numbers. Although, it has been prohibited in
the bar exams to ask for computations. There has been computations required of
barristers. So we will not forego with that. Just take it as a bonus. It's not making
your life difficult, it's expounding on what you're learning. If we just focus on the
provisions, there in the codal if you have looked into the tax code. For those who
have not read the tax code as yet, once you do start reading it, it takes not just one
reading or two readings for you to understand it, the technical provisions. So you
have met taxation along the way prior to reaching this stage? Easy or difficult? It is
difficult, no? Kind of difficult but let me tell you that taxation in your pre-law class
will be different in taxation in this class. So, that means somehow on equal footing
on one hand. So try harder in passing raw scores correctly in the exam.
I wouldn't/ I am not giving up the grade because I like to. The grades that I am
going to submit are the grades that you are making. That means to say that if you
give me your performance level, it would be the grades that you will see in the
computer. Major exams - midterms and finals will be given 30 points each.
Then, pre-finals 25% and lastly 15% for your class standing comprising
your oral recitations and surprise quizzes if I will be giving. And passing/I
don't want any student approaching me once I have submitted the final grades
asking for a reversal. It's not going to happen. That was an exclamation point. So, a
5 is already a 5 unless that the reason, probably I made a mistake/the computer
made a mistake in the calculation. But in so far as giving you the raw scores, it's
already/ as if there's no change once I give you your grades. So, if you are doubtful
of your class standing, probably you will need additional help from either of your
classmates who are experts in taxation here. You may ask how you fair already in
class. Do I need to check regularly your attendance when youre needed?
Not needed because I will be calling all of you. There will be oral recitations
every meeting and in case you are not around, that would take how many oral
recitations in order for you to recover. And for excused absences, it has to be given
beforehand that means to say I have to know beforehand of your absences unless
an emergency will occur. Raw scores - passing is 75% and probably the lowest
that I will give, it cannot be 60 over 100 passing. That would applicable this year
and so forth. So, if nobody will get 75, probably there would be an adjustment in
the passing scores - around 70. Any questions? Any clarifications? None. Kindly
write your names, room no. and you pre-law course.
Have you been told that your reference will be for General Principles, will be the
book of Dimaampao and for income taxation, that would be the book of
Mamalateo. If you notice, there is only 2 major topics for this semester:
General Principles and Income Taxation while the rest will be covered by Tax 2
which are estate and donor's taxes, value added tax, remedies under the Tax Code,
the Court of Tax Appeals law, double taxation, real property taxation and tariff,
customs, and duties. All of those will be covered in Tax 2. Why only 2 topics in Tax
1? We have to concentrate on Income Taxation. We will be devoting only few
meetings for General Principles. There will be 80 to 90% will be covered by
Income Taxation. It's the largest coverage for the bar. In fact, if the rules have
not been changed, 40% of the tax questions should, if the examiner will be
following, should have 40% weight while the rest will be given 5% each.
I only gave 2 textbooks as your source materials but it is a
requirement/mandatory that you will have with you your Tax Code. Even if
you don't have the resource materials in original copy, your Tax Code should
somehow be lasting until the Bar. Why? It is what we call your Bible in Taxation.
For most part of Taxation, it's where you see all national taxes administered by the
Bureau of Internal Revenue. We also have the Bureau of Customs, it's a different
law.
So, our tax code, the most recent tax code is Republic Act 8424 which is the
National Internal Revenue Code of 1997 which was effective in 1998. It was
actually superseded the previous tax codes of 1983, 1977 and the first tax
code of 1939 copied from the United States. So what you have in the Tax Code of
1997 effective 1998 and not so good (?) but it was somehow/ some provisions in
the value added tax were amended in 2005 by Republic Act 9337. Remember
the increase in the Value Added Tax from 10% to 12%. That was Republic Act
9337, 2005. (?). And another amendment is/but still we have Republic Act
8424, it was amended in part, in so far as introducing the exemption from
taxes of minimum wage income earners. That was in 2008-July 6, 2008 Republic Act 9504. Those were the major amendments. All the rest of Republic
Act 8424 stays the same. Make sure your Tax Code is the amended one.
And I have to tell you honestly that Saturdays are usually days for - I call it (family
day). I will not be on the 30th of next week. I will not be here on the 30th. In so
far as if I were a student with you now, I would not want a make-up class. That
would require me to meet you on some other day, di ba? So what I will be
proposing is that for July 7 and 14, we will having our class one hour early because
I cannot extend one hour late. You have another class. Instead of 1:30, we will start
12:30 of July 7 and 14. Do you have any other proposal for that if you are not
agreeable? I can meet you for a 3 hour class at 8:30 on June 30 if you want. But all
working students, that will taxing (?) Di ba? Do you like that arrangement? So,
what about the 12:30 until 4:30? Instead of meeting for another day or for a special
class, we will instead, don't worry, there will be a break in between - for 4 hours.
You can just imagine 4 hours, di ba? I think your attention span will last only for a
TAX MIDTERMS COMPILATION JENNIFER, JASPER, REUVILLE, RYAN, JADE, KRISTEL, JARED, JAN, NEIL, JESSTONY | 1
few minutes. And again on August 4, I will not be around. I planned out my
schedule for the entire year and Saturday (?). Do you know ? Saturday just before
midterms. I would propose again that to cover up for August 4, we will be meetingyou want Monday for that. No. For June 30, we will have July 7 and July 14, an hour
early. But for August 4, that's the Saturday before midterms, it is imperative that I
will meet you, it should be before midterms. Right? So, I was thinking that it should
be July 21, and 28, an hour early. So that means that the entire July for Saturdays,
you, and me also, 12:30 to 4:30. I have another proposal. Instead of 21 and 28,
we can have August 6, the day before you first midterm exam. It is a holiday. You
like that? (?) You are not even sure what subject is for the 1st day, di ba, August
7? Not tax, your tax is either Friday or Saturday. So, you want the 1st option which
is/so for the entire July, all Saturdays will have to be for 4 hours. Heavy. It's no
problem because just before midterms, you have your Saturday free. We could have
a special meeting if you like on a Saturday. Any other questions or do you have any
questions? We haven't started yet. People at the back, can you hear me? It's
usually a problem of my voice. It's very soft. So we will start.
First meeting, I am supposed to get to know you, di ba? But you have waived and I
have waived our first meeting. We were supposed to meet last Saturday. Classes
were suspended. The outline that I have given you is for General Principles. I will
be giving you another one... It depends on the pace that we are going to have.
Plenty of accounting and management accounting students. In the other class, there
are only like .. accounting students. For those who know, much is expected.
The outlines are there to help you follow through the discussions. It would frustrate
me if the question that I am going to throw at you was given/was already available
in the outline and you still can't answer. This has happened in the past. So, shall we
start with our oral recitations? It's not oral reading.
Remember the general principles, it's the easiest by far for Taxation. You have
already mastered it from Constitutional Law. What are the 3 main powers of the
government and who exercise the power of taxation. Simple recall...
Do you know the power of Taxation? What is the power of Taxation?
Taxation is the power by which the sovereign, through its law-making body, raises
revenue to defray the necessary expenses of government.
It is an inherent power of every sovereignty exercised by what branch of
the government?
It is exercised by the legislative department.
Exclusively?
Student: Yes maam but subject to restrictions provided by the Constitution. And
can be validly delegated to the President and through the local government units.
The power of taxation is inherent in every sovereignty and exercise by the
legislative branch of the government.
Burdens in the form of taxes against whom?
Imposed upon subjects, objects, activities or transactions. Subjects maybe citizens,
residents or not residents and even the type of tax that is to be imposed. Exacted
not only on persons or the subjects of taxation, property or objects of taxation, and
as well as activities or transactions performed within its jurisdiction.
Taxation is inherent in ever sovereignty, exercised by the legislative branch of the

government. Exacting burdens upon subjects, objects, transactions or activities. For
the purpose of raising revenues in order to meet the legitimate needs of the
government.
Have you been affected of taxes? Are you working? How are you affected?
Student: VAT maam! Buying in the fastfood.
So we cannot say that taxation will only affect those that are earning income.
Because taxation is not just solely related to income taxation. Earning income, we
will have income tax. For all other type of transactions, is affected somehow by
other tax. For a simple activity of purchase, value added tax affects almost
everyone in the consumer world. For every purchase that you make, did you notice
that you are passed on with a tax? Actually, its not the establishments that are
liable for the value added tax. Their liability is only to remit whatever you have
shouldered. As in fact, if you purchase a watch. You purchased that watch at SM.
Did you notice that the prices of these things include the value added tax? You are
the one that is burden with this tax. And not the seller whos going to just remit
what you shouldered. If you buy a book, if you ride a plane, there is always a tax
attached to it.
So in short, the nature of taxation boils
1. Inherent prerogative of the sovereignty
2. Legislative in character
3. Subject to constitutional and inherent limitations
down
to
three
nature
We were saying that the power of taxation is inherent in every sovereignty.

Why do you say so? Is it not confirmed by the Constitution?
So in short the government will not give services without the payment of taxes. So
we will have to believe that these politicians are not interested in taxes? Student:
Of course they are!
But for purposes of discussion, it is the State that is in need of taxes in order to run
the government.
Were saying inherent and not by the Constitution but what are these
constitutional provisions saying about taxation? Is it not the State the right
to tax?
Student: The constitution when talking about the taxation, it sets limits for the
taxation power.
When you come in point of time when there was no Constitution in effect,
does it mean to say that there is still the right of the government to impose
taxes?
Student: Yes ma'am.
Since it is not based on the confirmation of the constitution, the absence of the
Constitution make the government relinquish its rights to impose taxes. The power
of taxation, one of the key powers of the government, is the most pervasive of all
although police power is pervasive also. Pervasive in the sense, all the different
stages in our life are affected by taxation.
It is primarily legislative and only the legislative can enact a law to impose taxes.
And as mentioned, there are instance where it can be delegated. We will discuss
that when we reach inherent limitations.
The third nature of the power of taxation is that there are limitations.
What are the two classes of limitations?
Inherent and Constitutional limitations.
When we say inherent limitations on the power of taxation it means that the
right to tax of the government, there exist a limit to tax or restrictions. It does
not need any law or provision for the limitation to apply. For example, every
tax that need to be imposed have for its purpose the general welfare or for the
purpose of the common good. Otherwise, if the legislative branch will enact a
tax for the purpose of aiding a private enterprise, that will be robbery in its
sophisticated form. Youre giving someone elses money for a private person
and not for the general welfare.
And the second limitation to tax is the Constitutional limitations which are
found in our Constitution. You were saying a while ago that the provisions in
the Constitution simply refers not to grant the power but simply to set out the
limitations to power of taxation. Such as? (Students example was uniformity
and equality of taxation.) So there are many Constitutional limitations, and one
of these is uniformity of imposing taxes. That means for all types of subjects
belong to the same class will have to be subjected to the same rate.
What are the theories which would support the power of taxation?
Lifeblood theory?
Student: Taxes are need by the government in order to support the government
and in order for it to survive.
Overused theory that came from various Supreme Court cases. When there is a
question relating to whether an object, subject or activity is subject to tax,
lifeblood theory will come in. In the same way, if you are not sure of what to
answer whether a transaction is subject to tax, you will probably have one
chance left to discuss the lifeblood theory. But mind you class, it will not apply
at all times. The lifeblood theory tells us that in order for the government to
survive it has to be supported by its people and taxes will be the lifeblood of
every government. And there are many cases where in it was illustrated and
many provisions in the tax code that somehow illustrate why collection of taxes
is important to the government and how it is implemented. For example
government through BIR, our tax authority, cannot be denied in the collection
of taxes. Meaning to say that courts cannot file an injunction to stop the
collection of taxes as it deems fit in a tax assessment, safe in one exception.
You will learn that in tax 2. Practically all cases and methods of collection will
be supported by the government unless it is for an arbitrary right. Taxes will
not be subject to compensation or set-off. Meaning to say, that if you have a
claim for refund with the government for overpaid taxes and here comes an
assessment of underpaid taxes, you did not tell the government that it should
not proceed with the levy of your property because you have an existing
collectible from the government, it cannot be set-off. For the simple reason that
taxpayer and the government are not debtors and creditors of each other.
There are full of exceptions. (Tax 2)
And another instance where the lifeblood, the power of the tax is in relation to the
power to destroy. We will talk about that later.
CIR vs. CTA. Citytrust case! (sorry dili kayo clear ang transcription sa case)(just
kindly read the case)
Student: Citytrust was asking for refund because they claimed that they have
overpaid of their taxes. But when they claimed for refund, it was denied by BIR.
So you noticed class, when you file for a case for refund, usually half of the case is
denied by BIR.
It was in this case that there was a contention by BIR they could no longer the
overpaid tax because it was beyond the prescriptive period. _____________. The
court decided that indeed that the OSG is correct, the refund cannot be given
because it was beyond the prescriptive period.
That case is what year? 1994.
Student: The Supreme Court provided that the state is not bound by the mistakes
of its agents.
What agent? Did it not that BIR pursue the case?
BIR is commissioner of internal revenue. Every case filed by BIR is conducted by the
legal officers of the bureau.
This is a claim for recon which was granted by what court?
Granted by the court of tax appeals, confirmed by the court of tax appeals and
granting for recon was because the BIR failed to submit evidences as well. _______
(do not know unsay sumpay)
of the BIR, or the tax appeals is required to submit proof such as official receipts,
invoices etc., and the other party is required to submit their evidences. So in the
case of Diliman vs. Tax Appeals, court gave another chance to BIR and required
them to submit their own evidences.
For purposes of our discussion, we are looking into is how did the SC decide on
issues of requiring the govt to give back taxes that were supposedly erroneously
paid? Did they give up easily to say that they should give back the taxes to the
taxpayer. Sure enough they would say that its the lifeblood of the govt, its what
they use to pay for a civilized society and any form of relinquishment of such rights
should not be decided so easily. In 2006 this was finally resolved by the SC.
MR CLEMENCIO? Was the lifeblood theory upheld in the case of CIR vs.
ALGUE?
Wait maam, Ill try to remember. I believe that the life blood theory was not upheld
in the Algue case because what happened wasAlgue was claiming for deductions..
What type of deductions? What type of easement?
Tubal: Deductions for the expenses that they incurred in the purchase of the
properties of PHILIPPINE SUGAR ESTATE and their venture in the experimental
business called VEGETABLE OIL INVESTMENT CORP. so they were claiming for tax
deductions but..
Okay class, let me give you a background in tax deductions would actually
be strictly looked into by the govt. Why?
Whenever you claim expenses or tax deductions, it would not really lessen lower
your taxable income, which would be translated to lower tax collection, in this case
there was a claim for promotional expenses, usually this are incurred during the
billing of the corporation from the state while the operations are still going on. Wt
was claimed as an expense deduction.
Was it allowed by the BIR?
Student: The BIR COMMISSIONER contended that these expenses were not
ordinary, reasonable, and necessary business expenses. Thats why they disallowed
the tax deductions claim. However when the case went up to the SC they said that
Algue successfully proved that the expenses incurred were for such purposes that
would benefit the GOVT also thats why it deserves to be a deductible item,
because it says here that they were successful in convincing investors to venture
into the experimental business and it will cost them millions which the govt will also
benefit because of the revenues and the jobs that will be created.
Ok, since you are already in 3 rd year, you will have subjects on corporation code
where you will learn that in the operation of business there are 3 operational stages,
and in the operational stages you would either sell the stocks if you want investors,
if you cannot invest in it solely or with your family you will somehow have to hire
somebody to sell your stocks successfully, somebody who is really engaged in that
kind of activity. There is a chance that they will be denied. Aside from the fact that
they dont want to give tax deductions, for expenses to be considered as a
deductible item it should be ordinary, reasonable and necessary. Those are the 3
criterias you look into for the deductibility of an expense. If its ordinary to the
business that you are engaged in, is it necessary, is it reasonable. So when you are
in a pawnshop business ordinarily you need a security guard. Pero when your
business is selling in the sidewalk it wouldnt be necessary, reasonable in amount, in
fact it involves million expenses for a ten million investment..is the amount for
promotional fees reasonable? Its not? Therefore it is allowed, but in this case it was
found out to be ordinary, necessary, reasonable therefore it is deductible. the
doctrine was not upheld. you cannot argue that because of the lifeblood doctrine the
BIR correctly decided that it is not deductible. So its not in all cases that the
lifeblood doctrine is upheld.
What is the necessity theory?
Student: the second theory of the basis of taxation is the necessity theory. It means
that the basis of taxation is deeply rooted from the STATES necessity to raise
revenues to support public service. on the other hand the peoples necessity for
services and protection from the state in the form of infrastructure, navy, army, air
force and also for improvement in the economy and science and such needs of the
people which they expect the government to provide for them.
So do you think the govt will be justified to raise the current taxes of
corporations which is 30% in order to raise revenues, to defend our
Scarborough Shoal?
Student: In my opinion, I think it would not be necessary, I believe that if the
administrative side of collecting taxes would be done properly, we would have
enough budget to fund our national defense, in fact I believe this is already in our
budget but somewhere along the way it went to the pockets of politicians.
What is the symbiotic relationship theory?
Student: It means that the people, although they are burdened or made to
surrender a part of their property to the government, they should do so because in
turn the government is giving back compensation through services.
So its a give and take relationship between the govt and the people. The govt can
support its people if the people will support the govt, and support should be
proportional.
When you are saying through the benefits received by the people, can a
person who has not received any benefit from the gov't refuse to pay
taxes?
Student: As we have discussed earlier, the power to tax is (COULDNT HEAR WHAT
SHE SAID), and another reason is that it doesnt mean that a person did not directly
benefit from the government, it doesnt mean that ultimately he wasnt benefited
because the principle behind public purpose is it is both the direct and indirect
benefit that a person receives, even if a person is not directly benefited..The
development and the enhancement that the govt provided the state of the people
in general is also considered.
Ok it is not required for a person or taxpayer to be liable to the govt to support it
through taxes, that he or she would receive a direct effect.. on the same note, even
if a person is directly benefiting from the govt through food allowances, etc. to the
underprivileged and that they are not paying any taxes, the other taxpayers cannot
say that they should be required to pay taxes because its a balancing situation,
thats why we have a progressive system of taxation, the more you can afford. The
more you are liable to pay taxes. As for minimum wage earners, they are already
exempt from paying taxes.
What is the primary purpose of taxation?
Student: They primary purpose of taxation is to raise revenues.
Is revenue raising an exclusive purpose of the power of the legislature?
Student: There are other purposes of taxation, such as (inaudible) giving of tax
incentives for the welfare our economy and also for the welfare of our local industry.
How can our taxation affect our local industries?
Student: Foreign investors will be encouraged to invest more because they will get
tax exemptions. In a way the income tax we get from them are (inaudible)
So we have the primary purpose of taxation, which is to raise revenues in order to
meet the services for the govt. in all kinds of taxation whatever you call it, it
always has the primary purpose of taxation which is to raise revenues such as
estate taxes, when is it imposed? When does it take effect? So when somebody
dies, automatically the state will be interested in the property or the estate left by
the decedent and it will be subjected to estate tax. What really is the purpose
behind?, there should be a basis as well for imposing tax because its not income
tax, all the decedent did was die, and now his estate is subject to tax? There should
be another purpose aside from revenue reasons? Because according to the state it
is a silent partner in the accumulation of wealth of the decedent, the decedent and
his estate received benefits in perfecting the property throughout its lifetime. In the
same way income taxation or taxes in general encourages the local industry by
giving incentives like they dont pay income tax for the first 3 or 4 years of
operation to encourage investment from outside the country.
And also another secondary purpose of taxation is that it would protect our
local industry from what?
Student: From the intervention of
Ok, imagine the businesses in china, they could actually produce the same type of
products which they would then sell at a lower price. Where would they buy the
products? So in order to protect the growth of our own local industry we can play
around with taxes, customs dues and tariffs in the importation of these products. If
we would like to protect our local industry from this type of dumping of very cheap
items in the Philippines, we can raise customs duties and tariffs or even impose
bans on certain products from entering into the country so we can enjoy our own
products produced by our local manufacturers. The regulation becomes secondary,
although the collection of taxes has a revenue raising purpose.
And another secondary purpose is?
Student: For regulation maam. For example cigarettes there is excise tax cause its
bad for the health of the people. Another would be to reduce social inequality..in the
sense that if you have more you will be taxed more.
Could you give me an example?
Student: The tax that you pay is proportionate to the income that you earn.
Ok, to reduce social inequality, in the sense that if you earn more income you will
belong to a higher tax bracket. as your income increases your tax increases..but
actually its not happening..the gap between the rich and the poor is widening.
Is regulating a purpose of taxation?
Student: Yes that is a secondary purpose of taxation. First taxation has the power
to destroy for example cigarettes, they are bad for the body so in order for people
to avoid smoking, higher taxes are imposed on cigarette companies, and higher
taxes mean higher prices thus higher prices mean people will get discouraged to
buy.
So these are the same taxes imposed on cigars and liquors..we are actually
directing our taxes against the products itself not to the business or producer
because all corporations whether involved in the production of these items or not
will be slapped with the same tax rate in your taxable income..all your transactions
will be imposed the same taxes. The difference would lie in that if you produce
these items such as cigars and liquors will be slapped with an additional type of tax
which is the excise tax. If you see the stamp on top of the cigarette pack and the
wines there is a stamp signifying they paid an excise tax. So not only the income
tax paid by Lucio Tan, and not only the VAT which is ultimately passed on to the
buyer but there is another type of tax. It would result to a higher price but actually
in our country its not that bad .even regulars smoke, so they could really afford.
So you were saying it involves the power to destroy?
Student: It also has the power not to destroy, like it may strengthen our local
industry by giving incentives.
Lets talk about when it has the power to destroy and when not a power to destroy.
To what extent is taxation allowed as a power to destroy?
Student: Only in regulatory purpose..
Lets make it simple, the power to tax involves the power to destroy if it is used to
implement the police power of the state, not for purposes to raise revenue. Because
if the purpose of the taxation involves only to raise revenue you can never use it as
a power to destroy, it only becomes a power to destroy if it is somehow police
power.
But, would all implementation of police power of the state carry with it the
power to destroy? or would there be any limitation to that power?
Student: Yes maam, as long as there is compliance to the substantial and

procedural requirements, prescribed by the constitution then it would limit the
power to destroy.
So that would apply to every enactment of the tax law. It would have to follow the
rules on substantive and procedural due process, so even if it is the interest of the
govt to implement the police power of the state we have to consider if the law is
valid or not. Otherwise the SC would not uphold it. Because in your reading you
may have read that the power to tax is not a power to destroy so long as the SC
sits. It simply means to say that, so long as the SC is there to determine whether
the exaction is valid or not in the implementation or regulation of a business or
entity, it will not involve the power to destroy. In more cases the power to destroy
is only used to regulate or limit what type of entities? basically those that are
inimical to the public or general welfare..ex. the closure of jaguar bar.
What are the 2 aspects of the power of taxation?
Student: that is the levying/ imposition of taxes and the tax administration or the
collection of taxes.
Are both legislative in nature?
Student: No maam. Only the imposition of taxes is legislative in nature, the
assessment and collection of taxes is under the executive dept.
Aspects of taxation
Levy or imposition
Determination of purpose
It is with Congress to determine the public purpose of its law. So at the enactment
stage, the court has no right to inquire the wisdom/objectivity of the law. It is only
exclusive to the legislative branch. But once if there is a person questions the tax
law or taxpayers suit, the court can eventually determine whether or not the law is
for public purpose.
Determination of the subjects and objects of taxation
So to what type of person, property or activity is the tax directed against. There
should determination of who are the subjects, what objects, and what type of
transaction.
For example, the Local Government Code, insofar as the chapter on real property
tax is concerned, is only directed in determining what type of objects subject to real
property tax. You cannot see in the chapter a tax directed against an activity. So
maybe...
And what else?
Determination of the amount and rate of tax
You will notice that most of the taxes imposed by the legislative branch are in the
form of rates. Usually, it is in the form of tax rates. Ex: Income tax
And?
Determination of the kind of tax to be collected
Can you give us the different taxes that you know?
Student: Income tax, excise tax... etc. (di maklaro)

If youre engaged in the business of selling real properties, primary tax would be
the income tax. Second, is the VAT. Third, is the documentary stamp tax. And
finally, you will pay local transfer tax to the LGU.
For the first basic principle, there has to be fiscal adequacy to meet the
needs of the government, expenditures and others. There is this revenue
that covers the expenses that needs to be incurred by the government in
order to serve its people somehow it should be, not necessary equal,
adequate.
But it should be within our taxing jurisdiction

Determination apportionment of the tax
Apportionment of tax is determining what bracket of income would be subjected to
the tax. Example: Increasing the VAT rate from 10% to 12%.
Determination of the Manner and Mode of Enforcement and Collection
As a general rule, it is from the legislative branch. But it is further expanded by the
Bureau of Internal Revenue (BIR) for its actual collection. In the tax code, you will
see that income taxes are to be paid on the intervals of every quarter of the year, it
is already mandated by the Congress. If it is provided by the tax code that there
should be withholding of taxes, but the tax code does not provide on how to
withhold, it is now with the BIR to formulate the manner and mode of collection.
Administration
Agencies involved:
Can the BIR collect taxes without a tax law?
No, although the power of taxation inherent in every sovereignty, but its definition
would continue to say that it shall be exercised by the legislative branch. It is purely
statutory. Without a law, no tax can be collected.
There must be a law to collect taxes. In fact, if the law imposing the tax is doubtful,
it should be strictly construed against government, and in favor of the taxpayer.
But it should be other way around if the law is an exempting law, or amnesty, etc.
Lets now proceed to the second aspect of taxation Tax administration
What are the particular agencies involved in the tax administration?
1. Bureau of Internal Revenue
Headed by its Commissioner, under the Department of Finance. So we
could say that the Secretary of Finance is more powerful than the
Commissioner.
If a Commissioner will issue a ruling or opinion and a taxpayer questions it,
the Secretary of Finance can overturn the ruling or opinion.
2.
3.
Bureau of Customs (same with BIR, headed by its commissioner, under

DOF)
Provincial, City and Municipal Assessors and Treasurers
The third collecting agencies are the Local Govt Units.
Basic Principles of a Sound Tax System

What are the basic principles of a sound tax system?
1. Fiscal adequacy
2.
3.
Theoretical justice or equality

Administrative feasibility
Sources of revenues:
a. Taxes
b. Borrowings from International Funds
c. Subsidies from foreign government
If there is 100-Billion in revenues, only 50-Billion expenses. Is there Sound
Tax System?...
Fiscal adequacy:
The sources of revenues of the government comes from what? Revenues must be
adequate to support the service for the people.
There are 3 regular sources of Government revenues:
1. Taxes
2. Borrowings (international and local)
3. Subsidies coming from foreign government.
If the revenues generated is only one half of the necessary budget for this
years expenditures, can we say that there is a sound tax system?
No there is none because it doesnt coincide with and approximate the needs of the
government expenditures. It does not satisfy the fiscal adequacy requirement.
If its the other way around? There is 100 million in revenues and only 50m
in expenditures, is there a sound tax system?
If the revenues would heavily come from taxes and its not adequately spent for the
needs of the public. Its more taxes collected and lesser expenses, if more is given
and there is less expense then there would be no sound tax system. (Because it
would violate the theoretical justice principle which states that the tax burden
should be in proportion to the tax payers ability to pay, this will tantamount to
confiscation of property.)
More or less it should be somewhere in between. There should be no heavy
collection of taxes without regards to need of the people and also there should be
no less taxes and higher expenses. Otherwise you will always be engage in
borrowings from the World Bank.
If fiscal adequacy in not met, would it make the tax laws of our country
poor?
No cause when we say passing tax laws, its the prerogative of the congress. If its
already passed by the congress then it is constitutional however it may be avoided
If there is fiscal is not met, it will not disturbed the validity of the law which already
being implemented. The problem is to meet the balance between sourcing the
revenues and spending it.
What does theoretical justice mean?

The tax burden should be proportion to the taxpayers ability to pay.
So every tax law in our government to have a sound tax system must follow the
theoretical justice requirement which are actually the ability to pay principle, so
more income higher taxes. The equitable system taxation, the burden of taxation
will fall heavily on those better able to pay taxes.
When this theoretical justice or equality principle is not met, would it make
the tax law invalid?
If the theoretical justice or equality is not met and its proven that upon application
by the taxpayer that Its not just, fair and reasonable it may be declared by the
court as unconstitutional, but hardly because the power of taxation is unlimited in
its scope. Scarcely declared as unconstitutional. But once it has reached in the
Supreme Court, which is vested with power to declare WON a law is
unconstitutional.
What is the administrative feasibility principle?
Tax laws should be capable of convenient, just and effective administration.
That every tax law should be capable of efficient and effective enforcement
otherwise collection cannot be made. Even there is a tax law, if the collection as to
mode, manner and means is not properly implemented by the administrative branch
of the government it will not benefit the government.
3.
4.
Supreme in character- supreme only up to the extent to the selection of

the subject of taxation.
Inherent Limitation:
As we said there is an inherent limitation as to taxation, there is no need for
the law or the constitution to identify these limitations since you can find them
indirectly mentioned in the constitution. There are 5 inherent limitation.
a.
If there are some adequacy as to the administrative feasibility it will not make the
law valid as long as the law in itself is valid, just and reasonable.
Public purpose - only congress can enact taw laws, but must be founded
on a public purpose. It the purpose in for a private individual then such
law will be declared as unconstitutional.
1. Is for the welfare of the nation and/or for greater portion of the
population;
2. Affects the area as a community rather than as individuals;
3. Is designed to support the services of the government for some of its
recognized objects.
Refer case of Lutz vs. Araneta
The scope and limitation of taxation:

The scope of taxation are:
1. Comprehensive in the sense that the power of taxation could not only
affect persons, properties, objects and transactions, may also subject your
residency even if you are not a citizen of this country.
Compared to the case the Atty. read. The law was enacted alone for the
purpose of imposing a fee not really a tax for every feeds manufactured.
The objective of the law is to increase the fee for every stock of feeds to
rehabilitate another private entity engage in the same type of products.
Naturally that is unconstitutional because its purpose is directly for the
benefit of a private enterprise and not for the public in general. And feeds
is not really for the people but for the animals.
Can a non resident alien be subjected to community tax?

A non resident alien who has stayed in the Philippines for more than 3
mos. Will already be covered by the resident tax.
Even the properties that you own, you pay real property tax
If it has generated an income then you pay an income tax.
And who really determines the public purpose?

Congress, but if there is any doubt the court can intervene.
Unlimited in the sense that even courts scarcely venture in declaring it

unconstitutional unless it is clearly so. In fact regular court cannot easily
declare it unconstitutional and it is ultimately subjected to the review of the
SC. But at least the SCs power to review tax laws can never be ____. Its
an interplay of power. Co-equal branch. The role of the judiciary is there
simply to review the constitutionality of the tax law.
If ever there is a law taking away the constitutional power of the
SC to declare a law unconstitutionality, would it prosper?
Plenary- meaning it is complete in the sense that tax laws enacted will not
only identify the subject but also supplies what type of tax, what kind of
tax, rate, the amount the apportionment, how it to be collected including
the remedies available to the government and the tax payer.
Ex:
Remedy as to government- how will they go after the tax evaders
detailed into the tax code, the manner of confiscation how many
years?
Taxpayer: ex. What is the remedy if they erroneously charged.
For there to a sound tax system, there must only be a valid law observing
theoretical justice, fiscal adequacy as well as the
2.
NO, because it is a guaranteed right of the Supreme Court. Otherwise

the there would be no use for the SC. And SCs decision forms part of
the law of the land.
The final interpretation belongs to the Supreme Court.
Is the senior citizens act granting exemption (20%) on the

purchase and scrapping the 12 % VAT on meds purchases for
public purpose?
Yes, because even if it only benefit the senior citizens in some way it
will affect the entire general population since all of us will be getting
old.
b.
Inherently legislative, non delegation unless expressly stated by

the constitution.
c.
d.
e.
Territorial jurisdiction
International comity
Exemption of government entities agencies and instrumentalities.
within the framework of the national development program of the

Government. (flexible tariff clause)
Do you think that, just because, you were saying that the Customs are
more experienced in the said field, thats why they are given the power
as an exception? How about the BIR? What is the reason why such
power was delegated to the President? Is it really a delegation of the
said power?
Unlike the LGU, as what we have discussed earlier, the delegation to the LGU is
that they impose an ordinance for the implementation of a tax law to its
constituents; such is limited to the territorial boundaries of the LGU.
For every tax law, it has to be for the public purpose. For it to be declared that it is
for the public purpose, the ultimate result must favor the general public or for the
common good. Not necessarily the direct result right after its implementation but it
has to be the ultimate result.
In the case of Pascual, the construction was for/in a private entity which resulted to
the appreciation of the value/price of the private land. The SC declared such as
unconstitutional.
I do not think that it is a delegation. It is the function of the President. Just like
the power of the LGU to tax, it is also in the Constitution. It is what we call the
flexible tariff clause (power of the President to tax or impose tariff rates).
When general or public welfare requires, upon the recommendation by the
NEDA, the President can perform powers relating to custom duties and
adjustment of tariff rates.
A. Increase or decrease existing protective (?) tariff rates; the
increase must not be more than 100 percent ad valorem, which
means it should not be double the existing tax or tariff rates.
B. May impose quotas or totally ban the importation/exportation of
particular products and
C. It may increase the tariff rates but such increase shall not exceed
to 10%.
This power of the President as provided in the Constitution has to be
translated first into a law by the Congress. Such has been enacted
already as part of the Tariff and Customs law. In the said law, you will
find there the flexible tariff clause providing for proper guidelines. The
reason why it is given to the President is for expediency (?) purposes.
In order to protect local industries, there is a need to ban importation
of certain products from other countries. The President can make the
Executive Orders for such. Otherwise, the President has to wait for the
Congress to act upon it. It is not really within the expertise of the
President but the law itself already sets the parameters. There must
be a recommendation from the NEDA; a public hearing is also required
for it to be valid.
It is inherently legislative, we all agreed to that. Only the legislative branch?

The power to tax is inherently legislative but there are exceptions.
a) Delegation to the LGU the Constitution provides for the delegation of the
taxing power to the Local Government Unit (Section 5 Article X 1987
Constitution)
Section 5. Each local government unit shall have the power
to create its own sources of revenues and to levy taxes,
fees and charges subject to such guidelines and limitations
as the Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local governments.
The power to tax by a LGU, is it inherent or delegated power?
It is delegated.
Is there a probability that the LGU will lose its power to tax?
Yes.
In totality, does it lose its power to tax? Yes. How?
The LGU is under the executive branch of the government.
But how do they implement/collect tax?
It is thru their legislative branch, Sangguniang Panglungsod/ Panlalawigan/
Bayan. This is an exception to the general rule that the power to tax is
inherently legislative. The said power given to the LGU is a delegated power. In
the Constitution, every local government given its fiscal autonomy is given the
power to create its own sources of revenue, the raising of revenue includes the
power to tax. LGU do not have the power to tax without the provision on the
Constitution. But the Constitution itself does not give the arbitrary power to the
LGU, it provides for a further requirement that the Congress should enact a law
granting the LGU the power to tax. And what law is that? Such is the Local
Government Code of 1991 (RA 7160). There is a chapter there, the Local
Taxation and Real Property taxation. It is what gives life to the LGU.
b) Delegation to the President the Constitution provides for the
delegation of the taxing power to the President (Section 28 Article VI
1987 Constitution)
Section 28. The Congress may, by law, authorize the President to
fix within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts
c)
If you remember, the 10% VAT was increased to 12%. Where

is it found? EO of the President or by the Department of
Finance?
It is found in the revisions made in the 2005 NIRC. It is provided there
that the 10% VAT is increased by the President to 12%.
Delegation to administrative agencies it is not really a delegation. But it
is somehow a delegation since these administrative agencies are given the
power to enforce tax and issue circulars, rules and regulations.
Are they part of the laws of the land?
Yes, so long as it is within the confines of what the general law defines.
BIR by the Commissioner impose taxes; recommend regulations called
Revenue Regulations
Department of Finance, Secretary of Finance issues the regulations.
Checks WON if it is accordance with law.
DATE: 07/07/12
We said that we have 2 major topics for Tax 1: General Principles and Income
Taxation broken down to Income Taxation in General, Individual Income
Taxation, and Corporate Income Taxation. By next Saturday, we will be starting
topic on income tax. So today, we continue with our discussion on inherent
limitations. Have we finished the entire time on inherent limitations? Public
purpose? Yes. Inherently legislative, cannot be delegated, the 3 cases and the
exceptions? Yes.
Territorial Jurisdiction
behind the principle is because a resident citizen receives benefit and protection
from the government full time because he is a resident / not only a citizen but
also a resident. For example, Manny Pacquiao. He is a resident citizen. He is a
Congressman of Sarangani Province. If he earns from boxing abroad, that
income is taxable in the Philippines because he remains to be a resident citizen,
worldwide income. But if he chooses to become a non-resident citizen and
according to Sec. 23 of the General Principles of the Tax Code, a non-resident
citizen is taxable only on income within the Philippines because he does not
receive full benefit and protection from the Philippine government. Of course, it
is another matter when can you treat Manny Pacquiao or any individual for that
matter as a non-resident citizen or a resident citizen. That is another matter.
How will territorial jurisdiction limit on the power to tax?

So as a general rule, our tax laws would operate only within the taxing jurisdiction
of the State. The effectivity of these laws would cease beyond the territorial borders
of the Philippines so that our general rule only when the persons, subject matters,
or objects come within our State is subject to our rules. That is the general rule but
there are various exceptions.
An example of where the tax laws would not operate even within the
territorial jurisdiction of the Philippines?
Because of international comity. As we said that international laws forms part of
the law of the land. Even if there is such a law, if an exemption is provided either
by a municipal law or the tax code or an international tax treaty, then the tax law
will not be made applicable to the person given an exemption.
In the case of Atlas Mining, it involves Value Added Tax. This Value Added Tax,
does this observe territoriality? So in the simplest equation, exports are not vatable
while imports are presumed that its consumption will be in the Philippines, are
vatable. That's why with import trading goods or property/personal property that
will be subject to tax on top of the customs and duties that are collected by the
Bureau of Customs. However, you engage in the exports or selling of products
abroad/consumption abroad, it would not be subject to Value Added Tax.
What is the situs of taxation? An example?

Situs would be based on one factor alone. Agree? Situs of taxation is the place of
taxation. It is where/ the State which has jurisdiction or dominion over a person or
subject matter is the one rightfully allowed to levy and collect tax.
There were 2 principles discussed in the Atlas case. It was the Destination
Principle and the Cross-Border Doctrine. More or less this two - the Destination
Principle and the Cross-Border Doctrine - are the same in the sense that:
1. Destination Principle - says that goods and services shall be taxable only
in the country where it is consumed. So if it is consumed in the Philippines
means it's vatable.
2. Cross-Border Doctrine - says that no value added tax shall be added or
shall form part of the cost of goods that will be destined for consumption
outside the territorial border of the Philippines if its for exports. Those are
the 2 same principles.
While tax observers the general rule of territoriality but there are exceptions. The
exceptions would either be one of these categories:
1. Where the tax laws would operate even beyond the territorial
jurisdiction of our country; or
2. Where the tax laws would not operate even within the territorial
jurisdiction of the country.
Those are not the General Rule type.
Can you give me an example of each? Who is an OFW? Can you say that an
OFW is a resident citizen? If an OFW stays outside of the country for more than 183
days during the taxable year, it will be kept as a non-resident citizen.
An example of where the tax laws would operate still even beyond the
territorial jurisdiction of the Philippines. You're correct in applying to the
resident citizen. Why? Under/If you want to have a legal basis, Sec. 23 of
your Tax Code provides that resident citizens are taxable on their income within
the Philippines and outside the Philippines. If you want to know the rationale
So in the Philippines, we being resident citizens, we are subject to the jurisdiction of

the Philippine government and our situs of tax is the Philippines as a general rule.
What is a situs? It does not depend on one factor alone. It is not where you are
residing only. It is not what your nationality or citizenship is. It is not where the
source of income is. It is a combination of different factors. We have a very
complex situs of taxation that we have adopted.
So what are the different factors to determine the situs?
The different factors that you need to determine where the situs is: what kind of
tax is imposed, what is the subject matter that is subjected to tax who the
persons or objects that receive benefit and protection from the State. Those
are things you need to consider on top of the very basic Domiciliary Theory where
the residence is - a person or a corporation, the nationality theory or the
citizenship principle - what the citizenship of that person is and where the source of
income or where the service was rendered. So it is an interplay of different factors.
And sometimes there would be multiplicity of situs? You need say there there is
more than one jurisdiction, there is more than one state, claiming to levy and
collect the tax.
What could be the reason why multiplicity of situs would arise?
The income of Filipino citizen here and his income abroad will be subject to
Philippine tax and his income abroad will be subject to foreign tax. Because there
are different concepts of residency for those tax.
For example, if the Philippines would treat a person as a resident of Philippines/ a
citizen and a resident because he has stayed here for a number of days and it turns
out that he stays also in another country during the year for a number of months.
That country, according to their own laws would treat that person as a resident of
their country, then both States would have a right to tax the income earned there
and here and we can also tax the income earned here and abroad. Both States
would have taxing jurisdiction. Therefore, multiplicity of situs would arise. And also
because of the various concepts would arise of different tax on properties - personal
or real and multiple (?) relationship of intangible personal properties because
intangible personal properties do not follow the rule of where it is located because it
does not have physical presence. It cannot also at all times follow where the
domicile of the owner is because at times it would have a different situs. So
example, the prime (?) of McDonalds. What state has the taxing jurisdiction? Is it
the United States or the Philippines? So because of the lack of physical presence/
physical pinpoint who alone having the right to tax.
Now, in order to address the multiplicity of situs, what will the State do?
What else? What are the other remedies?
Allowances or deductions, in what form? Of what he has said already, giving tax
exemptions on the municipal laws granting income tax holidays for (?) investors.
The second remedy to multiplicity of situs is entering into bilateral international
agreements, either to exempt fully an income earned here by a non-resident
because it is already taxable abroad or to grant partial exemption by giving
preferential tax rates meaning instead of 30%, it can be 10%, 5% or 15%.
There are other 2 remedies. Tax Credit and? Have you read the case of Carlos
Superdrug? It was mentioned there Tax Credit. The allowance of tax credit simply
means that the foreign taxes that you have paid abroad for the income that is also
subjected to tax in the Philippines can be offsetted against the Philippine Income
Tax. Example, you are a resident of the Philippines. In fact, you stayed here for 10
months during the year. You went abroad for 2 months, you did a photo shoot,
earned Php1 million. It was taxed abroad because the service was performed
abroad. Now, since you are a resident citizen and according to the law, you are
subject to tax for worldwide income. That Php1 million that you have earned
abroad will be included in your income earned during the 10 month period of stay
here. Fully taxable here in the Philippines but a portion of that is already tax. In
order to avoid double taxation, foreign tax that you have paid can be offsetted as
tax credit against the Philippine income tax due. But the Philippine income tax
would have a component that income that was earned abroad. Two taxes imposed!
To avoid double taxation, offsetting is allowed to a certain extent and not full!
And the fourth remedy is to grant tax deductions. Tax deduction allowed claiming
as expenses the taxes you have paid abroad. Tax credit, it is the tax offsetted
against the tax due! But when you say tax deduction or tax expense deduction, the
tax that you have paid abroad will only be claimed as an expense against your
taxable income and not directly to tax.
As to which is better? It will be tax credit because you can avail of the full benefit
what you have paid abroad.
So we have identified four remedies to address the multiplicity of situs.
Moving on, situs of income tax.
Domiciliary theory - residence
Citizenship or nationality theory
Source principal or place of income, which is usually for services rendered, activities
performed, businesses engaged in!
Now, talking of domiciliary theory it creates a general rule of domicile or residency!
We are talking in fact of aliens who are resident in the Philippines and corporations
that have acquired residence in the Philippines.
Why then?
Because even if alien individuals or foreign corporations, the mere fact that they
have acquired residency in the Philippines we use the domiciliary theory in order to
apart jurisdiction over them.
Talking of nationality theory naman, we are talking of the citizens who are not
residents but because even if they are not residents of the Philippines but because
they are citizens of the Philippines, we can tax their income earned in or out of the
Philippines. A person outside of the Philippines, we lose jurisdiction of the person
using domiciliary theory because they are not residents of the Philippines. But
because of the nationality or citizenship principle, we can tax their income even if
they are not in the Philippines.
If it is your nationality theory, resident citizens and domestic corporations. Domestic
corporations are organized in the Philippines regardless of who the owner is (not the
60-40 sharing). We have plenty of corporations organized in the economic zones!
Fully owned by foreign individuals. And taxable within the Philippines. The 60-40 is
only for the recognition if it is a Philippine Corporation or not a Philippine
corporation.
Source rule will apply to all other. Non-resident citizens have only taxable incomes
which are only here in the Philippines. We dont have jurisdiction because state does
not afford full protection and benefits to these nonresident citizens.
Who are nonresident citizens?
Immigrant relatives who are staying abroad. Even if they have not acquired
American citizenship but because of their immigrant status. Let's say they stayed 3
months in the beginning and 4 months in the end of the year and 7 months total,
they are still considered as nonresidents because of their status as immigrants.
They are only taxable if they have income which was generated here in the
Philippines. Overseas contract workers, are not really exempt. They are actually
outside of the Philippines because of a permanent employment. They can be
considered as nonresident citizens because of their permanent employment.
If you're a tourist of foreign county, are you a resident citizen or a
nonresident citizen?
You're a tourist and a talent scout discovered you and you were cast in the amazing
Spiderman. And given talent fee, taxable in the Phils? Shooting in the movie and
required physical presence for 10months during the year, you are already
considered as nonresident in that particular year and not taxable in the Philippines
of that talent fee earned abroad. You can play when you reach income tax. You can
play where you want to tax. No tax in Brunei daw! Stay 7 months! Tax free income!
So much for Brunei.
Residence or poll tax is based on the residency?
Its not based on the nationality theory, not based on source of income but based
on residency or domicile. Poll tax, capitation, community tax, personal tax, cedula!
A Friend, foreigner, met in Boracay. He asked you if he is liable for community tax.
What will you say? Liable or not? If he stayed in the Philippines for 5 months and
made Boracay as temporary residence! Liable or not?
Residence, capitation or cedula is based on the residency not on nationality or

source. As long as he is a resident, he will be subject to this kind of tax. Residency
does not mean that he has to make the Philippines as his principal seat of
residence. It only means to say that one is considered that he makes the Philippines
his temporary stay. More than 3 months would make him an alien individual liable
already for this type of tax.
For property, where is the situs for personal, real, tangible and intangible
property?
Student: For real property, situs will be where the property is located. Personal, will
follow the owner. If tangible, where it is located or usually kept. Intangible, it will
follow the owner.
Student: There are exceptions, for intangible. If the law provides for the situs of
such intangible property. Example? Foreign corporations, (explained thoroughly by
maam later! Giuna niya ang real property)
Real property, situs = where it is located
Mr. Patindol has a real property located in Korea. Subject to Philippine tax or
not?
Answer: For real property, although said it is subject to tax where it is located, that
is the general rule. We have also to consider different factors. The property is
located abroad but Mr. Patindol is still a resident, the income generated of the sale
of such property is subject to Philippine income tax. Unless of course he decided not
to declare it.
In so far as personal intangible, situs is follow where the owner resides. But there
are some rules to be followed.
Example: Mr. X, non-resident American, not residing in Phils. During his stay
here, he bought shares in GMA and at that time he died, the certificates
representing his ownership was located in the US (place of residence).
Would that be subject of tax here in the Philippines?
Answer: Still taxable here in the Philippines because he obtained benefits of the
Philippines. How did he benefit? More on the domestic corporation which issued
the shares. GMA is receiving protection from government. It will be translated
into the value of the shares of stocks and will benefit whoever the holder of the
stocks certificates. The American was indirectly benefited. The intangible
property is related to a domestic corporation and hence will have situs here in
the Philippines.
You were talking about a foreign corporation. A foreign corporation will have a
foreign situs. Situs outside the Philippines. A foreign corporation is a corporation
organized abroad and receiving protection and benefits from a foreign government.
But if the Foreign Corporation operating more that 85% of its transaction here in
the Philippines, then we can consider the shares of stocks issued by the corporation
as having situs here in the Philippines. Why? 85% of income is derived here in the
Philippines and transactions are receiving protection and benefits here in the
Philippines. You dont limit your thinking that if it is a foreign corporations, it does
not operate here in the Philippines. That is wrong thinking because corporations,
identified where they are organized, but can do business in different countries. If it
turns out it is a foreign corporation but doing business here, it can have Philippines
situs. In fact there are many corporations which are considered as foreign
corporations because it is organized in Hong Kong and other countries. Meaning it is
organized in countries where taxes are very low. Example, they organized it in this
country but the operation is in the Philippines because of cheaper labor. That will
get situs within the Philippines.
(Transcriber's notes)
Exceptions to personal intangible situs:
1. When the property has acquired a business situs in the another jurisdiction
2. When an express provision of the statute provide for another rule
Excise tax or donor's tax. Based on the place, nationality and residence.
Criteria are place, taxed upon properties located within the Philippines.
For nationality, taxed upon their properties wherever situated.
For residence, tax upon their properties where situated.
Reason given by Atty: Because donor's tax and excise tax is more on excise
taxation. When you reach tax 2, estate tax is different from income tax. (Subject to
succession and will be thoroughly discuss upon reaching tax 2)
..The entire estate here and abroad...Why? Because the law on succession is based
onand estate is based on
Student: the law where he is a citizen.
And businesses where is the situs? Lets move on to international law and a
limitation to the taxing power of the state.
Student: Foreign comity all the states are equal such that we dont tax foreign
dignitaries coming into our country and they dont also tax us, also it also
recognizes that we have to give credits when it comes to foreign corporations doing
business here in the country.
Is that part of international comity?
Student: for me it is part because for example there is a business here in the
Philippines and we also have businesses in that country, we can have bilateral
agreements to give tax exemptions.
There is already equality of the different states regardless of size and power and
even if we proceed on to tax the USA, the refusal to pay taxes would result in us
suing the USA and states are immune from suits, the non suability of states, thats
why if they send in foreign dignitaries, ambassadors they will not be subject to tax
in fact what they are bringing in will not be subject to import taxes or customs
duties. In so far as the ownership by these foreign states of embassies are not
subject to real estate taxes because they are considered extensions of these states.
Can the govt tax itself?
Student: no, the rule is the govt cant tax itself because it would be like taking
money from their own pockets.
In your study of the constitution, have you come up with a provision
stating that the congress cant pass a law taxing the govt? Although the
constitution is silent on such matter, but congress deems it important to exempt the
govt, its instrumentalities.
Are GOCCs also exempted?
Student: only up to the real property is exempted.

The Republic of the Philippines, its compositions like cities, provinces,
municipalities... its instrumentalities... like the MIAA, the fishing ports operated by
instrumentalities are generally exempt from taxation... instrumentality is not really
an agency, not a GOCC its somehow, any agency of the govt not within the dept of
trade, dept of national defense etc. but it is vested with special functions and
jurisdiction empowered by some or even all of the corporate powers found in the
corporation code and allowed to administer special funds giving operational
autonomy usually through a charter. Its not a GOCC, its not an agency its exempt
from taxation. But when we talk about agencies its generally exempt if its
performing governmental sovereign functions, but when it performs a patrimonial,
private, proprietary functions it will be subject to tax.
General rule all GOCCS are subject to tax except if there is a law exempting them.
Ex. Like the Tax Code of the Phils. It gives exemptions to four GOCCs: the GSIS,
Philhealth, SSS, PCSO probably because its for general welfare and not
proprietary.
NAPOCOR is still exempt but not because of the Tax Code but because of its charter.
In so far as real property taxation is concerned, still the constitution is silent...but
congress has laid down in the local govt code that the RP its agencies and
instrumentalities shall be exempt from taxation so long as its beneficial use is not
leased out to a taxable person... in whatever capacity that property is held on to by
the govt so long as it is not leased out to a taxable person.
Who is a taxable person?
Lets move on to constitutional limitations there are 2 categories the direct and
indirect constitutional limitations.
The case of Laguna: What type of property? What capacity? Who owned it?
Student: There was a warehouse and land and taxes were imposed in both. It was
govt owned and it was reserved for use for NBC.
What is the status of NBC?
Its a GOCC. The land was reserved for use for their primary functions, they erected
a warehouse They raised the propriety of taxing both. The decision of SC was that
the land was not actually rented, it was only reserved and the even if it was given
to NBC, it was still govt owned and still exempt from tax but the warehouse was
not govt property so it is taxable.
Atty: The classification of the land was a public land, for which ownership was
retained by the govt. although it leads me to question why it was given exemption
by the sc, probably because it happened before the effectivity of the local govt
code, because it was expressly stated there that the RP its agencies and
instrumentalities shall be exempt from taxation so long as its beneficial use is not
leased out to a taxable person, and NBC was a GOCC, a taxable person leasing the
property.
Uniformity and equity in taxation, are they the same? As a limitation...
Student: Equity and uniformity it doesnt mean that they are the same In
uniformity it means that the people of the same class are taxed the same rate while
in equity it means that it is based on the ability to pay.
Let me discuss uniformity first, all taxable articles or property of the same class
shall be taxed at the same rate not the same amount because thats not uniformity.
Ex. I tax all students with 100 pesos It might be minimal o burdensome depending
on the person. A tax is uniform if operates with the same force and effect to all
subjects within the same class, as it is found in every place. meaning to say if the
Sanggunian will impose a tax it will be considered uniform if that tax would operate
to all persons similarly situated wherever it is found in that jurisdiction. It should
not be very specific to one person it should be applied to all persons of the same
class within the taxing jurisdiction. Conversely naman we can say that articles of a
different kind may be taxed at a different rate.
But equity is different or the equality in the burden or equitability of the tax, as you
say it depends on the ability to pay, it more or less is accomplished whenever the
burden of the tax falls equally and impartially upon the persons under that law.
Although in my understanding these are all equity. Uniformity is an equity.
Equitability is an equity. One is a horizontal equit. One is vertical equity. If you look
at Section 24 of tax code enumerated there are the different taxes applicable to an
individual taxpayer from 5% down to (writing a diagram on the board)...These are
the different tax rates... and the burden in each tax would be different as to the
next bracket because the 5% would only apply to income not exceeding 10,000,
10% would apply to more than 10,000 but not more than 30,000, 15% would apply
to income more than 30,000 but not more than 70,000.
But not more than 30, 15 percent would apply to the income of more than 30k but
not more than 70k. Your 20 percent tax would apply to income of more than 70k
but not more than 140k, the 25 % would apply to income of more 140k but not
more than 250k, and the income more than 250k is subjected to 30 % so long as
the income will not reach more than 500 k and any income more than 500k is
subjected to the highest tax rate.
If you look into the burden of taxes, this is the equity or the ability to y principle.
Bigger taxes on those who are better able to pay. The more income you earn the
higher the tax rate that youd be imposed. This is the vertical equity of the
equitability of the tax.
If you look into the uniformity of the tax, belonging to the same class, you look into
the horizontal equity or uniformity of the tax. The income earners on this bracket
will be subjected to tax whether or not he is located in Luzon, Visayas, or Mindanao
as long as his income is more than 10k this uniform tax rate would apply.
Discussing about the case (cant hear what was the title) involving the uniformity in
the VAT. Value added tax is uniform because it was uniformly applied to all
consumption of goods and service, thus constitutional.
2. What is progressive system of taxation?
Taxation is progressive when tax rate increases as the income of the
taxpayer increases.
Its not only in income taxation that progressive system is
encourage, even in estate taxation and donors taxation you will
notice in the tax code that the higher the value of the estate, the
higher the tax rate. Same applies as to tax on donations as to
non-stranger or a relative.
Are REGRESSIVE taxes prohibited?
Regressive taxes are not prohibited however the constitution encourages

the progressive system of taxation.
The constitution does not directly prohibit the imposition of regressive

system of taxation.
What is a regressive system of taxation?
The tax rate increases but the income decreases. There is no such system
in the Philippines. And when you talk of regressive taxes it does not
always mean that there is a set of rates.
Regressive tax may refer to one rate of tax only. Not just the argument
that VAT is a regressive tax. It is not necessary ___ no escalation rate of
12%, its a flat rate.
In the case of Tolentino:
o
It was said that it was a regressive tax, why? Its not because of the rates.
o
Because the burden of 12% is uniformly apply to all types of income
earners. The burden of 12% is higher for low income earner and lower to
those high income earners.
o
Compare the income of a janitor vs. the CEO. The 12% that would be paid
by the janitor would be heavily burdensome as against his 10k income vs.
the 12% paid by the one whose income is so big.
o
But the argument of the SC saying that its not a regressive tax is, the vat
seeks to distribute to as many goods and services as possible and
maintains the exemption of vats to the basic goods and services for the low
income earners.
o
So it still maintains that according to the VAT law, sec. 109 of tax code,
there are many exemptions granted to the basic goods and services
affordable by the low income earners.
o
And also for the many exemptions provided by the tax law, ex. A parcel of
residential lot, if the amount will not reach to a 1.995m then its not
Vatable, but if its 1.999m or 2m its vatable. It gives a lee way to the low
income earners to avoid the value added tax. For leased property not
exceeding 12k not subject to vat but those condo units, they are already
subject to vat.
o
One of the reasons why the constitutions provide the progressive system of
taxation is for the government to concentrate more on the direct taxes
because its based on equity.
Indirect tax
o
More burdensome. So the constitution wants to minimize
o
Ex. VAT, the burden is shifted on the ultimate consumer.
Excise tax, the purchase on Tobacco, alcohol and same shifted also to
The consumer. Its subject to vat and excise tax.
3. Exemption of the religious, charitable and educational entities, non-profit
cemeteries and churches from property taxation.
o
Exemption from real property taxes which are actually, directly and
exclusively used for the purpose.
o
Real properties:
Land, building and Improvements.
These 3 institutions are not exempt from personal property tax.
For these institutions to be exempt from real property tax do they need to
be a non-stock, non-profit institution or can they be a proprietary
institution?
o
BOTH (not sure about the answer.)
Who enjoys as far as the educational institution are concerned, what type
of educational institutions enjoys real property tax exemption (of course
with the requirement that ADE)?
o
The constitution does not distinguish, therefore the real property tax
exemption would be enjoyed by BOTH non-stock non-profit institution and
other private proprietary institution.
The test of exemption, is it the ownership of the property?
o
No as long as the property is ADE for the purpose.
So if you have a parcel of land that you have leased out, to scientology. For
religious purposes. Taxable or not?
o
Taxable because the rent that you get from the property is subject to
income tax
ADE = Actually, Directly, and Exclusively
So if you have a parcel of land that you have leased out to scientology
(religious purposes nalang). Is that taxable? Im talking about the property
and not the income it generates.
Student: It is exempt from real property tax, if it is ACTUALLY, DIRECTLY AND
EXCLUSIVELY used for their religious purposes.
So the test for exemption is not the ownership but the use of the property
Class, regardless of who the owner is so long as the use is A, D, E for either
religious charitable or educational purposes, that would be exempt from real
property tax. ONLY real property tax. The income generated from these is normally
subject to income tax.
The case of Lung Center Philippines talks about the incidental use of the
property.
When you say exclusive use, does it mean the sole and primary use of the
property alone?
Student: It admits of activities. In the case, Lung Center Philippines is a non-stock,
non-profit entity and a portion of their building is vacant and another purpose is
leased for commercial purposes. The issue in the case is whether the properties of
Lung Center Philippines are exempt from real property taxes or not. Answer: It is
partially exempt. The portion of the building leased to private entities are not
exempt as these are not ADE used for charitable purposes. Only those that were
used by Lung Center are exempt from real property tax.
Is the Lung Center still considered a charitable institution despite the fact
that it admits patients who are paying?
Because the contention here is that it has lost its charitable nature because it has
leased its properties to commercial entities and because it has admitted paying
patients.
Student: It is still a charitable institution. It does not lose its charitable nature by
the mere fact that it derives income from patients and lessees.
But does that not make it now an ordinary corporation generating income
from its activities?
Student: As long as the income generated is not used for a private purpose.
Okay. What defines a charitable institution class primarily, would be the articles of
incorporation as registered in the SEC. In fact, insofar as determining whether a
school is a non-stock, non-profit institution, you look at the articles of incorporation.
According to the articles of incorporation of Lung Center, it is a charitable
institution. The fact that it is admitting paying patients constituting 40% of their
available beds does not strip it of its charitable nature because the main purpose of
LC is really to admit the needy patients and its only incidental that other patients
would avail of their services.
So long as that part of the real property is devoted for charitable purposes, it is
exempt from real property tax. But the spaces leased to commercial entities would
be subject to real property tax. As to who would be liable to pay for such tax, it
would be subject to agreements between LC and their lessees (in the lease
contract).
The SC went on to say that ADE means the direct, immediate and actual application
of the property itself. LC argued that the income generated from the leased
properties was used for the charitable purpose. This is wrong because the basis for
the exemption is the direct, immediate and actual application of the property itself,
not the proceeds or the application of the income.
The case of Abra Valley College.
Student: The College was taxed (Real property) because it rented out the first floor
to Northern Marketing Corporation and the 2 nd floor was used as the directors
home. The property was actually levied and sold at a public auction. AVC wanted to
seek for the nullification of the seizure and the public auction because it argued that
the property is incidentally used for educational purposes.
What did the SC say on the use of the property for the directors home and
the lease of the property to NMC?
Student: The use of the director and his family of the 2 nd floor was incidental to the
educational purpose of the school. However, the lease of the 1st floor by NMC was
for a commercial purpose so they should be taxed for that.
So incidental use of the property is allowed and it will come within the ambit of ADE
use because the incidental use was reasonably necessary.
What about the case of reverend Fr. Casimiro Lladoc?
Student: This involves the donation of property from (some entity) to a parish
priest. It was taxed (Donors tax). The reverend claimed that it shouldnt be taxed.
SC said that exemption only applies to real property tax. This tax is in the form of
an excise tax, and does not come within the ambit of the exemption.
So if there is a donor who paid a donors tax, and the donee (a priest) claims that
he is not liable for donees tax because the donation was used for religious
purposes.
Is he correct?
No because the exception only applies to real property tax. This is an excise, not
property tax.
Next constitutional limitation is that non-stock non-profit educational institutions are
exempt from taxation on all revenues and assets ADE used for educational
purposes. What is the extent of this exemption?
Student: as long as they are ADE for educational purposes.
All taxes?
Student: No! They are exempt from income, property, donors tax and customs
duties.
What properties of educational institutions are not taxable?
Student: ALL! Even personal property.
The constitution is specific: all revenues and all assets of non-stock, non-profit
institutions are exempt from taxes so long as its ADE used for educational
purposes.
What are the requirements for a school to be exempt from income tax?
Student: School must be a school. Must be private. Nonstock, non-profit. Must be
accredited by CHED, DECS. Assets must be used ADE for educational purposes.
The connotation of the exemption is that the school is only exempt from direct
taxes. USC is still liable to pay for VAT! Tuition fees are not VATable but when USC
purchases appliances for example, it cannot claim that it is exempt from paying VAT
because the appliances will be ADE used for educational purposes.
Why?
Because the exemption only applies to direct taxes, VAT is an indirect tax.
What type of property is exempt from tax? What property of the
educational institution is not taxable? All assets? Even personal property?
The constitution is specific that all income, all assets of non-stock non-profit
educational institutions are exempt from taxes as long as it is actually, directly and
exclusively used for educational purposes.
What are the requirements for a school to be exempt from income tax?
Not all schools are exempt from income tax. The requisites are as follows:
1. It should be a private institution
2. It should be a non-stock non-profit educational institution
3. It should be accredited by government institutions such as TESDA, CHED,
DECS
4. Revenues and assets must be actually, directly and exclusively used for the
purpose.
Once you have established all these requisites, then you can say that it is exempt
from taxes.
The connotation of being exempt from income tax means that it would only be for
direct taxes.
Will the University of San Carlos, a non-stock non-profit educational
institution be exempt from VAT on its purchases? Can the supplier of San
Carlos pass the VAT to San Carlos? Can San Carlos refuse to pay Value
Added Tax on its purchases using the reason that it is exempt from tax? If
San Carlos buys aircon from an appliance center, can the appliance center
pass the tax to San Carlos?
Yes. Because the exemption provided by the constitution is an exemption on direct
taxes and VAT is an indirect tax. Whatever vat forms part of the cost of the good
purchases. So long as it is the purchase price, then VAT. It will have to pay. The
exemption is only for income tax.
It does not also include an exemption from withholding taxes. It cannot refuse to
pay withholding tax. Its exemption is only limited to its income and not my income.
Will the payment by Baristo of its rent to San Carlos be exempt of income
tax? Even if its within the premises of the school?
So the 2 requisites must be met:
1. It must be an incidental activity by the school itself
2. And it must be located within the campus.
If San Carlos would invest your tuition fees to money market placement,
time deposit, foreign exchange, is the interest subject to income tax?
In accordance with the banking laws, whenever we make investments of our
money, you will notice that our deposits will earn interest, it will automatically be
subject to income tax. San Carlos cannot actually refuse payment of these kinds of
taxes without a valid legal basis before it can claim that it is exempt. The
constitution is very general lang in the sense that all assets, including deposits, will
be exempt if its ADE used so thats very debatable. But what is the fruits of these
investments, the interest will be used for educational purposes, why will it not be
exempt from income tax?
In the opinion of the Secretary of Finance, the final withholding tax on peso
deposits, foreign exchange, money market placements are exempt from income tax
if earned by a non-stock non-profit educational institution so long as:
1. It will file an ample information every year
2. It will submit audited financial statements
3. It will produce a certification coming from the bank or financial institution
as to the income they have earned from the investments
4. A certification of how it was actually utilized in the educational activities of
the school
5. A board resolution coming from the Board of Trustees as to the educational
purpose of the interest of such investments.
Now, how about proprietary educational institutions?
What do you mean by proprietary?
In the nature business which has the end of obtaining profit. Sec 27B of tax code
provides partial exemption granted to proprietary institutions.
What is this exemption?
It is an exemption of income tax. Ordinarily, institutions or private entities are
subject to 30% corporate income tax. When you say corporate income tax, it does
not mean tax only on corporations. It is a tax on all businesses or entities other
than sole proprietorships or other than those ran only by 1 individual. Whether we
say corporation, strict corporation, entity, foundation, institution or a partnership
that is taxable, it is subject to corporate rate of 30%. Supposedly, educational
institutions will be covered by this because it is not a sole proprietorship, it is an
entity. But by virtue of constitution, non-stock, non-profit educational institutions

has been granted full exemption from 30% income tax while proprietary educational
institutions under section 27B of tax code provides for a partial exemption of 20%.
It means to say that proprietary educational institutions are subject only to a tax
rate of 10% because the 20% is an exemption. Although it did not say 20% but we
presumed that the difference between 30% and 10% is 20%. Schools will be
subject to 10% income tax.
On customs duties, San Carlos will be exempt from paying taxes if what it imports
are ADE used for educational purposes such as computer units, projectors, air con,
etc. For all other cases such as motor vehicles, not exempt from tax.
Exemption from donors tax, what do you mean by that? Who is the donor?
The non-stock nonprofit educational institution is the donee. The purpose is to
encourage donations.
If a decedent in his will wrote in his will he bequests a certain property to
USC, will the estate be required to pay estate tax on the property donated?
Transfers to non-stock nonprofit institutions are still subject to tax.
Reason: Section 87 par. D. the following shall not be taxed:
d) all bequests, devises, legacies or transfers to social welfare, cultural and
charitable institutions, no part of the net income of which inures to the benefit of
any individual; Provided, however, That no more than 30 percent of the said
bequests, legacies or transfers shall be used by such institutions for administration
purposes.
Now, Section 30 of your tax code: Sec 30 last paragraph of the tax code which
says all entities otherwise exempt from income tax which includes non-stock nonprofit educational institution are exempt from income tax. It is just but a repetition
of what the constitution provides, but in the last paragraph, it further went on to
clarify that all income derived by these institutions including non-stock non-profit
educational institutions will be subject to income tax if it is an income derived from
the use of real, personal prop. And the income from the activities conducted for
profit are subject to income tax regardless of the disposition thereof. So it would
appear that if San Carlos earns income from any of the activities mentioned, it will
be subject of income tax even if the proceeds will be used for educational purposes.
The third is very understandable, if San Carlos earns income by holding concerts,
then it will be subjected to income tax because the school should not be engaged in
profitable activities. But what is questionable, is the use of real and personal
property should be subject to tax regardless of the disposition
The first part of Section 30 is somehow being in conflict with the constitution
because the constitution provides that all assets so long as it is actually directly and
exclusively used for education purposes are exempt from taxation. But as of this
date that provision of section 30 has not been declared as unconstitutional therefore
it is still valid as of this date. Any income with the use of personal, the use of real
property even if its not for the purpose of profit, remember the third
paragraph/phrase of activities conducted for profit is now definitive of use of real
and personal property, so flatly use of personal and use of real property subject to
tax, and activities conducted for profit are subject to tax regardless of the
disposition of the proceeds.
Lets go to proprietary education institution, has the constitution provided
for the exemption for these type of schools?
Student: there is no direct constitutional provision that provides for exemption for
proprietary educational institutions, however the constitution says that the congress
may grant exemptions to them because of the policy that we favor the growth of
education so they are granted partial exemption.
Law? And that is?
Student: The tax code.
Which grants?
Student: grants that the proprietary educational institutions are partially exempt
20% from income tax so they are only liable to pay 10%.
The constitution has no specific provision and what the exemption of proprietary
educational institution, although it directs congress to enact a law if it deems fit to
grant an exemption to this proprietary educational institutions.
Proprietary are those stock corporations although non-profit education institution,
and in accordance with Section 27b of your tax code proprietary educational
institution are only liable to 10% income tax, where is the exemption? The
exemption is the difference between the normal 30% corporate income tax as
against their liability of only 10%.
So what are the requirements?
Is the private education institution although stock it must still be for non-profit
accredited with the duly required government agency such as DECS and CHED, and
its income of proprietary educational institution from other sources meaning from
non related to education activities must not exceed 50% of its total gross income of
the school. So meaning to say, other income should not be 50.1% of the total
earnings of the school, otherwise it will lose its exemption it will now be subjected
to 30% tax of its whole income.
Are proprietary education institutions exempt from income tax on their
investment deposits? Proprietary education institutions are not given the same
exemption as non-stock non-profit educational institution, they are still subject to
income tax although at the lower rate of 10%, that goes through as well that they
will not be given the exemption on their interest derived from investment and
deposits. It will still be fully subjected to the 7.5% foreign currency deposits and
20% of interest income from regular peso deposits, because the opinion issued by
the department of finance is only applicable to non-stock non-profit education
institution and according to the life-blood doctrine, the interpretation of tax
exemptions it has to be strictly construed against the tax payer.
Lets move on to the next constitutional limitation, prohibition against
imprisonment for non-payment of poll tax.
Student: Anyone who fails to pay for their cedula cannot be prosecuted or
imprisoned; however for the other taxes that is required one maybe subject to
criminal prosecution.
Although the tax laws that we have in the Philippines are not penal in nature, but
for non compliance with our tax laws it carries with it criminal liabilities for ex. Tax
evasion cases, etc., and it may result to imprisonment simply to penalize the
violators of the tax law. But insofar as this is the constitution already which provides
for the prohibition, there will be no one who will be imprisoned for the non-payment
of poll tax. But for other acts, it may lead to imprisonment of course, like
falsification of the cedula. For non-payment of poll tax on time and the due date is
on or before the last day of February, any payment beyond that day the punishment
is only payment of additional surcharge, no imprisonment.
Revenue bill must originate exclusively in the house of representative not in the
senate.
In the case of Tolentino, what is required in the constitution is the bill itself
originate from the house, regardless if its superseded by the senate version so long
as it originates initially from the house of representatives, it has met the
requirements. It is the bill not the law which is required to come from the house of
representatives, otherwise if it is the law which should come from the house of reps,
the version of house of reps, you would have to limit the right of the senators to
pass on the validity of the version of the house of reps.
Now why do you think it should originate from the house of reps?
Student: Aside from the fact that it is provided for in the constitution, its because
the representatives in the house of reps who are actually more in touch with the
realities of their respective districts and their respective constituents as to the
necessary revenues that will be raised and as to what can be afforded by their
constituents, but primarily its because it is provided in the constitution.
Lets move forward to the granting of tax exemption.
Student: All laws granting tax exemption, must be passed through law and that law
must be agreed upon by the majority of all members of congress. All members
present not all members present!.. separately voted by the senate and congress.
If we say there are 232 members of the house and the senate has 23, for a
total of 255 and to constitute a quorum you only need one half plus one.. if
only 126 attended, how many votes needed to pass the law granting the
exemption?
Student: a valid tax exemption law would base on the total number of the
congressmen, it would be 127.
In order to pass a valid law granting a tax exemption absolute majority is
necessary, majority of all those members voting separately without regard with the
number of individuals present during the meeting
Why do you think so?
Student: Because if the law requires majority of the total number of the members of
congress, it would need a higher number of majority. Because if we take a look at
the grant of tax exemption its not beneficial to the government because basically
tax is the life blood of the government, if the government will grant tax exemption
necessarily it would be the concern of all the members of congress
But what about if it is the withdrawal of the grant tax exemption? Say for
example there is already an exemption granted. Say for example the
proprietary education institutions is partially exempt of 20%, its only liable
to pay 10%, here is congress wanting to impose 30% tax on proprietary
education institutions, no more 20% exemption. What is the required
number of votes in order for congress to pass validly the law? Or it cannot
be passed at all? Would it violate the non impairment clause?
Student: its allowed maam, that exemption of proprietary education institutions is
in a form of a law and congress enacted that law so they have the right to amend or
modify that law and the voting percentage required for the withdrawal of that tax
exemption would be majority of members present.
Why is it different with granting?

Student: Because withdrawal would be beneficial to the government
The granting of tax exemptions class, in order to avoid the indiscriminate grant of
tax exemption congress has to be rude by strict majority of all members. Not all
members present. Voting separately so even if during the meeting only plus 1
attended without considering the number of absences, we still commit plus 1
based on the TOTAL population of the senate and the house. If only a total plus 1
is present, all of them must concur to the granting of tax exemption. But in the
withdrawal of tax exemption, since its already favorable to the government, it only
requires the vote of the majority of those present, but still it must always observe a
quorum.
In the granting of tax exemptions, in order to avoid indiscriminate grant of tax
exemptions, congress has to be ruled with a strict majority (absolute majority) of all
members of congress voting separately. So plus 1 of the total population of
senate or congress. But in the withdrawal of the grant of tax exemptions, since this
is already favorable to the government, it will only require a relative majority which
means plus 1 of all the members present during the meeting in which case, a
quorum must be observed.
Non-impairment of the jurisdiction of the supreme court in tax cases
What is that limitation of the power of congress to impose taxes? The SC
has the power to finally adjudicate tax cases. If congress decides to amend
the constitution, can it withhold form the SC this power to decide the
finality tax cases?
No. It is provided in the constitution.
What is the role of the SC in so far as the power of congress to impose
taxes is concerned?
The SC acts as the final arbiter in tax cases. The constitution provides that congress
is so powerful as to withhold and take away the various powers of the different
courts that we have. But it withholds from congress the power to take away from
the SC its role as the final arbiter in tax cases, the power to review, revise, modify,
affirm any issues on the legality of taxes, the constitutionality of tax laws etc. Power
of congress actually stops in the enactment of the law but the final determination
whether it is constitutional or not still belongs to the SC. The 3 branches of the
government are still co-equal, each has a role to play.
The two remaining limitations:
Flexible tariff clause the delegation made to the president in so far as
customs duties and tariffs are concerned.
The president is vested with authority by law to increase tariff rates, even for
revenue purposes only.
However, it bear stressing that the statutory power of the president to fix tariff
rates, import or export quotas, and tonnage or wharfage dues must be subject to
limitations and restrictions indicated within the law itself. Furthermore, such
delegation must be in accord with the framework of the national development
program of the government.
The term flexible tariff clause refers to the authority given to the president to
adjust tariff rates under section 402 of the Tariff and Customs Code, which is the
enabling law that made effective the delegation of the taxing power to the President
under the Constitution.
Power to raise its own sources of revenues has been given to local
government units.
Every LGU shall have local autonomy. They shall have their own power to raise
revenues. Any collection must inure to the benefit of the LGU. In the LGC, it
provides that you cannot pay to a private entity thats why you cannot pay in banks.
There are also limitations in the LGC, such that you cannot collect income tax,
customs and tariffs tax, etc.
Dimaampao:
Each local government unit shall have the power to create its own sources of
revenues and to levy taxes, fees and charged subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees and charges shall accrue exclusively to the local
governments.
Delegation of legislative taxing power to local governments is justified by the
necessary implication that the power to create political corporations for purposes of
local self-government carries with it the power to confer on such local government
agencies the authority to tax.
However, despite the grant of taxing power to LGU, judicial admonition is given to
the effect that the tax so levied must be for public purpose, uniform and must not
transgress any constitutional provision nor repugnant to a controlling statute.
Double taxation (to be discussed more thoroughly in the later parts)
INDIRECT CONSITUTIONAL LIMITATIONS
1. Due Process Clause
Dimaampao:
Due process mandates that no person shall be deprived of life, liberty, or
property without due process. The implication is that one may be deprived
of property as long as the requirement of due process- notice and hearinghave been complied with.
Due process is usually violated where the tax imposed is for a private
purpose as distinguished from a public purpose; a tax is imposed on
property outside the state; and arbitrary or oppressive methods are used
in assessing and collecting taxes. But a tax does not violate the due
process clause, as applied to a particular taxpayer although the purpose of
the tax will result in injury rather than a benefit to such taxpayer.
The following situations are illustrative of violations of the due process
clause:
a. If the tax amounts to a confiscation of property
b. If the subject of the confiscation is outside the jurisdiction of the
taxing authority;
c. If the law is imposed for a purpose other than a public purpose;
d. If the law is applied retroactively imposes unjust and oppressive taxes;
e. Where the law is in violation of inherent limitations.
Substantive and Procedural.

How do you satisfy the requirement of substantive due process?
Student: It should not contradict the constitution
What should not contradict the constitution?
The law itself.
How do you satisfy the procedural due process requirement?
Student: It must not be arbitrarily passed.
The procedure for enforcing a tax collection. The constitution provides that no
person shall be deprived of his property without due process. Otherwise stated, a
person can be deprived of his property so long due process is observed - as the
taking of the property. That is why the power to tax equals the power to destroy.
You are deprived of your property. Due process would mean/ it is a 2-fold thing substantive due process and procedural due process. Very easy to understand that
when it is substantive due process the law which the government seeks to impose
must satisfy the constitution itself and the laws must not contradict the
constitutional provision. Now, if that is satisfied, it does not mean also that the
taking of property would already be within the due process clause because there is
still that procedural aspect. When you say procedural - that means that the matter
of enforcing the tax laws must be just and reasonable. It must give the taxpayer the
opportunity to be heard. An opportunity to be heard - that's where notice and
hearing requirement is required.
For example, you have a property, Mr. Bautista which you have not paid real
property taxes for 10 years. And as part of the remedy of the government is either
to collect your delinquent real property taxes or to levy your real property and sell it
at a public auction.
Can the government directly after you failing to pay the real property taxes
that are delinquent, can the government directly appropriate the real
property that you owe and transfer the title in its name?
When you say that there is no procedural due process observed even if the Local
Government Tax Code allows the levy of real property for unpaid taxes but still the
taking was without due process. It was without the required public auction, the
notice. If your real property will be taken to answer for unpaid real property taxes,
there has to be notice that your delinquent. There has to be notice that your
property will be (?) and eventually to be sold at the public auction. He did not
experience any of those; therefore the taking was without due process. Invalid.
Let me give you another example. That real property of yours has not been paid in
taxes for 10 years. You were served/given an assessment only to your delinquent
property tax. After all, the government proceeded to publish a notice of public
auction sale in a newspaper of general circulation.
Do you think that has already satisfied the procedural due process and in
case of public auction the property will be sold, the sale is considered
valid? Publication for 20 days that your property will be sold at public
auction. So the question there is will the public auction operate as a notice
to you since notice is required? Another question - is it not a notice to the
whole world? Is the sale valid? Can you still contest the validity of the sale?
According to the Supreme Court case, whenever it concerns real property that will
be levied and sold at public auction because of unpaid real property taxes meaning
that your real property will be made answerable to unpaid taxes, personal notice is
required at all times. Otherwise, if that is not given, even with the publication, it
will not be valid. You can still question the sale. What is in publication is notice to
the whole world more applies to land titles not in taking of property for tax (?). And
in cases of issuances when the Revenue District Offices that we have even the BIR,
in cases of issuances of administrative (?), revenue circulars by the Bureau of
Internal Revenue, there are 2 things that can happen. If the circulars issued by the
Executive Branch of the government is simply a general implementation of the
regulation that the law provide without additional burden, it does not require notice
and hearing. The mere fact that it is issued, it is already enough. But if the circular
would impose additional burdens that penalties will be imposed by the BIR, it will
require notice and hearing. That is what happened in the case of Fortune Tobacco.
It can be struck down as invalid for its failure to notify the subject or persons
concerns.
The case of Carlos Superdrug
Student: The case of Carlos Superdrug. There were groups of private corporations,
drugstores, who assailed the Senior Citizen's Act which granted them 20% tax
credit on those establishments who were required to grant such discounts on Senior
Citizens. So the main point is that it amounts to confiscation of property because
the previous Senior Citizen's Act usually the discount was shouldered by the
government before. The amount discounted will not shifted to the drugstores. But
in this case, the Expanded Senior Citizen's Act does not give a tax refund but only a
tax credit. So in effect, only 32% of the 20% discount shall be granted as a tax
credit to the drugstores. So one of the issues in this case was due process was
followed in enacting the law. My understanding was that the right to due process
was based in balance with the power of the State-police power- which the power to
regulate the exercise of rights and property. The subject will be into the interest of
general welfare. So the Court found that the credit that the general welfare has
primacy because again, police power is that most unlimited power of the State. In
effect, they cannot claim due process and in a sense the purpose of the law was
also valid because it is goes with the policy of the State to look after the welfare of
the Seniors of the society. And also that if only the petitioners rendered some time
to actually calculate the loss and their earnings, it's not really confiscatory because
they calculated it in such a manner that they assume that all their clients are senior
citizens, thus they should be giving discounts to all.
So this is merely a comparison of the previous Senior Citizen's act wherein they get
full credit because it was a tax credit scheme.
Under the expanded Senior Citizens Act, what was allowed was for any discount
granted to a senior citizen will only be claimed as a tax expense deduction.
Yes, you (referring to Galit kaba? Gallito) were right about the primacy of the
power police for the welfare of the senior citizens.
Equal Protection
Was there valid classification in the enactment of the Senior Citizens Act?
Yes, all persons subject to such law shall be, so long as they are similarly situated
and in like circumstances, subjected similarly in accordance with the privilege
provided by the law and other provisions imposed by it. So, equal protection among
equal. You dont expect the same equality if you are beyond that classification
already.
Is equal protection more on uniformity or equality?
In order to make a valid classification, the classification must be:

1. Based on a substantial distinction. So there is a substantial distinction
between individual taxpayer earning P10, 000 income annually and an
individual taxpayer earning P500, 000 income annually.
2. Germane to the purpose of the law. So if the purpose of the law is to tax
based on the ability to pay, then the higher the income, the higher the tax.
3. It must not only apply to present condition but also to future conditions.
if there are others individual corporations would fall in the same
circumstance, the same should similarly apply
4. It must be applied to all members of the same class. So if a resident
citizen is subjected to 5-32% tax on income, within or without, even a RC
who is currently on a tour would have to be subjected with the same tax
rate.
Ormoc Sugar Company v Treasurer of Ormoc
The ordinance was so specific and cannot be applied to future conditions, so
unconstitutional.
Non-impairment of the obligations of contracts
When do you usually invoke such provision?
So the non-impairment clause is usually invoked in issues of the granting and the
withdrawal of exemption.
What are the requirements for the taxpayer to validly invoke it?
(1) There must a pre-existing contract.
(2) Lets talk about the parties first, who are the parties of the contract? It
must be between taxpayer and government.
(3) The subsequent law somehow alters or removes the exemption granted to
the tax payer. When can there be valid withdrawal of the tax exemption?
Is the grant of exemption revocable or irrevocable?
It is generally revocable. But it becomes irrevocable when the contract has some
sort of consideration in favour of the government.
The grant of exemption to non-profit cemeteries is by virtue of a law, the
Tax Code. Can Congress withdraw such exemption?
In that case class, Congress can withdraw the exemption because the exemption
granted, in the first place, was a general concession to all those non-profit
cemeteries. There is no specific contract between this particular ABC non-profit
cemetery and the government, and there is also no consideration. You cannot also
say that the contract is supported by a consideration therefore it cannot be
withdrawn. What is required is SUBSTANTIAL CONSIDERATION, not simply social
benefit generated from the grant of exemption. Not just minimal consideration.
The reasons why obligations in contract entered into by the government cannot be
impaired when it is supported by substantial consideration are:
1. The Government cannot arbitrarily do so at its own will.
2. The Government descents into the capacity of the private person.
What power of the State can impair obligations?
The police power for the general welfare.
Whats the next limitation?
No-infringement of religious freedom
What does it say?

The tax law should not impair the exercise of ones religious beliefs.
American Bible Society v. City of Manila
Can the Cebu City Government collect municipal license fee from Catholic
Trade Center for selling bibles?
Yes, what the Constitution seeks to prohibit is the imposition of taxes that would
limit religious freedom. So imposing license fees against a religion that would want
to hold an activity, etc., that would be prohibited. In the case of American Bible, it
was actually the distribution of bibles for a minimal profit during an activity, NOT in
a store, not in a establishment. So the fact that the government was trying to
collect a license fee before a distribution for a minimum profit, that would already
limit the religious freedom of this group. But you have to take into consideration
that the Constitution only seeks to protect the religious ACTIVITY, but not the
commercial undertaking of the religious sectors. So meaning the Catholic Trade
Center below, since it is already considered as commercial entity, any sale would be
subjected to income tax, municipal license fee, VAT.
No appropriation for religious purposes
Separation between the church and the State. The State should not support any
particular religion. But there are four exceptions to the general rule. The
Government may appropriate public funds to pay priests and ministers that are
assigned in particular places.
What are these places?
(1) The Government orphanages;
(2) Leprosarium;
(3) Armed Forces;
(4) Penal Institutions;
Not in any way in support of a particular religion, but as compensation for their
services.
No impairment of the freedom of the press
Are the press people exempt from taxation? Are they? (No answer)
What is not supposed to be subjected to taxation? Is it the activity or the
people?
So the press people should not be subjected to license fees or requirement of prior
payment of taxes, fees. Otherwise, that would be limiting their freedom. But it does
not mean that publishing companies earning income in distribution of newspapers,
magazines, etc are exempt from tax. They are not! Ah, Swerteha gud ninyo! They
are basically just like any individual taxpayer, they are subject to tax.
But under the Tax Code, Section 119, one of the exemptions granted are
newspapers of general circulation that are issued in regular interval so long as they
not principally devoted for profit. There are various exemption you can find in the
law.
Power of the President to veto any particular item/s in a revenue or tariff
bill
Now lets go to the distinction of the powers of the State.
A.
Taxation distinguished from police power and eminent domain

Taxation
Eminent Domain
Police Power
As to purpose
The property
The property is
The use of the
(generally
taken for public
property is
money) is taken
use; it must be
regulated for
for the support
compensated
the purpose of
of the
promoting the
government.
general welfare;
it is not
compensable.
As to
It is assumed
He receives the
The person
compensation
that the
market value of the
affected receives
individual
property taken from
indirect benefits
receives the
him.
as may arise
equivalent of the
from the
tax in the form
maintenance of a
of protection and
healthy economic
benefits he
standard of
receives from
society.
the government.
As to persons
Operates upon
Operates on an
Operates upon
affected
(1) A
individual as the
(1) A
community; or
owner of a particular
community; or
(2) Class of
property.
(2)Class of
individuals.
individuals.
As to the
May be exercised May be:
May be exercised
authority
only by the
(1) Exercised by the
only by the
which
government or
government or its
government or
exercises the
its political
political subdivisions; its political
power
subdivisions.
(2) Granted to public
subdivisions.
service companies or
public utilities.
As to the
Generally, there
No amount imposed
Amount imposed
amount of
is no limit on the
but rather the owner
should not be
imposition
amount of tax
is paid the market
more than
that may be
value of property
sufficient to
imposed.
taken.
cover the cost of
the license and
necessary
expenses.
As to the
Is subject to
Inferior to the
Relatively free
relationship to
certain
impairment
from
the
constitutional
prohibition;
constitutional
Constitutions
limitations.
government cannot
limitations.
expropriate private
property, which
under a contract it
had previously bound
itself to purchase
from the other
contracting party.
Effect
Including the
There is a transfer of
Is superior to the
prohibition
the right to property. impairment of
against
contract
impairment of
provision.
the obligation of
contracts.
(Referring to the Catholic Trade in USC)
Can the City Government ask them to pay Municipal License Fee for selling
Bibles?
Yes. In the case of Catholic Trade, their purpose is for profit ad not for religious
purposes.
What the Constitution seeks to prohibit is the imposition of taxes that would limit
religious freedom. The imposition of license fees against a religion who wants to
hold an activity etc., the said prohibition will apply. In the case of American Bible, it
was a foreign, non-stock, non-profit missionary. It was actually the distribution of
bibles and other religious articles for a minimal profit during an activity, neither sold
in a store nor in an establishment. The fact that the government was trying to
collect a license fee before the said distribution, such will already be a limit to the
religious freedom of this group. BUT you have to take into consideration that the
Constitution only seeks to protect the religious activity but not the commercial
undertaking of these religious sects. So meaning, the Catholic Trade and St. Pauls
located in Ayala, since they are already considered as commercial entity, any sale is
subject to income tax, VAT, municipal license fee etc.
No appropriation of public fund for religious purposes. What does it mean?
It means that the Congress shall not and cannot pass a law that would in any way
support a religious group. It would seem to other religions that the State is favoring
a religion. And also there is a separation between the Church and the State.
The separation between the Church and the State. The state shall not support any
particular religion.
The coming of the Pope in the country?
Public funds were spent but Pope was acting as a head of a State. The public funds
are for the support of the State.
But there are four exceptions to the said rule.
The State may appropriate public funds to pay priests, lay ministers etc. (depending
on the religion of the one who needs their services) that are assigned in particular
places: orphanages, leprosarium, in the armed forces and penal institutions; where
such appropriation is for the priests or lay ministers compensation for the services
they have rendered (does not in any way refer to any support for any religion).
Are the press people exempt from taxation? What is this freedom of the
press? Does it refer to freedom from taxes? What is not subject to
taxation? Is it the activity or the people?
It is the activity. So the press people, if they gather for an activity, they should not
be subjected to ant license fee and any requirement of prior payment of taxes or
fees, otherwise, it will limit their freedom. Publishing companies who are earning for
the distribution of these documents/papers/materials are not exempt from tax just
like in ordinary companies. Under the tax code, one of the exemptions granted are
on newspapers of general circulation that are issued in regular intervals so long as it
is not principally devoted to profit. There are various exemptions as found in your
tax code.
Lets go to the different powers of the government. Police Power, Eminent
Domain and Power of Taxation
(Not transcription kay funny kaayo ni na part. Pasted the table from MAMALATEO
(REVIEWER))
Taxation
Eminent
Police Power
Domain
Authority to Government or its
1. Governmen
Government or its
exercise the political subdivisions
t or its
political
power
political
subdivisions
subdivisions
2. Granted to
public
service
companies
or public
utilities
Purpose
For the support of the
Taking for
Regulation, for the
government
public use;
promotion of
just
general welfare;
compensation
not compensable
is needed
Persons
Operates upon a:
On individuals
Operates upon a:
affected
1) Community or
as owners of
1) Communit
2) Class of
the property
y or
individuals
Class of individuals
Effect
Money contributed
Transfer of the No transfer of title;
becomes part of the
right to
only restraint on
public funds
property
the injurious use of
the property
Benefits
Assumed that
Receives the
Person affected
received
individuals receives the
market value
receives indirect
equivalent of the tax in
of the property benefits as may
the form of protection
taken from
arise from the
and benefits received
him
maintenance of a
from the government
healthy economic
standard of society
Amount of
No limit on the amount
No amount
Amount imposed
imposition
of tax that may be
imposed but
should not be more
imposed
rather the
than sufficient to
owner is paid
cover the cost of
the market
the license and
value of the
necessary expenses
property taken
Relationshi
Subject to
Inferior to the
Relatively free from
p to
constitutional
impairment
constitutional
Constitution limitations; prohibition
prohibition;
limitations;
against the impairment
government
superior to the
of the obligation of
cannot
impairment of
contracts
expropriate
contract provision
private
property which
under a
contract it had
previously
bound itself to
purchase from
the other
contracting
party
On taxes, can you consider your taxes as personal liabilities on your part?
Yes. Say for example, you organized a corporation with your classmates. The said
corporation did not pay the taxes.
Can the taxes unpaid by the corporation become your own personal
liability?
No. The corporation has a separate and distinct entity from the board of directors or
stock holders. It means that if the corporation cannot pay, the government should
go after the corporation first. If after the corporation cannot pay the taxes, thats
the time the stockholders will be liable for taxes.
So does it mean that there is a chance for the stockholders to be personally
liable for the tax not paid by the corporation?
Yes.
In normal cases?
The stockholder is only liable up to the extent of his contribution. Personality of the
stockholders and the corporation itself are separate and distinct. As a general rule,
the stockholder will not be held liable for the liabilities incurred by the corporation.
There are three types of businesses, a corporation, partnership and sole
proprietorship. In a corporation, the liabilities of the corporation will not be the
liability of the stockholders.
EXCEPTION: Only if it is found out that the assets of a dissolved corporation have
been distributed to the stockholders without the payment of taxes.
Why?
Tax is a preferred credit.
Different types of taxes. Derived from the national laws, the tax code, special laws,
local and national taxes etc.
How do you define taxes?
Taxes are the enforced contribution levied upon the person, property or the
activities wherein the person is engaged into, by the state which has the jurisdiction
over the person, property or activities or services done and is actually exercised by
the law-making authority in order to meet the needs and demands of the
constituents of the government, basically to raise revenues.
Taxes are enforced proportional contributions levied by the state through the
legislative branch by virtue of its sovereignty against persons, subjects or objects or
services, in order to meet the demands of the government and other public means.
If you break it down, that constitutes the characteristics of taxes.
1) It is an enforced contribution. We can never say it is voluntary. If it was
voluntary then no one will pay their taxes
2) It is proportional. Why? Its based on the persons ability to pay. It is
distributed to those who are better or able to pay
3) Generally payable in money. Money as the standard of measure to be used
(since it is constant). You cannot offer your property for the payment of
your taxes EXCEPT if the government has reached the lines and has to
resort in levying such property. Another would be, in the past, certificate of
4)
5)
6)
banks were allowed as payment but nowadays its not feasible anymore,
what we have right now are tax certificates for tax credits. You can use
such for the payment. Where do you get them? These are issued to you in
lieu of tax refunds for erroneously overpaid taxes. The government will not
reimburse you; it will only give a certificate indicating that this is the
amount that you overpaid.
Imposed against persons, subjects or object under the jurisdiction of the
state
Levied by the state through the legislative branch
For public purpose
What are the requisites to make the tax law valid?

1) It must be for a public purpose
2) Uniform in taxation
3) Within the power/jurisdiction of the taxing authority
4) The assessment must be in consonance with the due process clause
5) Tax shall not infringe inherent and constitutional limitations
Classification of taxes
1) As to subject matter or object
2) As to burden of incidence
3) As to the determination of the amount
4) As to purpose
5) As to the scope or authority imposing the tax
6) As to graduation or rate
DATE: 07/14/12
What is the basis of taxation - nationality, residence or source of income?
In all capitation or poll tax?
Student: Residency
What is property tax? What kind of property? What is the basis of taxing
the property? Other than raising revenue? My point is: Is it because it is
generating income or used in some form of privilege?
student: Used in some form of privilege.
Such as what?
Mere ownership of a real property would subject the owner to real property tax. Of
course, we refer to the property itself.
Specific example? In your case or somebody elses that you know?
Student: Somebody else owns a lot.
What type of lot?
Student: For residence purposes ma'am. Residential lot and then based on the
value of the lot, a certain percentage will be imposed as a tax.
And you call that tax as?
Student: Property tax
Property tax?
It's called real property tax. Before it was called real estate tax. But in order to
avoid confusion with estate tax - on the privilege of transmitting property upon
death - we now call it property tax on mere ownership of real property (?). There is
no, as of this date, there is no personal property tax. Only real property tax. Real
properties are subjected to real property tax.
All of your taxes based on a real property, the personal property aside from mere
ownership is not the real property tax but rather some other form of tax either
because it is used in business, because of its value as computed in community of
poll tax.
And the 3rd class according to subject matter is?
Student: Excise tax - is that which that not fall with the meaning of property tax
and poll tax and the basis of which is the residency or the person's property but not
those which impose based on the tax of such individual's properties
Is this the same as those imposed on alcohols, cigarettes, automobiles,
jewelries?
Classification of taxes as according to subject matter may be divided into 3
categories. It may be personal tax. It may be property tax or it may be the catchall provision of excise tax.
Personal tax, as an example, is directed upon a person by his residency in the
country. That person may be a citizen, not a citizen so long as he is considered a
resident, and for aliens so long as he has stayed in the country for more than 3
months.
That's the personal, poll, capitation tax or you call this cedula or
residence. Aliens who have stayed in the Philippines for more than 3 months may
still be exempt if they do not fall with the category of ambassadors, and the
representatives of foreign embassy.
The second type of tax under subject matter is the property tax. We only have one
property tax directed against property itself. That's called a real property tax. All
other taxes directed against or maybe in some way related to property such as the
transmission of real properties or personal properties of a dead person to his heirs is
not a property tax because the tax there is directed against the privilege of
transmitting the property. Another example with a personal property or a real
property transmitted by the living to another person thru donation. That is not
property tax. Although it is computed based on what was valued/transmitted, but
the tax itself is directed against the privilege of making a donation.
And the catch-all provision which the Excise Tax is not exactly the same as excise
tax found under the Tax Code which refers to excise tax on cigarettes, alcohols,
automobiles and jewelries. What you find in the Tax Code is a specific name of a
kind of tax which is an excise tax. What the excise tax that is categorized here as
either personal property or excise tax is a general classification of all other taxes not
personal but property.
It may include all other taxes not real property tax, not your residence tax,
which is income tax and excise tax. Why?
Excise tax is imposed on the performance of an act, the enjoyment of a privilege,
the conduct of the business, or the performance of a/exercise of a profession. So it
may be income tax. It may be donor's tax. It may be Value Added Tax. It may be
all the others.
As to burden or incidence:
1. Direct
2. Indirect
So the difference in the Direct and Indirect taxes is shifting of the burden of the tax.
In direct taxes, direct, it is when the Statutory Taxpayer is directly burdened with
the tax. When you say a Statutory Taxpayer, he's the taxpayer identified by the
law to pay the tax to the government. While indirect taxes are some kind of taxes
wherein the government has the expectation that such statutory taxpayer upon
moving the tax imposed can shift the burden to someone else either to another
person in the process of distribution or directly to the ultimate consumers. Example
you said is the Value Added Tax because under the law, it is the seller who is the
statutory taxpayer but the seller can pass upon the value to a buyer.
What are the other kinds of indirect taxes?
Excise taxes on fuels may be passed on by the seller of fuels to the international air
carrier consumers. Percentage taxes practically sales in consumption taxes that are
indirect taxes. And customs duties may be passed as well.
As to the amount of tax, the determination of the amount of the tax, how
are taxes classified?
Student: Specific - tax imposed by the head or number, or by some standard of
weight or measurement. ex. Excise tax on tobaccos, liquors.
That may not hold true now with the law on multi-tiered law on alcohol and tobacco
products which impose tax on the value of the products. Specific tax - an example
would be common carrier tax, fixed tax on passenger jeepneys with a capacity of
this much, is subject to a fixed tax on this amount while passenger jeepney or bus
with this number of capacity, this amount of tax.
The Ad valorem tax?
Including real property tax. Is this the value assessed on real property?
Specific tax is the fixed amount. It's not a rate. A fixed amount of tax based on a
number or head or specific weight of measurement or any standard of value.
While on the other hand, an ad valorem tax is the fixed proportion or rate on the
assessed on the value of the property itself or whatever, the example he has given
on the imposition of property that was made.
Mixed is both the imposition of specific and ad valorem.
As to the next classification - the purpose, you already know that there is a primary
purpose for taxation. There are secondary purposes. The general, fiscal or revenue
type is that it is a primary purpose that taxation imposed in order to raise revenues.
What special, regulatory or sumptuary purpose is the secondary purpose wherein
taxation is used to regulate an activity, a business, or promote general welfare, etc.
As to the scope or authority imposing the tax - self explanatory. A tax may be
imposed by the national government. What kinds of taxes? Those found under the
National Internal Revenue Code, those found under the Tariff and Customs Code.
On the other hand, since the municipal or local government has already been given
the power to raise its own sources of revenues, they can impose/these local
government units can impose the tax thru tax ordinance. And all of these taxes are
found under the Local Government Code.
Next Classification?
Student: The next classification is the graduation or rate. First, we have the
progressive in which the rate progresses as the income increases.
Example?
Student: We have the income tax in which we have brackets for a certain range of
income which also has a corresponding rate.
Student: Second is the Regressive in which the rate increases as income decreases.
It is not allowed in the Philippines because it is unfair to those who earn less.
So, regressive is where the income and tax are inversely proportion.
And?
Student:
We have proportional ma'am. Proportional is neither regressive or
progressive. It is based on, for example you have a fixed rate. For example you
have taxes for corporations in which 30% tax rate as to their income. It is based
also on the property, subject or object.
Real property tax, is it regressive, progressive, proportional?
It is proportional because it is a fixed rate of tax based on the value of the real
property tax.
Distinguish taxes from licenses.
Student: As to source: Police power for licenses; power of taxation for taxes.
Student: Second as to purpose: License for regulation; taxes for revenue.
Student: As to amount: tax - it is unlimited; while licenses they are fixed.
Fixed to what extent?
To cover the cost of regulation.
Student: As to when paid: licenses are paid before a business can start; taxes paid after the business starts its operations.
What happens when there is no payment? What happens in cases of nonpayment of license fees and non-payment of taxes?
Non-payment of license fees will may a business operation illegal. Why? Because it
is supposed to be paid on or before January 20 of every year prior to operations.
While non-payment of taxes- it will not necessarily make a business illegal but the
taxpayer will be subject to penalties.
Are toll fees taxes?
No.
What are toll fees? How do you distinguish them from taxes?
Example? Every time you enter a building, you are required to pay toll?
Toll fee - A sum of money for the use of something, a consideration which is paid for
the use of a property which is of a public nature; e.g., road, bridge
Toll fee is a demand of proprietorship while taxes are demand of sovereignty.
Insofar as who can collect taxes is only the government while toll fees maybe
collected by the government or a private individual or private corporation. The
purpose of taxation is to raise revenues while the purpose of toll fee is to cover the
cost of such infrastructure. In Cebu, I am not sure if we have toll fees for the use of
bridges or roads. Coz SRP has no toll fee but in Manila, there are plenty. We can say
that toll fees are not taxes although its purpose if collected by the government,
apart from the recovery of the cost, is to raise revenues for the government
because it is subjected to value added tax. Toll fees are taxable.
Compromise Penalties are those granted by the government in lieu of a prosecution
for the violation of the tax law.
So class, whenever a taxpayer fails to comply the provision of the tax code like
income tax, failure to pay on time or failure to file the tax return which is also a
violation will lead you to the payment, not only to the deficiency there is but you
have to pay 25% surcharge. The 25% (50% if fraudulent) which is based on tax you
did not pay plus 20% interest per annum plus compromise penalty. There are three
additions, surcharge, interest, and compromise penalty. The surcharge and interest
are provided by the law. Compromise penalty is something that when they
negotiate. It is imposed by the Bureau of Internal Revenue for you to avoid criminal
prosecution. But if you refuse to pay compromise penalty, say you are only willing
to pay the basic deficiency tax of surcharge and interest but not the compromise
penalty fixed in amount. The government cannot forced you to pay compromise
penalty. All it can do is to proceed with the criminal prosecutions. Unlike surcharge
and interest, it can be pursued by the government.
What is special assessment?
Special Assessment is a levy on a parcel of land that has been directly benefited by
the public.
What is really the purpose of special assessment?
Not primarily for revenue purposes but in some way is like a toll fee for the
government to recover a part of the improvement made. It's directed to those land
owner and directed to the land itself that is benefited by the structure made by the
government. Not directed to the general welfare. It is the owner of the land who will
pay. It is special as to time and place because there must be a special tax
ordinance. It is made by the local government and not by Congress. A special
hearing has to be made to give property owners to object. Special assessment will
reach 60% value of the land. Only the few will be shouldering the cost of the project
for a period time over ten years. It also called a special levy. A special form of
property tax.
Who may exempt from special assessment?
Usually those who are exempt from property tax.
And the second type of exemption granted for special levy, if the property that was
used by the government is a portion of the property donated by the landowner
benefited by public. Of course the property must be given consideration which was
given to the donee.
How about a debt?
Tax
Basis
Based on law
Effect of nonpayment
Taxpayer may be imprisoned

for his failure to pay the tax
(except poll tax)
Debt
Based on contract or
judgment
No imprisonment for
failure to pay a debt
Mode of
payment
Generally payable in money
May be payable in
money, property or
services
Assignability
Not assignable
Can be assigned
Interest
Does not draw interest unless

delinquent
Draws interest if
stipulated or delayed
Authority
Imposed by public authority
Prescription
Prescriptive periods for tax are

determined under the NIRC
Can be imposed by
private individuals
Civil code governs the
prescriptive period of
debts
So debts are based on contracts entered into by government or person while taxes
are based on a statute. Debts bear interest but only if stipulated into writing as
provided by the civil code. While taxes do not actually bear interest unless the
taxpayer becomes delinquent or is found to pay deficient, it cannot be subject to
stipulation insofar as taxation is concerned. Debt are generally payable in money
although it can still be paid in kind like a property or dacion en pago while taxes are
payable only in money unless it is in a formal tax credit certificates.
The constitution provides that there can be no imprisonment for nonpayment of
debts and poll taxes. Its nonpayment will not result in imprisonment unless it is
correlated with estafa. While for taxes, there can be imprisonment for violation of
the tax code. A poll tax is an exception. A nonpayment of poll tax will not result in
imprisonment. That's why lawyers are not good debtors. Do you know lawyers are
not usually granted credit cards? Lawyer ka ma'am? Goodbye! Because lawyers
know there can be no imprisonment for nonpayment of debts.
Debts are assignable and they can be subject of compensation and offset.
Does that rule apply to taxes? In the case of Francia...
The land was appropriate and expected just compensation. He was a tax delinquent.
He invoked that he tax delinquency was extinguished because he expected just
compensation from his appropriated land. He tried to offset the two amounts. The
Supreme Court said that in taxes, there is no debtor-creditor relationship. It cannot
be subject to set-off!
So generally, taxes are not subject to compensation or set-off between the taxpayer
and the government because the relationship is not that of a creditor-debtor. Taxes
are a demand of sovereignty of the republic which has to be paid without
unnecessary interruption. So even if the taxpayer has existing claims for refund
from the government which also happened in the case of Philex Mining, it cannot
have the defense that they can offset by claiming refunds.
Generally, reading in to the different cases it did allow set-off. An exception is the
case of Domingo!
Where both of the claims of the government and the taxpayer against each other
have already become due, demandable, and fully liquidated, compensation takes
place by operation of law and both obligations are extinguished to their concurrent
amounts.
In the case of the taxpayers claim against the government, the
government must have appropriated the amount thereto. (Domingo vs. Garlitos,
G.R. No. L-18849, June 29, 1963)
The taxpayer here died. There are two things certain in life, death and taxes. On
this case, an estate tax was due on the property left. During his lifetime, he was a
government employee and had unpaid compensation for services rendered. Then at
the point where the estate tax was already due, the unpaid services was already
appropriated by government for payment. It was already ready for release. It still
lifeblood doctrine which dominated. The government was not willing to wait for the
estate tax payment. Whatever was determined for the unpaid services of taxpayer
was already determined for offsetting and compensation. Still the government was
at the advantage of this point. Instead of pursuing the deficiency taxes, there was
already amount appropriated, the requirements were already present for set-off.
The amount was due, demandable and liquidated. No point of paying the heirs this
amount of salary and wait for the heirs to pay the tax. There will be a chance that
no payment of tax will be made.
Subsidy?
A pecuniary aid directly granted by the government to an individual or private
commercial enterprise deemed beneficial to the public; not a tax although a tax
Student: ..given to a certain individual or private enterprises.
As far as govt is concerned we are interested in foreign subsidies or
grants...its not really a donation but a grant of aid because a donation is
given by a private entity while a grant is given by the govt. and revenue?
Student: Revenue is encompassing because it includes subsidy, taxes and tariffs.
And internal revenue are those found in the Internal Revenue Code or the
NIRC tax code? Customs duties and tariffs?
Student: It falls on those exported or imported into a country, while taxes are
broader.
Customs duties and tariffs are imposed on those imported and exported outside our
country. and the rest those are items supposed to be within the country lang. tariffs
are synonymous with customs and duties, but tariffs can also be considered as
_____ .
Lets proceed to forms of escape from taxation. There are six forms of escape
from taxation: shifting, capitalization, transformation, avoidance, exemption,
evasion and only one is illegal its tax evasion.
What is shifting?
Student: Shifting is the transferring of the burden of taxation from one person to
another, like when there are taxes on a sale it is usually the seller who is liable to
pay tax however the seller passes on the incidents of taxation to the consumer.
Shifting involves the transfer of the burden of taxation from the statutory taxpayer
to the consumer. it may be a process of shifting or just one shift.
It involves 3 factors which are?
Student: impact, shifting and incidents of taxation.
The impact of taxation falls on the statutory taxpayer, going through an
intermediate process of shifting, can transfer the burden to the ultimate user where
it is already the incident of taxation it is when the burden finally rests. There are 3
forms of shifting which are forward shifting, backward and onward shifting.
Student: Forward shifting is the transfer of burden to the end user from the
producer to the distributor and the consumer finally.
Where the burden of taxation is transferred from the factors of production
to the factor of distribution until it rests on the final consumer or
purchaser. Example?
Student: value added tax
Backward shifting?
Student: From the consumer to the distributor then to the producer.
Where the burden of taxation is transferred from the purchaser to the factors of
distribution until it falls unto the factors of production. it simply is the opposite of
forward shifting.
Example capitalization. and onward shifting is?
Student: more than one shifting of the burden.
When the burden of taxation is shifted 2 or more times throughout, it can be
forward or backward. Example: value added tax. Imagine the fisherman what does
he use to catch fish? The net, fishing boat, then he will be selling his fish to 555 in
the small fishing port it will be the manufactured. At this point there is no VAT
because there are certain aspects of selling of basic consumptions that not subject
to vat in order for the tax to address the regressive issues, and marine food product
in its original state is not vatable. but when the 555 sell that to the wholesaler it will
be subject to vat, why? because the fish is no longer in its original state, its already
chopped, flavored. The wholesaler will pass on the vat if it sells to SM, if SM sells it
in a restobar and when it is served to a person there is VAT. If it was sold to the
wholesaler for 100pesos plus 12(VAT) it is already 112 in the hands of the
wholesaler. If he sells it for 150 plus 18(VAT) - puhunan is 168. SM sells it for 200
plus 24(VAT) - puhunan of the restobar is 224, we sell it for 300 and it is this
person who will actually shoulder the taxes passed on which totals 54 pesos. It is
the process of forward shifting.
Fisherman
+ VAT
+ VAT
555
Wholesaler
Mfr.
100+12=112
+ VAT
SM
+ VAT
Room 404
Restobar
150+18=168
150+18=168
310
What do you understand of capitalization?

Student: Capitalization is when the consumer would reduce his price to the seller
because he knows that in the long run he would have to pay the difference of price
in taxes.
Capitalization is the reduction in the price of the tax object equivalent to the
capitalized value of the future taxes that the purchaser expects to be called upon to
pay. so in plain words the purchaser would actually request the seller to lower the
prices and its the purchaser who is avoiding the tax because he is expecting that
when he already owns the property he will be made to pay taxes relating to the
purchase. thats why it is called backward shifting in a sense it is the purchaser who
actually escapes the taxation. in the example in the book if a real estate that is sold
and the buyer is expecting to pay taxes and he wants to avoid paying a higher value
to the property and still be required to pay future taxes, he may actually compute in
his mind that in 10 years these are the taxes Im going to pay and I want the seller
to shoulder the tax..so he wants to selling price to be lowered by that amount.
In contrast had it been sold directly from Todas company to RMI for 200m less cost
of 90m, as an ordinary asset it would be subjected to 30% tax. So the tax would be
33m.
Ordinary 30% of profit
And transformation?
Student: For example he is selling a product and he thinks that if he would add the
VAT he would lose market, he would not include the tax and compensate by
producing more at a lower cost.
When the manufacturer or seller who is actually imposed of the tax would fear the
loss of market, if he would add on the tax to the selling price, would instead
shoulder the burden of the tax by not passing it on to his buyers and instead
compensate himself by improving his process of production by turning up more
units at a lower cost.
And tax avoidance?
Student: It is when the taxpayer would use a certain scheme of avoiding tax using
lawful means.
Whats another name for tax avoidance? tax minimization. in contrast what
is tax evasion?
Student: Tax evasion is when a taxpayer purposely, deliberately would try to avoid
paying taxes or lessen his taxes by not declaring proper income for taxation. it is
fraudulent.
Whats another name for tax evasion?
Tax avoidance is the use of legal and permissible means or alternative methods of
assessing your tax liability, it is not breaking the law it is using the letter of the law
to avoid the tax. While tax evasion is fraudulently avoiding to pay your taxes, there
is intent to deprive the govt. of the taxes.
But looking at it, it would have to be considered as tax avoidance.
A real property in this case, may be a parcel of land maybe considered as an
ordinary asset or a capital asset. It becomes capital if it is not used in trade of
business but if it is used, the asset becomes ordinary asset. That building and parcel
of land as far as the Insurance Company is concerned the asset is an Ordinary
asset. And in ordinary assets corporation are taxable at 30% on profit. So if the
building is only 50m and it was 90m in the books of the corporation. If it is sold for
200m the profit will be 110m and the tax would be 33m.
Now in this case, was he able to avoid the 33m? Ceveres wants to avoid
the 33m, is it possible?
Toda (Cibeles) 90m Altonaga 100m RMI 200m
So here the profit Toda would have is only 10m and tax would be 30%. In the case
of Altonaga it is a capital asset, because a person in his personal right and
capacity would be only be using the building for personal use and the capital gains
tax for an individual is only 6% of the selling price or the FMV whichever is higher.
3m + 3m = 6m
200M 90M = 110M x 30% = 33M
100M
CIC
Cost
(90M)
200M
Altonaga
10M
X 30%
3M
+
=6M
RMI
CPG 6% of SP
(Capital Asset)
10m
X 30%
3M
Was there avoidance or evasion of the tax?
There was, supposedly these avoidance scheme would have been possible
if Altonaga was not in any way a conduit simply with CIC (Todas company)
and RMI if Altonaga was really a third person to CIC and RMI.
The factors of evasion are present because RMI (even prior to the sale of
Altonaga and CIC) already paid 2 sets of 40m to CIC and it was reflected in
the books of RMI and CIC.
And the second factor, that Altonaga on the same day that he bought the
building from CIC sold it to RMI. Simply to avoid the 30% tax on the 200m,
because CIC can never use the capital gain tax of 6% because capital gain
tax is only for capital asset.
What are the three factors that connote tax evasion:
1. The ends to be achieved, (i.e. the payment of less than that known by the
tax payer to be legally due, or the non-payment of tax when it is shown
that a tax is due)
2. And that is accompanied by a state of mind which is wilful and deliberate.
Bad faith
3. That such action is unlawful. (i.e. he has not file a return or that the return
was understated and there is over claim so it would result to lower
payment of taxes or no payment at all)
In the case of CIR vs. Pascor it involves a false or fraudulent tax return as well.
And majority of the case discussed that an affidavit is not equivalent to an
assessment of tax but nonetheless even in the absence of an assessment in a false
or fraudulent tax return. An assessment is not necessary in order to file a criminal
case against a tax payer.
What are the evidence to prove tax evasion:
Is difficult to prove because it is a state of mind. It builds on a thought of

evading taxes.
1. Failure to tax returns
2.
Under declaring his income in the tax returns for 2 yrs or more.
How was tax evasion proved in the case of Republic vs. Gonzales? (Refer to case
digest)
The declared income was very minimal, so those which he defended as

exempt from taxation by a concessionaire within the military base were not
declared but in fact looking at the treaty agreement, the exemptions for
the concessionaires granted not for income tax exemption but only for
some municipal license fee.
Therefore his failure to declare for taxation purposes for 2 consecutive

years is an indication of his fraudulent intent and deprived the government
for taxes that would have been collected.
Distinguish tax avoidance and tax evasion:
Tax avoidance
Tax evasion
Legal way of avoiding the taxes. Not When you break the letter of the law.
breaking any law.
i.e. tries to avoid the payment of tax
I.e. transferring to another place.
Time depositing money, that you
only withdraw the money after 5 yrs
then it is tax free.
What is tax exemption?
Grant of immunity to particular persons or corporations or persons of a particular
class from the tax which such persons or corporations within the same taxing
district would have been oblige to pay.
Certain class within certain district are exempted from taxes.
What is tax amnesty?
When the government intentionally overlooks the violations of the taxes which are
not paid. Its alike giving the tax payer a clean slate. But its not automatic amnesty
without any consideration given to the government.
It is not granted by the general law, but granted under a special law. And the last
amnesty the Atty. Tiu knew of was granted last 2005, where in tax payers are
encourage to come out and apply for amnesty for a particular number of years. And
they only have to pay a certain percentage in the difference in their net worth from
one point to another.
Ex. A true blue tax evader that is never caught and you want to have a
peace of mind so you apply. But actually there is no basis for the
government to assess your taxes because you have never declared your
income. So what the government does is the tax amnesty for the last 5
years. 2005-2010. The increase in your net worth between these years will
only be taxed for example 5% in exchange for no prosecution for those
years.
But its not favourable for the government to be giving tax amnesty every now and
then otherwise we wont be paying taxes now and we will only be waiting for
another tax amnesty law.
What is the nature of tax exemption?
1. It is PERSONAL, it cannot be transferred.
2.
3.
4.
5.
It is BASED ON CONTRACT, so it cannot violate the non-impairment of

contracts clause
It is a WAIVER ON THE PART OF THE GOVERNMENT.
It is GENERALLY REVOCABLE, unless it is based on a contract
It is NOT NECESSARILY DISCRIMINATORY, because presumed that
there is substantial distinction between those who are exempt and
those who are not.
Are tax exemptions transferable?

Nature of tax exemption
1) Personal--Mere Privilege granted to certain classes of taxpayers. Not
transferable.
Example: Exemption granted to the corporation will not include the
stockholders because the corporation has a separate personality and the
exemption only applies personally to it.
2) Revocable Except, when the exemption is founded upon a contract with a
valid and substantial consideration.
3) Waiver on the part of the government to collect the taxes which it could
otherwise have collected and it is not necessarily discriminatory because it
is founded on a rational and substantial distinction between classes that
are exempt and those that are not.
Is the power to grant tax exemptions inherent?
Student: Yes because the power to tax is an inherent power. The power not to
tax, likewise, is necessarily an inherent power.
Insofar as LGUs are concerned, is the power to grant tax exemptions
inherent?
Student: No.
LGUs do not have the inherent power to tax. That power is delegated. With that
delegated power to tax, comes the power to exempt BUT only within the confines of
the delegated power.
For example, the LGUs are allowed to tax real property. With that power comes the
power to identify real properties that are exempt from Real Property tax (levied by
the LGU).
If they do not have the power to levy real property tax in the first place, they
cannot say that these real properties are exempt.
EXCEPTION:
When the enabling law delegating the power to tax limits the granting of
exemptions to specific entities.
What should be the basis of a valid grant of tax exemption?
Student: Must observe public interest.
Grounds for tax exemptions may either be based on contract, public policy
and reciprocity. Discuss each.
Student: Contract: when the basis for the grant of tax exemption is a contract
supported by a valid and substantial consideration.
Reciprocity: When the Government enters into a bilateral tax treaty with another
state granting the same exemptions that the other state would grant our Filipinos
and domestic corporations engaging in business in their state.
Reciprocity not limited to tax treaties. The tax code also has reciprocity provisions
such as estate taxation providing that non-resident alien decedents who somehow
have intangible properties in the Philippines would not be taxed if their laws provide
that Filipino decedents with intangibles located in their territory would likewise not
be taxed.
Public Policy: In order to justify the losses the government incurs from noncollection of taxes, the basis for tax exemptions must be for public policy and the
purpose of the law granting the exemption must be for the publics benefit such as
the exemptions granted to non-stock non-profit educational institutions (in order to
support education).
2 kinds of tax exemptions?
Student:
1. Express: When the exemption granted is specifically stated.
2. Implied: When the law does not tax a certain person, property, or activity,
it is considered to be an implied tax exemption.
Exemption by omission should have been a more appropriate term for implied tax
exemption.
Scope of exemptions?
Student:
1. Total: When a person, property or activity is exempted from ALL DIRECT
taxes. So the exemption does not include the payment of VAT, since this is
an indirect tax. UNLESS the law granting the exemption specifically
mentions that the exemption includes the payment of indirect taxes.
2. Partial: exemption only applies to particular taxes. Example: only real
properties are exempt, while all other taxes are collected.
As to the object:
Tax exemptions may be directed against persons or properties.
Example:
1. A person is exempt from the paying of residence tax because he is below
18 years old and he does not have a source of income
2. Exemption from real property tax of religious institutions.
Tax exemptions as we know are revocable. What is the exception?
Tax exemptions are generally revocable except if it is supported by a contract with a
valid and substantial consideration and when the government would revoke an
exemption, only a relative majority of congress present during the meeting is
required.
Construction of Tax Laws
It has to be construed against the taxpayer and in favor of taxation due to the lifeblood doctrine.
What are tax remissions?
Tax remission or tax condonation, defined
The word remit means to desist or refrain from exacting, inflicting or enforcing
something as well as to restore what has already been taken. The remission of
taxes due and payable to the exclusion of taxes already collected does not
constitute unfair discrimination. Such a set of taxes is a class by itself and the law
would be open to attack as class legislation only if all taxpayers belonging to one
class were not treated alike. [Juan Luna Subd. v. Sarmiento, 91 Phil 370]; The
condition of a tax liability is equivalent to and is in the nature of a tax exemption.
Thus, it should be sustained only when expressly provided in the law. [Surigao
Consolidated Mining v. Commissioner of Internal Revenue, 9 SCRA 728]
There is a tax condonation or remission when the State desists or refrains from
exacting, inflicting or enforcing something as well as to reduce what has already
been taken. The condonation of a tax liability is equivalent to and is in the nature of
a tax exemption. Thus, it should be sustained only when expressed in the law.
Versus
Tax amnesty, defined
A general pardon or intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of tax evasion or violation of a revenue or tax
law; partakes of an absolute forgiveness or waiver by the government of its right to
collect what is due it and to give tax evaders who wish to relent a chance to start a
clean slate; not favored nor presumed in law; if granted by statute, terms of the
amnesty must be construed strictly against the taxpayer and liberally in favor of the
government.
What do you understand by compromise? In what case would the
government enter into a compromise favourable to both parties?
The situation actually is the taxpayer is actually liable. There are 2 grounds for a
compromise. In your civil code, Article 2028 defines a compromise as a contract
whereby the parties, by making reciprocal concessions, avoid a litigation or put an
end to one already commenced. So tax compromise is entering into compromise
concessions to avoid litigation or put an end to one already commenced. So both
parties would meet halfway. There are 2 grounds for a compromise:
1. Financial incapacity to pay the amount or the assessment. It may be
reduced to a minimum of 10 per cent. Lets say the assessment is for the
payment of taxes for the past 10 years, for example 1 million, but looking
at the financial capacity of the taxpayer, it cannot afford. So compromise
can be agreed upon such that the taxpayer will only have to pay a
minimum of 10 percent from what has been assessed such that from the 1
million, he will only be liable to pay 100,000. Is it favourable to the
taxpayer? Yes. There is a discount of 90 per cent. Is it favourable to the
government? Yes, because of not collecting at all, at least it can collect a
certain percentage of what has been assessed. But of course, financial
incapacity has to be duly proven.
2. When the assessment of the government is of doubtful validity. When it
has been haphazardly assessed. When there has been a questionable
assessment, it will be favourable for the government to enter into a
compromise rather than pursuing an unreasonable assessment. The
Supreme Court may declare such an assessment invalid so the government
may enter into a compromise thereby collecting only a minimum of 40
percent of what has been assessed.
So this is not tax exemption, the taxpayer is still liable to pay for taxes.
What is double taxation?
Taxed twice by same taxing authority, same taxing period, same subject matter and
for the same purpose, within the same taxing year. This is violative of the
constitution provision of due process and equal protection clause.
Double taxation
Meaning of double taxation
a. Strict sense (direct duplicate taxation/direct double taxation)
(a) Taxing twice,
(b) By the same taxing authority,
(c) Within the same jurisdiction or taxing district,
(d) For the same purpose,
(e) In the same year [or taxing period],
(f) Some of the property in the territory.
Both taxes must be imposed on the same property or subject matter.
b. Broad sense (indirect duplicate taxation/indirect double taxation) taxation
other than direct duplicate. It extends to all cases in which there is a burden
of two or more pecuniary impositions.
Is double taxation prohibited by the constitution?
It does not outrightly prohibit double taxation but it indirectly prohibits direct double
taxation because it violates due process clause and equal protection of laws.
Although there is no word double in the constitution, once a person invokes that
there is double taxation in the strict sense, it means to say that he is invoking the
violation of equal protection clause and the deprivation of his due process.
Villanueva vs. City of Iloilo, GR No. L-26521, December 28, 1968
FACTS:
Relying on the passage of RA 2264 or the Local Autonomy Act, Iloilo enacted
Ordinance 11 Series of 1960, imposing a municipal license tax on tenement houses
in accordance with the schedule of payment provided by therein. Villanueva and the
other appellees are apartment owners from whom the city collected license taxes by
virtue of Ordinance 11. Appellees aver that the said ordinance is unconstitutional for
RA 2264 does not empower cities to impose apartment taxes; that the same is
oppressive and unreasonable for it penalizes those who fail to pay the apartment
taxes; that it constitutes not only double taxation but treble taxation; and, that it
violates uniformity of taxation.
ISSUES:
1. Does the ordinance impose double taxation?
2. Is Iloilo city empowered by RA 2264 to impose tenement taxes?
HELD:
1. While it is true that appellees are taxable under the NIRC as real estate dealers,
and taxable under Ordinance 11, double taxation may not be invoked. This is
because the same tax may be imposed by the national government as well as
by the local government. The contention that appellees are doubly taxed
because they are paying real estate taxes and the tenement tax is also devoid
of merit. A license tax may be levied upon a business or occupation although
the land or property used in connection therewith is subject to property tax. In
order to constitute double taxation, both taxes must be the same kind or
character. Real estate taxes and tenement taxes are not of the same character.
2. RA 2264 confers local governments broad taxing powers. The imposition of the
tenement taxes does not fall within the exceptions mentioned by the same law.
It is argued however that the said taxes are real estate taxes and thus, the
imposition of more the 1 per centum real estate tax which is the limit provided
by CA 158, makes the said ordinance ultra vires. The court ruled that the tax in
question is not a real estate tax. It does not have the attributes of a real estate
tax. By the title and the terms of the ordinance, the tax is a municipal tax
which means an imposition or exaction on the right to use or dispose of
property, to pursue a business, occupation or calling, or to exercise a privilege.
Tenement houses being offered for rent or lease constitute a distinct form of
business or calling and as such, the imposition of municipal tax finds support in
Section 2 of RA 2264.
When is an instance when a law will be declared as unconstitutional for
being oppressive, unreasonable because of double taxation?
Although the constitution does not directly prohibit double taxation but if a tax
imposition is violative of the due process and the equal protection clause, then it
may be declared as invalid.
What are the modes of the government to eliminate double taxation?
CIR vs. Procter and Gamble, GR No. 66838, December 2, 1991
FACTS:
Procter and Gamble Philippine Manufacturing Corporation declared dividends
payable to its parent company and sole stockholder, Procter and Gamble Co., Inc.
(USA) from which dividends the thirty-five percent (35%) withholding tax at source
was deducted. In 1977, private respondent filed with petitioner Commissioner of
Internal Revenue a claim for refund or tax credit. There being no responsive action
on the part of the Commissioner, it filed a petition for review with CTA. In 1984, the
CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax
credit.
On appeal by the Commissioner, the Court reversed the decision of the CTA. Thus, this petition
ISSUE:
Whether or not the issue on whether a withholding agent in the Philippines is legally
entitled to refund maybe raised for the first time on appeal by the Government.
HELD:
The BIR should not be allowed to defeat an otherwise valid claim for refund by
raising this question of alleged incapacity for the first time on appeal before this Court. This is
clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed
in the claim for refund, is likely to run away, as it were, with the refund instead of
transmitting such refund or tax credit to its parent and sole stockholder. It is
commonplace that in the absence of explicit statutory provisions to the contrary, the
government must follow the same rules of procedure which bind private parties. It
is, for instance, clear that the government is held to compliance with the provisions of
Circular No. 1-88 of this Court in exactly the same way that private litigants are held to such
compliance, save only in respect of the matter of filing fees from which the Republic
of the Philippines is exempt by the Rules of Court.
Modes
1.
2.
3.
4.
5.
of eliminating double taxation:

Grant of Tax credits
Reciprocity clauses
Tax treaties- offsetting of taxes in between countries.
Tax expense deductions- when the tax is claimed as an expense
Grant of tax exemptions
If both country would impose 30%, 30%. Naturally its one income it should be
subjected to only one tax, if a tax has been paid in the Philippines using 10%, then
the 10% will be offsetted against the 30% payable in U.S, bottom-line, what was
paid is 10% in the Philippines and 20% in the U.S. a total still of 30%, thats one
way of eliminating double taxation. So, is either granting tax credit, reciprocity
clauses, tax treaty between two states, tax expense deduction as we said when the
tax paid is claimed as an expense, and number 5 granting tax exemptions.
Our tax laws political, civil penal in nature?
Student: Civil in nature, in a sense that taxes, even if the country is occupied by
any other government, still Philippine taxation would apply.
Power of taxation is generally for revenue raising, any provisions on imprisonment
is simply to exact compliance from the tax payer. To make tax payers pay the tax.
Are taxes imprescriptible? Or do they have prescription?
The tax law in contrast with the civil code is more special, the civil code grants for
general prescriptive period and since it is a general law it will not be applied to
taxation law. Under the national internal revenue code there are prescription
provided, under the tariff and customs code there are prescriptions also provided.
So that makes tax laws having a prescriptive period, and in some cases without.
Would you want to have tax laws without prescription period?
You are already 60 years old and you are the BIR will send you a love letter asking
you for the payment of deficiency taxes when you were 25 and earned multi million
in your law profession. Diba?
In order to give peace of mind to the tax payers, and to encourage the government
to collect the taxes within a specified period, there has to be a prescriptive period.
Under the tax code the government is only given 3 years to assess direct taxes.
Under the local government code, the local government unit is only given 5 years
from the due date of the tax to assess direct taxes, and under tariff and customs
code the bureau of customs is only given 3 years from the final liquidation of the
import entry declaration to question the payment of customs, beyond those period
the government can no longer inquire into the correctness of the tax paid, except if
your tax return or tax payment is attended with fraud falsity or you have not filed
any return at all, it is somehow imprescriptible because your tax code provides that
it shall be 10 years from the date of commission of the fraud or discovery. i.e. it
was committed 11 years ago, but the government says that it only obtained
knowledge today, the government still has 10 years from today to make the collect
assessment, that makes it imprescriptible because knowledge is a state of mind.
And also insofar as filing criminal cases for tax violations the government is given 5
years prescriptive period to file a criminal case.
When is that 5 years counted?
From the commission of the offense or from the discovery and the institution of the
judicial proceedings. If the government will say we only discovered it today, will 5
years start? Not yet, this 5 years will only start from when the government will file a
case, discovery and filing of the case. That makes it imprescriptible.
Those imprescriptible cases would only apply for fraud dealing tax payments. Other
than that you can rely on the prescriptive period under the tax code.
What do you understand on mandatory and directory provisions of the tax

code?
Mandatory provisions of the law are intended for the security of the public such that
if the circular etc. any issuance by the government would affect the liability of the
tax payer, it has to be complied with otherwise non-compliance can make the act of
the government or taxing authority as invalid because its a mandatory provision of
the law. but if its a directory provision meaning these are simply directives to the
tax authorities to perform these steps not adding any liability to the tax payer nor
penalty, non-compliance of which would not result to the act of the tax authority as
invalid.
Rules and regulations for tax purposes insofar as BIR is concerned we call it the
revenue regulations. Revenue regulations are in the nature of issuances these are
formal issuances intending to clarify and explain the law by its clarification and
explanation of the law and also to carry into effect its general provisions for the
administration and procedure by the tax authorities.
Who is the issuing authority for revenue regulations?
Secretary of Finance upon recommending approval coming from the bureau of
internal revenue commissioner. So its not that the commissioner of internal
revenue will issue and sign the revenue regulation, all he can do is come up with a
draft revenue regulations submit it to the secretary of finance, maybe changed,
maybe revised but once approved the issuance belongs to the secretary of finance.
but you will see two signatures, both of them.
the power of the commissioner of internal revenue to recommend the promulgation
of revenue regulations cannot be delegated to his subordinates, cannot be
delegated to his assistant, or to his deputy commissioners. its one of its power that
cannot be delegated because generally all powers of the commissioner can be
delegated to his subordinates.
In order for regulations to be valid what must be complied?
Should not be contrary to law, published in Official Gazette must be reasonable and
within the authority.
Does it have the force and effect of the law?
Yes
How different is administrative opinions and rulings and who issues it?
They are of less general interpretations as compared to rules and regulations?
What do they contain? if we say that revenue regulations intends to clarify
and explain the law and to carry into effect the general provisions for
proper administration and procedure of the law, what are the contents of
administration rulings?
Administrative rulings and opinions are of less general and less formal interpretation
of the law addressing individual situation and problems presented by the tax payers
themselves. they cannot address hypothetical questions for the tax payers but
rather only actual and real situations. it is less general because its not that you
may write a letter asking for your tax implications for a certain transaction that you
have and you will be answered.
He cannot delegate that power to his staff.
Student: I think he can delegate the authority to the prime ministerto the
Commissioner.
The power to issue an opinion can be delegated to the assistant commissioner and
to deputy commissioners, except in 2 instances..
In what cases? What could be a reason for the Secretary of Finance reverse
the rulings of his predecessors?
Student: Subsequent changes in regulations..
What type of rulings should always be issued by the Commissioner and no

one else?
Student: rulings of first impression.
S the possible reason the secretary of finance reverse the rulings of his
predecessors is when he believes there should have been a different construction of
the law other than what has been issued. so he believes it was an erroneous
interpretation by his predecessor, there has to be a valid basis.
What are rulings of first impression?

Student: When there are no precedent cases.
With respect to the prospectivity and retroactivity of our tax laws?

Student: They are prospective in nature.
And number 2?
Student: when it involves the revocation of existing decisions.
As a general rule?
Student: As a general rule but its not absolute. One of the exceptions is when a
legislation is passed that expressly provides for a retroactive effect on a tax law.
However this act of congress is under the limitations of the constitution that it
should not violate due process because it should not impair vested rights.
The power to issue rulings and opinions can be generally delegated except in 2
instances. In rulings of first impression, when the issue is novel There is no
precedent as yet, and when it involves the revocation, reversal, clarification of
existing rulings. with the entry of Commissioner Kim Henares she issued a circular
that she would be the only one to issue rulings even is its not anymore a ruling of
first impression and even if its not a case of revocation, reversal of existing
decisions. Meaning she has to look into all cases.
So the general rule is that tax laws should be prospectively applied except when the
law itself provides for a retroactive effect but the exception to the exception is that
is that it can be retroactively applied if it is not harsh and oppressive to the
taxpayer.
Can the secretary of finance issue an opinion?
It can only be allowed if it is not harsh and oppressive.
Student: I think the Secretary is restrained in promulgating regulations and rules

for taxation.
When a regulation or an opinion is issued and subsequently revoked by the

Commissioner, can it have a retroactive application?
Let me give you an example. You sought for an opinion whether your transaction is
taxable or not. Commissioner issued a favorable opinion saying that you transaction
is not taxable. On the belief of that opinion, you did not pay taxes. Afterwards,
another Commissioner came in, revoking the previous ruling and believed that it
was incorrect. He issued another opinion saying that transaction previously was
already taxable.
He cannot issue an opinion? Let us say that you wrote to the BIR
Commissioner for an opinion that turned out to be unfavorable on your
part, but you believe otherwise, can you elevate your questionable opinion
to the secretary of finance?
Student: Yes
Whats the difference?
Student: The power of the Secretary of Finance is Lets say Im a taxpayer,
whenever I have questions for the BIR commissioner and I dont like to go straight
to the Secretary of Finance for an opinion because that is the power of the
commissioner, its just really an appeal to the secretary of finance that we ask for
his opinion.
Can there be retroactive application of the law? Otherwise stated, can the
BIR collect taxes during the period which you applied the exemption.
Student: No!
Why do you think the secretary would give you an opinion?

Student: I think it is one of the necessary consequences under his scope of
authority being the head of the dept.
Transcriber's notes:
When the taxpayer seeking exemption applied it in bad faith and thus able to
get the exemption
When the taxpayer seeking exemption deliberately omitted/ misstated material

facts leading to the grant of exemption
When the subsequent findings of the BIR are different from the facts present
when the ruling was made
*In all cases, it is about the data presented by the taxpayer
Because the Secretary of Finance has of the supervisory authority over his
Commissioner.
Administrative interpretation forms part of the law of the land although they are not
actual legislations.
Can the Secretary revoke the rulings of his predecessor?
commissioner revoke the opinions of his predecessor?
Student: Yes
Or
the
General rule, there can be no retroactive application of a repeal of a regulation, a

ruling or an opinion. But there are exceptions. What are the exceptions?
You're saying that when a taxpayer deliberately mistakes or omits material facts in
the tax returns or in the information or document provided by the BIR. So,
deliberate omission of material facts.
When the facts subsequently gathered by the BIR are materially different from the
facts provided by the taxpayer.
So there are three instances when the repeal or revocation of a regulation or a
ruling would result to a retroactive application. Such that retroactive application will
be harsh and oppressive to the taxpayer. It will be applied because the taxpayer is
in bad faith, deliberately omitted or misstated material facts in his tax returns or
documents submitted to the BIR, or when the facts subsequently gather by the BIR
are materially different from the facts submitted by the taxpayer.
So if you have read an opinion or in the future you will read an opinion, the last
sentence provided there by the BIR is that this ruling shall be invalid if it is found
out that facts are different from what was presented. So it's a clause that will
automatically declare invalid if subsequently it is found out that facts are materially
different.
Let me give you an example why tax laws are applied prospectively in the absence
of or notwithstanding express provisions of retroactivity. In July 6, 2008, RA 9504
took effect. It provided there 50,000 tax exemption already for personal but the law
took effect only July 6 until December (a period of 6 months). Prior to that, the old
law was 20,000; the old law was from January to July for 6 months. So what
exemption will be applied? Is it 20k or 50k? The law did not say that it has
retroactive application; therefore we cannot use the 50k exemption. Exemptions are
strictly construed against the taxpayer, what it took place is that issued a Circular
which explained that the exemption can be applied pro-rata. From January to July
5, the exemption will be 20k. From July 6 to December, the exemption will be 50k.
Since its effectivity is only 6 months each, the total exemption for the year for the
individual taxpayer will be only 35k which is half of 20k and 50k. All employees
would know that. At the end of year, employees will know that they have an exempt
income that is 50k for the entire year. Had it not for the clause that retroactive
application of the law, then the entire 50k exemption will be applied.
Decisions of the Supreme Court and the Court of Tax Appeals will form part of the
law of the land.
How do you construe tax laws?
Transcriber's Notes:
Taxation is statutory in nature. Without tax law, no taxes imposed.
If there is a tax law that is clear (in imposing tax) then it must be carried out.
IT will be strictly construed against the tax payer because he is clearly liable
under the law.
But once the provision is doubtful, it is only when it will be construed strictly
against government --- only when there is doubt! Because tax laws are purely
statutory in nature, without a clear tax law, there can be no tax. Also because
taxation is an exaction and a burden.
If the tax law is very clear, there is no room for interpretation and it will be applied
as it is. But if doubt exists, then it will strictly apply against the government who
had the opportunity to make it clear and in favor of taxpayer. That is different for
tax exemption.
Tax exemption, how do you construe it?
Strictly against the tax payer --- because taxation is the rule, exemption is the
exception. All persons, property, and transaction should bear a burden a share in
the cost and expenses in running the government.
Strictly construed against the taxpayer and liberally construed in favor of the
government. Lifeblood doctrine! In the same way amnesty is construed in that same
way, tax condonation, tax remission, etc. Even tax refunds are construed strictly
against taxpayers because it will diminish the funds of the government.
Erase 3-5! Only until number 2.
Exclusion is different from exemptions. We will discuss this later and found in
Section 32b of your tax code. These are income excluded from your gross income,
no need to report to the government. Exclusions will also be construed strictly
against taxpayer because it will result in lesser funds for the government.
Non-retroactivity of repeal for regulations and rulings, and its exceptions
General Rule: there can be no retroactive application of a repeal of a regulation, an
opinion or a ruling. But there are exceptions, what are the exceptions?
Exceptions:
1. When the taxpayer is in bad faith.
2. When the taxpayer has deliberately omitted or misstated material facts in
his tax returns or documents submitted to the BIR.
3. When
4. When the facts subsequently gathered by the BIR are materially different
from the facts submitted by the taxpayer.
So if have read an opinion or, in the future, you will read an opinion, the last
sentence provided there in the BIR is that this ruling shall be invalid if it is found out
that the facts are different from what was presented. It will automatically be
declared invalid. Take note: materially different.
Example why tax laws are actually applied prospectively
In July 6, 2008, RA 9504 took effect. It provided 50,000 tax exemptions already for
individual. But the law took effect only July, 6, 2008 until December for the period
of six months. Prior to that, the old law provided 20,000 tax exemption (January to
July 2008). So what tax exemption will be applied to the taxpayer? It is the 20,000
or the 50,000 which is provided in the current law. (1) The law did not say that it
has a retroactive application; therefore we cannot use the 50,000. (2) The law on
tax exemptions are strictly construed against the taxpayer. So what actually took
place is that BIR issued a circular that the exemption may be applied pro-rata. (Get
the average: 35,000) half of 20,000, half of 50,000.
Had there been a clause which would state retroactive application of the law, then
the entire 50,000 exemptions would be applied in 2008.
Decisions of the Supreme Court and the Court of Tax appeals
Will form part of the law of the land.
Prospective
R.A. 9504
20,000/6 mos.
50,000/6 mos.
2008
July 6
Construction and interpretation

Tax laws
How do you construe tax laws?

General Rule: If the tax law is clear, no room for interpretation. Then it has to be
applied as it is.
EXC: If doubt exists, it has to be strictly applied against the government who has
the opportunity to make it clear, and in favour of the taxpayer.
Tax exemption and exclusion
Strictly construed against taxpayer, and liberally in favour of the government (Life
blood doctrine of the vampire government haha); same with amnesty, tax refunds.
Income Tax
What is income tax?
It is a tax on all yearly profits arising from the use of property, profession, services,
etc.
Before you know what is taxable, you have to first know what income is. What is
income? Income is all wealth which flows into the hands of the taxpayer other than
a year return of capital. Therefore income tax is a tax on the wealth that flows to
the hands of the taxpayer.
Exclusion (Section 32B Tax Code) by the way is different from tax exemption. These
are income excluded from your gross income, no need to report to the government.
It will be strictly construed as well because it will result to fewer collection of the
government.
Features of the Philippine income tax law
Tax treaty vs. Tax Code

If there is a conflict between the tax treaty and any municipal tax law (Tax
code, Local Government Code, etc.) that we have. Which provision will
prevail?
GR: Tax treaty provision will prevail. Reason: to lessen the effect of double taxation.
You dont have to look into which of the two is recent. Just take into consideration
that the purpose of the tax treaty is very special. It has to prevail. EXC: UNLESS the
tax treaty provision is burdensome.
Progressive
Are all income tax progressive? No. So which income tax is progressive?
Income tax on individual is progressive. For corporation, its proportionate at 30%,
so not all income taxes are progressive.
If the municipal law is actually more favourable than a tax treaty, then the tax
treaty has not actually addressed the issue. The tax code now will prevail.
Example:
Under the tax code, all corporations (whether DC, RFC, NRFC) are subject to a tax
rate of 30% flat rate. But the tax code provides that non-resident foreign
corporation lessors of vessels, machineries, and aircraft (MVA) are subject to 7.5%.
Some tax treaties provide that lease of commercial scientific equipment would
qualify as a royalty subject to a tax rate of 10%-15%. Now here comes ABC
corporation (a NRFC) sending its vessels to the Philippines for lease to a domestic
corporation. What rate should be applied?
TC: 30% on NRFC
TC: 7.5% on NRFC lessors of MVA
TT: 10%-15% Royalties (inc. lease of MVA)
Direct tax
It is a direct excise tax
Number three...
Comprehensive tax situs
ITEM
Nationality
RC
NRC
RA
NRA
(etb/netb)
DC
RFC
NRFC
Residence
Sources
All sources within are taxable in the PH.

Resident foreign corporations. Taxable in the Philippines?
Yes.
The second one (the Tax code 7.5%) - because the tax code is more favourable,
under the exception.
Non-resident foreign corporations?

Not nationals and not residents. Yes.
TT: 0% Business Profit Ordinary Income

TT of 0% will be applied
Sources of tax laws
1. Republic Acts
2. Ordinances
3. SC decisions
4. Rules and regulations
5. EO of the President example: increase of VAT rate from 10% to 12%
What is consistent is that if they earn income in the Philippines, they are
taxable because the Philippines is the situs or place of taxation. The state
in which it has jurisdiction over the said corporation or entity has the right
to collect taxes, notwithstanding that it is a non resident and foreign
corporation, non-resident alien or nationals or citizens of our country.
Imagine a corporation organized outside the country, has not set foot in the
country, but is still taxable in the country, the source principle will apply.
Lets move on to income taxation.
You have a corporation (Room 404) and you are the president. You obtained a loan
from XYZ Corporation, said corporation is based in Japan. Monthly payments are 1M
for principal and 1M in interest. Who is earning income? What income is this? There
is interest income. We have to determine who is earning here, is it your corporation
or the outside corporation? It is the outside corporation. That outside corporation
did not come here in the Philippines to execute the contract. The signing was
conducted abroad. Is it taxable in the Philippines? Yes. Considering that its source is
from the Philippines. When you are looking into the taxability of an income, whose
nationality would you look into? The one earning the income or the one paying the
income? The one earning the income.
Is the interest earned by the outside corporation taxable? Yes. Nonresident foreign corporations are taxable for income coming from (within)
the Philippines. You have to determine whether the interest was earned in the
Philippines. Section 42 of your Tax Code. The provision there states that situs of
income is where it is earned.
SEC. 42. Income from Sources Within the Philippines. (A) Gross Income From Sources Within the Philippines. - The
following items of gross income shall be treated as gross income from
sources within the Philippines:
(1) Interests. - Interests derived from sources within the Philippines, and
interests on bonds, notes or other interest-bearing obligation of residents,
corporate or otherwise;
(2) Dividends. - The amount received as dividends:.
(a) from a domestic corporation; and
(b) from a foreign corporation, unless less than fifty percent (50%) of the
gross income of such foreign corporation for the three-year period ending
with the close of its taxable year preceding the declaration of such
dividends or for such part of such period as the corporation has been in
existence) was derived from sources within the Philippines as determined
under the provisions of this Section; but only in an amount which bears the
same ration to such dividends as the gross income of the corporation for
such period derived from sources within the Philippines bears to its gross
income from all sources.
(3) Services - Compensation for labor or personal services performed in
the Philippines;
(4) Rentals and Royalties. - Rentals and royalties from property located
in the Philippines or from any interest in such property, including rentals or
royalties for - (a) The use of or the right or privilege to use in the
Philippines any copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property or right;
(b) The use of, or the right to use in the Philippines any industrial,
commercial or scientific equipment; (c) The supply of scientific, technical,
industrial or commercial knowledge or information; (d) The supply of any
assistance that is ancillary and subsidiary to, and is furnished as a means
of enabling the application or enjoyment of, any such property or right as
is mentioned in paragraph (a), any such equipment as is mentioned in
paragraph (b) or any such knowledge or information as is mentioned in
paragraph (c); (e) The supply of services by a nonresident person or his
employee in connection with the use of property or rights belonging to, or
the installation or operation of any brand, machinery or other apparatus
purchased from such nonresident person; (f) Technical advice, assistance
or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking,
venture, project or scheme; and (g) The use of or the right to use: (i)
Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.
(5) Sale of Real Property. - Gains, profits and income from the sale of
real property located in the Philippines; and
(6) Sale of Personal Property. - Gains; profits and income from the sale
of personal property, as determined in Subsection (E) of this Section.
(B) Taxable Income From Sources Within the Philippines.
(1) General Rule. - From the items of gross income specified in
Subsection (A) of this Section, there shall be deducted the expenses,
losses and other deductions properly allocated thereto and a ratable part of
expenses, interests, losses and other deductions effectively connected with
the business or trade conducted exclusively within the Philippines which
cannot definitely be allocated to some items or class of gross income:
Provided, That such items of deductions shall be allowed only if fully
substantiated by all the information necessary for its calculation.
The remainder, if any, shall be treated in full as taxable income from
sources within the Philippines.
(2) Exception. - No deductions for interest paid or incurred abroad shall
be allowed from the item of gross income specified in subsection (A) unless
indebtedness was actually incurred to provide funds for use in connection
with the conduct or operation of trade or business in the Philippines.
(C) Gross Income From Sources Without the Philippines. - The
following items of gross income shall be treated as income from sources
without the Philippines: (1) Interests other than those derived from
sources
within
the
Philippines
as
provided
in
paragraph (1) of Subsection (A) of this Section; (2) Dividends other than
those derived from sources within the Philippines as provided in
paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor
or personal services performed without the Philippines; (4) Rentals or
royalties from property located without the Philippines or from any interest
in such property including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents, copyrights, secret
processes and formulas, goodwill, trademarks, trade brands, franchises
and other like properties; and (5) Gains, profits and income from the sale
of real property located without the Philippines.
(D) Taxable Income From Sources Without the Philippines. - From
the items of gross income specified in Subsection (C) of this Section there
shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any expense, loss or
other deduction which cannot definitely be allocated to some items or
classes of gross income.
The remainder, if any, shall be treated in full as taxable income from
sources without the Philippines.
(E) Income From Sources Partly Within and Partly Without the
Philippines. - Items of gross income, expenses, losses and deductions,
other than those specified in Subsections (A) and (C) of this Section, shall
be allocated or apportioned to sources within or without the Philippines,
under the rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.
Where items of gross income are separately allocated to sources within the
Philippines, there shall be deducted (for the purpose of computing the
taxable income therefrom) the expenses, losses and other deductions
properly apportioned or allocated thereto and a ratable part of other
expenses, losses or other deductions which cannot definitely be allocated
to some items or classes of gross income.
The remainder, if any, shall be included in full as taxable income from
In the case of gross income derived from sources partly within and partly
without the Philippines, the taxable income may first be computed by
deducting the expenses, losses or other deductions apportioned or

allocated thereto and a ratable part of any expense, loss or other deduction
which cannot definitely be allocated to some items or classes of gross
income; and the portion of such taxable income attributable to sources
within the Philippines may be determined by processes or formulas of
general apportionment prescribed by the Secretary of Finance.
Gains, profits and income from the sale of personal property produced (in
whole or in part) by the taxpayer within and sold without the Philippines, or
produced (in whole or in part) by the taxpayer without and sold within the
Philippines, shall be treated as derived partly from sources within and
partly from sources without the Philippines.
Gains, profits and income derived from the purchase of personal property
within and its sale without the Philippines, or from the purchase of personal
property without and its sale within the Philippines shall be treated as
derived entirely form sources within the country in which sold: Provided,
however, That gain from the sale of shares of stock in a domestic
corporation shall be treated as derived entirely form sources within the
Philippines regardless of where the said shares are sold.
The transfer by a nonresident alien or a foreign corporation to anyone of
any share of stock issued by a domestic corporation shall not be effected or
made in its book unless: (1) the transferor has filed with the Commissioner
a bond conditioned upon the future payment by him of any income tax that
may be due on the gains derived from such transfer, or (2) the
Commissioner has certified that the taxes, if any, imposed in this Title and
due on the gain realized from such sale or transfer have been paid.
It shall be the duty of the transferor and the corporation the shares of
which are sold or transferred, to advise the transferee of this requirement.
(F) Definitions. - As used in this Section the words "sale" or "sold"
include "exchange" or "exchanged"; and the word "produced" includes
"created", "fabricated", "manufactured", "extracted", "processed", "cured"
or "aged".
You should know that the protection or benefit is received by the borrower. Any
activity performed using the funds borrowed, it has received benefit or protection
from the government. Therefore, it is taxable (benefit principle). The foreign
corporation is not registered in the Bureau of Internal Revenue, it is up to the
taxpayer to withhold the tax.
System of Taxation (Schedular and Global)
Schedular Income Tax System it is when you pay in separate schedule. Income
from compensation, business, from exercise of ones profession, from investment
etc. they will be separately filed, deducted with different allowable deductions and
computed of different applicable taxes.
Global Income Tax System all source of income, whether it is sourced from active
pursuit of business such as income from services, exercise of ones profession,
businesses and all income from passive such as investments including (practical)
games and other sources are to be combined and be deducted from whatever
deductions applicable. If you are an individual tax payer, you will apply the
individual tax rate and if you are a corporation, you will apply the flat rate of 30% .
Difference: Global ITS combines everything while Schedular ITS separates
different incomes
What we have here is partly global ITS and partly scheduler ITS.
As illustrated:
Schedular vs. Global

Comp.
Global
Sched.
PGPS
5-32%
Or
30%
After all
deductions
Prof.
Bus.
Other Inc.
FWT
Passive
CG FWT
Capital
- All deductions
5%-32% or 30%
-
Compensation income is sourced from rendering services, from exercising

ones profession, from business, other income, sideline, passive income
from investments and capital gains. If we were following the global ITS, we
will add all of these and deduct the allowable deductions and multiply it
with the 5-32% tax rate of individuals or 30% for corporations. In
scheduler ITS, there are different incomes. We apply tax rates for each.
Why are we partly scheduler ITS and Global ITS?
o
We combine all the active income and subject it to the 5-32%
individual tax rate or the 30% for corporations and subject it to
the allowable deductions or expenses. We do not combine the
passive income because it is still subject to a final withholding tax.
This means that whoever is the payor, for example a bank for the
interest we earn, will be obligated to withhold the moment the
interest is earned. And then this is already subjected with finality
and there is no need to add the income. Capital gains is only
taxed at the time there is transaction. This will not be combined at
the end of the year.
Gross income when the income is taxed without the benefit of deducting the
expenses. Applies to non-resident foreign corporations because they are not
expected to do business here therefore they incur expenses here in the Philippines,
they will be taxed at gross.
Net income when expenses are allowed to be deducted
We are generally following the net income taxation. The government allows us to
deduct allowable deductions except in two types of tax payers. These are the nonresident aliens (does not exceed 180 days in their stay) and non-resident foreign
corporation.
Gross income taxation is advantageous to the government, it raises more revenues.
It is disadvantageous to the tax payer because you will not be allowed to deduct the
expenses you have incurred
Net income taxation is advantageous to the tax payer since he will be allowed to
deduct but such is disadvantageous to the government since there is avenue for
fraud, taxpayers might deduct expenses not related to their businesses.
Features of Income Taxation
Graduated rates
Progressive
Modified gross income in a sense that some individuals who are not
engaged in trade, business or profession are not allowed to deduct
business expenses but it becomes modified when they deduct personal
exemptions (single or married) with additional deductions for qualified
dependents
Governed by Pay as you file system. When you file your income tax return,
you are required to pay immediately (then and there)
Features of corporate income taxation
Not graduated rates
Not progressive
Proportionate rate of 30% regardless of your status of residency or
nationality
Follow net income tax EXC non-foreign corporations
Pay as you file system except those corporations who have availed of the
electronic paying system wherein they are given 5 days in order to pay
their taxes
purposes, as well, income is considered within a specified time. Income tax for
corporate taxpayers, their income is considered on a yearly basis. Individual
taxpayers, income is also considered on a yearly basis unless if the income that you
are considering is from one transaction alone which has to be reported for final tax
purposes. So, those are the distinctions and the return of capital is non-taxable. So,
example, if you pay premiums for an insurance and you would like to withdraw it
and the premium is returned to you, the premiums that you have paid, in the law it
is not income but rather a return of capital. But whenever an income is given to
you, it will be taxable. Capital is non-taxable.
What are the sources of capital? What income can be derived from a
capital? Give me an example?
Income can be derived from (1) capital, (2) labor, (3) both capital and labor, and
(4) sale of property or dealings with properties. With the income which you derived
from capital are those types of when you invest a certain fund or wealth that you
have and it will generate interest, dividends from shares of stock investments and
these will be considered income only (?).
What type of income is generated from service? You can give an example.
Business, is it purely for service?
Compensation income, income for professional income by the exercise of profession.
How about the combination of labor and capital?
Both investment of labor and capital may produce income such as engaging in
business.
And dealing with property, the sale of (?). Without question the sale of real or
personal property.
DATE: 07/21/12
What is income?
Income is all wealth which goes to the hands of the taxpayer other than the mere
return of capital. This is, say for example, that you were able to close the deal for
the sale of P10 million worth of property.
All wealth which flows into the hands of the taxpayer other than the return of
capital. If you were able to sell P10 million worth of property, the entire selling
price/proceeds is not income because the cost of the property is the return of
capital. You don't consider it as profit. Unless the type of wealth which flows into
you is for the payment of a service because in service you cannot quantify the
account of service or the cost actually. If the service is for dancing, and you were
paid P10, 000 per dancing, that makes income. What else do you consider, the
movement of your body - it's not.
Other than mere return, what is capital? So you are the income of your
parents? Differentiate income from capital.
While capital is the tree, income is the fruit. So you're thinking that income is the
by-product of capital. If you have an existing fund, any interest earned from
investing it will be the flow of the fund which is of course, the interest income. If
there is what you call wealth, income - if it the wealth that you receive from
inheritance - that is your capital. The income would the service of the wealth or
any flow outside of that wealth. As you have said also, capital is the fund or
property at an instant of time. You can consider at any point in time with your
capital is even if you've (?) you can consider what your net worth at one instant of
time. You can compute what your capital is for the day. So when you say income, it
is the flow of services derived from that income within a specified period of time
because income is something which includes the cost, as a general rule. For tax
But is this an exclusive list from where you derived your income? So what
are the other sources?
Investments is already part of income from capital. Illegal activities may be derived
from dealings with properties or from service. Prizes or winnings so long as they are
not exclusions from gross income. Prizes and winnings, if not an exclusion from
gross income and usually from investment in capital, so long as it is not from a past
service rendered, then it can be from other sources. So, I am saying that income is
not solely derived from these 4 types. Not only from capital, from service, labor and
capital or from dealings in property because income covers all wealth that flows into
the hands of the taxpayer including treasures, illegal transactions, winnings
received, etc.
Do you consider the payment of the government of just compensation for
expropriation is an income subject to tax? Property expropriated from the
government, you were paid just compensation. It is not voluntary on your
part to sell the property but you derived nonetheless just compensation. Is
just compensation taxable? But you were paid?
What are the requirements or criteria for an income to be subject to tax?
There must be profit.
Do you agree that just compensation received from the government from
the expropriation of property is not income subject to tax? What do you
think class, subject to tax or not? Why do you think it is not subject to tax
because it is an involuntary sale? You have no profit?
The sale of real property in expropriation cases is still considered as an income. As

to whether or not it is subject to tax, it is subject to tax. Any sale of real property
that is considered as a capital asset is subject to the 6% capital gains tax as a rule.
But because this is considered as subject to the 6% capital gains tax based on the
selling price or fair market value without consideration of how much it actually cost
on the part of the seller. But because the purchaser is the government, you are
given freely an option whether to be taxed at 6% capital gains tax based on the fair
market value or gross selling price or the 5-32% tax on the net income. So, you
simply have to choose. Would I want to be taxed at 6% based on the selling price or
fair market value or would it be favorable on my part at 5-32% but since the basis
is not the selling price but the profit only. So even if the latter rates - 5 to 32%, or
any of those rates except 5% is higher than 6% but the basis is only the profit. So,
if the purchase price of the government is say for example, P1 million, and your
cost in buying is P1.2 million, you better choose the 5-32%, you don't pay any tax
because you did not gain a profit, you lost. Unlike the 6% wherein you have pay
6% based on the fair market value or the selling price without regard to how much
you purchased the property. But if the purchaser of that property is not the
government, not in an expropriation case, it has to be paid at 6% regardless of the
(?). That is just a special case lang but it is taxable. I believe that you have and I
am expecting that you have reached that part in exclusions of gross income. And
the list of exclusions from gross income does not provide that expropriation (?) are
excluded from gross income, right? Do not presume.
We move on to the next topic - Existence of Income
True or false? Only when there is profit shall there be taxable income?
Because income tax is a tax on income. Without any income or profit, there
shall be no income tax? True or false? Why? Give an example of all the
income taxes that we have enumerated in the outline, letter c - different
types of income tax. Does 1 or 2 (?) not on an actual income? It would
have been easier to say yes because income tax on all the yearly profits but
you said no. So, what is income? Capital gains on what? And?
For example, I own shares of stocks in PLDT. I purchased it at P1.00 per
share and I am selling it now at P2.00. Forget about the PLDT.
ABC Corporation - I own shares of stock in ABC Corporation. It is not listed
and traded in the Stock Exchange. I purchased the shares P1.00 each per
share. I sold it at P5.00 per share. I realized profit P4.00 per share. Is it
taxable on the P5.00, P4.00 or P1.00?
Taxable for 5, so selling price. If I sold it for 50 cents each, am I taxable for
the 1 peso cost? The 50 centavos selling price?
Criteria to determine if an income is taxable.
The first criterion is that there must be income or profit. You can only say that
there is income or profit if the proceeds from the service, let's say from the sale of a
property less cost of property, there is a possibility of difference. Meaning your
selling price is higher than the cost, and then you have a profit. Without this profit,
as a general rule, that transaction is not subject to income tax because it contracts
taxes on the profit.
The exception would be if the type of income tax, any of those enumerated in letter
C, will be computed on a presumed gain and not on an actual gain. There is
presumed gain if the basis of the tax is on the capital rather than on the profit.
When will that happen? Capital gains tax on real properties is classified as capital
asset because as I have mentioned a while ago, if what you are selling is a real
property that is classified as capital asset not used in trade or business, the tax
there is a 6% capital gains tax on the presumed gain. This means 6% tax on fair
market value or selling price, whichever is higher. If you have a real property which
you have purchased for 1 million, you sold it at 500k because the property has
depreciated in value. You incurred a loss.
As a general rule, income tax will not be applied. But the basis of the capital gains
tax is on the capital asset. It is on the selling price (500k) or the fair market value,
whichever is higher. The fair market value is not within our control unlike the selling
price which is in our control. We can provide for the selling price in the deed of sale
while the fair market value is provided by the BIR, Assessor's Office. Whichever is
higher will be the basis of tax. So if the fair market value is 600k, the capital gains
tax will be based on this amount. Is this a tax on income? Not really. But the
presumption on a capital gain tax is that there is a presumed gain probably because
real properties appreciate in value as a general rule. If this is case, this is not a tax
on income but a tax on capital. Why? 600k is a mere portion of 1m. Part of 1m is
600k which is subjected to tax. The 400k is the amount that you never recovered
from your cost. So that is just an example, but there are still others for the multiple
choices. Just think if that is a tax on income or a presumed gain of tax.
Php 400,000
Cost
Gross SP
Php 600,000
Php1, 000,000
500,000
Or
Php (500,000)
Appreciate
Php600, 000
FMW whichever is higher
1. BIR
2. Assessors Office
Number 2. The income or profit must be realized or received, actually or

constructively. Is there any difference between realized and received?
Student: Realized, for example is a property. You sell if for 1m and after 2 years, its
value will appreciate to 10million. Not unless you sell your property, you will now
realize the 10m.
Example: You have an apartment. You entered into a contract of lease for
1 year. All rents payable at the end of the 1 year contract. Say for
example, you started out the rent or leasing out of your apartment July 1,
2010. Ending June 30, 2011, midway for the calendar year. At the end of
the calendar year, December 31, 2010. Are you expected to declare a
taxable income from leasing your apartment as owner? YES.
The mere fact that you are able to lease out 6 months over 12 months, the
activity has been finished from July 1 to December 31, 2010, your right to
collect has already ripened. It is already due. So you should at the end of
the year declare it as a realized income.
While received income is?
Received income may be actual or constructive.
Student: Received income (actual), is when you actually receive the income. It's
really in your hands. When you sell something, cost is 1m and sold it at 5m. So
what you received is the actual money or property is in your hands. Constructive
received, I will just try maam. You are entitled to it but you don't really actually
have it. For example is a corporation, you are entitled to your share. Stock has
increase from 1m to 1.5m.
When you setup a corporation, it will have a separate and distinct personality. So
when you setup a corporation, the income of the corporation will not be counted as
income of the stockholder. For example, 10 million investments and through time it
gained 100million dividends. The value increased. Is it already considered as income
for stockholder? Not yet. Corporation is not a good example.
1. Actual receipt income may be actual receipt or physical receipt.
2. Constructive receipt occurs when money consideration or its equivalent is
placed at the control of the person who rendered the service without restriction by
the payor. (Sec. 4.108-A, RR 16-2005)
But in a PARTNERSHIP rather! Any income gained in this year will be considered as
constructively received by the partners and will be expected to be recorded in the
individual tax returns of the partners. So if there is a partnership, diba in a
partnership there are regular withdrawing, that is an income on individual partners.
At the end of the year, the partnership is not subject to tax because it is presumed
that the general professional partnership is not in it for profit. So if the end of the
year, it still realized. If there 1m net income, and not distributed it will be
considered as constructively received by the individual partners. So if there are 5
partners, it will be considered as 1m each on the individual partners.
So let me give an example on constructive receipt of income, if you have a contract
of lease and you are the lessor. And you have a misunderstanding with the increase
on the monthly lease. And you refuse to receive the amount because to you it is not
sufficient. The lessee or tenant deposited the amount in court in order to avoid any
interest, which will be considered as an income even if you did not receive it. It is
already within your disposal.
Received of income is of course different from realized income. To received, there is
an actual or even not with you but it is still within your control. Realized income is
not yet received, but you have a right over it already, not translated into cash and
probably receivable. Example you have rendered service in January and at the end
of the year you will have to close you books and report it to tax authorities. Would
you consider the amount received as part of your income? Yes, because you have
already rendered the service. Another example is the contract of lease. You enter in
December 1 2011 until Nov 30 2012, not paid. Agreement is paid on Nov 30. At the
end of Dec 1 2011, you will be required to report. Shall you consider it as part of
your income? Yes, to a certain extent, 1 over 12. By Dec. 31, you have already
rendered lease services for 1 month already. Even if you have not received payment
but service is rendered as of date, it is already reportable as income but not the
entirety.
Anyway there are different test.
What is realization test or severance test?
Student: Test when income is actually received or realized by the person.
At what point in realization test, that income or gain is already taxable?
Realization test, principle is that there will be no taxable income until and unless
there is separation or severance from capital something that which is of
exchangeable value. So there is separation or severance from capital of another
thing. So kung manganak sya or the tree of the fruit. Then that is the time that we
say there is a gain or income is already taxable.
Are stock dividends distributed by corporation to stockholders, is than

under the realization test?
Student: I think, YES?
Another student, do you agree?
No, they are not considered as taxable amount. Stock dividends is not a realized
income because it still with the corporation.
How would you explain stock dividends to your classmates?
Stock dividends, there is corporation and it gained from it investments. The stock
dividends are still with the corporation and it is not severed yet. Stockholders are
not free to dispose unlike cash dividends.
So if cash dividend will be made, there will be an expectation of cash to be
distributed. Or there could be property dividends, an expectation of property to be
distributed. So there is a severance from your capital investment and that dividend
will be received. Unlike when it is a stock
...Because tomorrow the corporation may actually decline in its operation, it may be
losing, it may come to a point when the capital will be diminished, so long as its not
distributed its never within the full control of the stockholders, it may be lost over
time. So its not taxable because there is no realization.
In order for a gain to be taxable the condition is that there must be the presence of
a claim of right over the alleged gain and simultaneously therein absence of the
unconditional obligation to return the alleged gain or to retain the alleged gain so
that it will constitute an income. the presence of the claim of right over the alleged
gain and the absence of an unconditional obligation to return.
Example?
Best example is the realization test.
Another example. Can you discuss the example in PBC vs. Henares. Taxable
or not taxable? Why?
Student: It is taxable because it is an income.
Actually in that case it would center on fraud, whether theres fraud and whether
the payment of surcharge would be 50% or the ordinary 25% ...but we have to
discuss the claim of right here. Di ba there was a deposit of 1000 and it was
erroneously made for 1million dollars, thinking that it was due to him, it was fully
withdrawn, and the tax return for that year was filed but without declaring that 1
million as income. There was a declaration that although it was not taxable it was
not paid up taxes. The BIR said that at the point when the tax return was filed,
there was a full claim of right over the alleged gain and the absence of an
unconditional obligation to return it, why was there absence? Because at the
closing of the period, Dec. 31, there was not yet a requirement from the depositor
although it will be made to return the following year, but as of that closing that
period, there was a full claim of right over the alleged gain and the absence of an
unconditional obligation to return it.
Economic benefits test?
Student: Economic benefits test is any economic benefit that increases the net
worth of the taxpayer is taxable income, whatever the source of the benefit.
What do you mean net worth?
Its the value of the person whether natural or juridical, its your assets minus your
liabilities, thats your net worth so if something comes to you increasing your net
worth and it satisfies the economic benefits test, it is taxable.
Example: youre an employee of ABC corp., the corp. offered you to purchase stocks
to make you a stock holder. the current market value of the ABC stocks is at 12
pesos per share, the option given to you was to buy at 6 pesos per share, if you
exercise your right to buy.
Will it be taxable?
Student: I think it is taxable, because the value of the stocks are actually at 12
pesos but you are buying it at 6 pesos, so it will increase your net worth.
How will it increase your net worth?
You receive more value, when you bought the shares at 6 pesos only, you increase
your net worth by purchasing assets.
If the option given to the employee was not exercised, there is no taxable income,
because no money came out of the employee, no asset was received, usually stock
options are given to gain the loyalty of the employees to make them stick to the
company. if the employee exercised his right, gives up 6 pesos of his assets in
exchange for a share valued at 12 pesos, naturally his net worth, his assets minus
liabilities, will increase, while the difference between the fair market value, which is
the actual selling price of that share in the market, minus the cost of getting that
share .the cost was only half of the market value. So its already an increase in the
net worth and economic benefits test was complied with.
Recognition of income, realization of income, methods of accounting. that is used by
the taxpayer to compute the tax but usually for tax purposes there are three
methods of accounting. The cash basis method which is the easiest method to
understand for non-accounting people. whenever you receive cash you recognize it
as income, when you let go of cash you recognize an expense and the difference is
the income under cash basis of accounting. while the accrual basis of accounting, it
is not considered as receipt of cash at all times, so long as the ____ has already
been given and goods has already been delivered and you have a claim of right over
that, there is already a receipt of all the _____ and when you can receive it but at
that point the services have already been rendered income has already been
earned. And in so far as deductions are considered, it does not matter when you
incurred the expenses so long as you incurred the expense. You got ten janitors in
your company that already rendered 1 month of service and you havent paid their
salaries, you recognize an expense? Yes because the services have already been
rendered in your favor. While the third method of accounting is a combination of
both, you just have to determine which best serves its purpose.
Lets move on to the different kinds of taxable income? how do you classify
gains?
Student: There are 2 classifications, the capital gains and the ordinary gains. for
capital gains and ordinary gains, it is important to properly differentiate the two
soit would be best to use the negative application of the tax code, capital gains is
defined as those assets in the possession/owned by the entity except the 3, those
property
So whenever a taxpayer would earn an income or a gain, it is has to be classified if
it is a capital gain or ordinary gain. usually the connotation of an ordinary gain is it
comes from ordinary transactions, and an ordinary transaction will result from the
use of an ordinary asset, so youd have to know what an ordinary asset is. An
ordinary asset is not a capital asset, and according to the book it is defined as if its
not capital asset it has to be ordinary asset. in your mind ordinary assets are those
used in the usual trade or business, exercise of profession..so it may be the
ordinary asset will produce an ordinary transaction which will produce positively an
ordinary gain, and these are your compensation income, income from business and
all income from the ordinary dealings of property and all other income not classified
as a capital gain. Capital gains are classified as those arising from capital
transactions. capital transactions resulting in a capital gains from dealings in shares
of stocks of domestic corp. not by a broker of securities, capital gains arising from
real properties classified as capital assets found in the Phils..not those real
properties owned by a business because if it is owned by business those are
ordinary, and number 3 all capital gains arising from all other capital assets, it will
be discussed separately because it has special rules not applicable to ordinary
transactions and capital transactions involving shares of stocks and real properties
classified as capital assets.
Why is it important to distinguish ordinary gains from capital gains?
Student: Usually because the treatment of taxation for ordinary gains are different
from the treatment of taxation to capital gains. ordinary gains usually are profits
arising from transactions while in capital gains there is a presumption that it arises
from profits from capital transactions.
The importance in distinguishing between capital and ordinary gains is because we
follow a partly schedular and partly global income taxes. in global, all income
regardless of the type are taxed at the same rate, while in semi scheduler you have
to differentiate each and every type of income, in partly global and partly schedular,
we only distinguish between, combining all ordinary transactions, combining all
capital transactions, combining the tax rate of income. and there is also importance
in knowing the type of income for purposes of complying when it is to be paid,
because capital gains is different in that case and in what type of tax returns to be
used, etc.
What is gross income?
Student: gross income are income from whatever source.
Such as?
student: Such as services rendered, income from business.
Does it need to be received in cash to be considered as part of gross
income?
Gross income are all income from your profit or from whatever source derived. And
it need not be received in the form of cash for as long as it increases your net worth
and it satisfy the economic benefit test or the realization test.
What do you mean by income from whatever source derived?
It is a catch all provision; so long as income is realized or received whether it comes
from a legal or illegal transaction it will form part of your gross income, UNLESS it is
granted an exemption or an exclusion in any part of the tax code tax, tax treaty or
special law.
ALWAYS REMEMBER that there is that clause which provide that taxable unless
there is an exemption.
Distinguish gross income from net income
Gross Income
Allows no exemption and no deduction.
Net income
The taxpayer is allowed to reduce the
gross income by deducting expenses and
exemption.
Ex. Exemptions to certain individuals
and additional exemptions dependents.
If you are engage in selling furniture, during the year you imported furniture with
the value of 1m. Your sales reached 5m from that 1m imported furniture. Your
expenses (commission, transportation etc.) amounted 2m. How much is your gross
income and how much is you net income?
(In millions)
Selling price:
5
Less cost of material used/ capital:
1
Gross Income:
4
Less: expenses transpo, commission etc
:
2
Net income:
2
Why do you have to deduct the cost of furniture?
Because part of the 5m is simply a return of capital. Your capital in order to
generate sales of 5 million is when you purchase first this inventory of furniture.
Costing 1m.
Not all the 5m is your profit because you have to deduct your capital. So your gross
income is 4m.
Return of capital is either:
In the form of inventory
In the form of properties

These are not part of your gross income
In SERVICES usually, how much is the gross receipts will be equivalent to gross
income because you DONT have the return of capital. Unless you consider
depositing? Or LENDING as a service, then return would be the capital, gross
income would be capital + interest capital
Gross income the 4m then net income is after he allowance or deduction

of the expenses of 2m. So net income is only 2.
Under our jurisdiction, we that we usually follow the net income tax method but
there are tax payers who are taxable at gross income. So there is an importance in
knowing how much is gross income and how much is net income. Because a
taxpayer maybe subject to tax at net or at gross.
GR: Tax payers are subject to tax based on their net income.
XPN: What types of tax payers are subjected to tax at gross income?
NRA-NETB
NRFC
Why? For the simple reason that they are engage in a trade
or business. (because they have no expenses allowable to be
deducted)
Classification of income as to source:
sources WITHIN the Philippines
sources WITHOUT the Philippines
income PARTLY within and without
Where is the SITUS OF INCOME TAX?

Depends if the source of income is within or without.
Sec __ provides for the definition of gross income and what it includes but only says
including but not limited to. So there maybe be other income that does not form
part of gross income. Why is that so? Because in the definition itself of gross
income is income derived from whatever source.
So the important thing is to know what are the exclusions. Because if its not an
exclusion from gross income it would have to be an inclusion. The exclusion from
gross income in so far as the tax code is concerned is an EXCLUSIVE LIST. The
other exclusions is be found under the constitution or in the special law or under a
tax treaty. But it would help to know the list in the tax code.
The exclusion from gross income in the tax code will start from income
from compensation, income from business, income from the exercise of profession,
interest, rents royalties etc. (will be discussed in another topic, enumerate ra daw)
As part of
compensation income, as part of it is, fringe benefits
business income,
professional income,
income from dealings in property
interest
dividends which are both income from investments
rents
royalties
prizes and awards
annuities
pensions
Income from whatever source derived which can be anything you can
think of that increases the wealth of a certain person of corporation.
o
Ex. You have a certain indebtedness. And the creditor decided
to condone your debt, is that considered as income on your
part? ANS: if it increases your net worth the forgiveness of
indebtedness will be considered as gross income because the
requires to part with a certain asset just to fulfil a certain
obligation. In fact it increased your net worth, because asset
liability = net worth.
o
If a liability has been deducted because it has been condoned
or forgiven, thus it will increase your net worth and based on
the economic benefit test an increase in net worth is a taxable
income.
o
If you claim a tax refund from the government. It will be
taxable if you are given the money itself or a tax credit
certificate if it will result to the increase of your net worth.
The different SITUS of these income that we have enumerated.
Compensation income- the place where the service is rendered or

performed.
o
Q: You are an EE of a domestic corporation as part of your
training, you were given an assignment contract to be sent
in your parent company in Australia for 2 months.
Therefore service for the entire year you will be out of the
country for 2 mos. So therefore services will be performed
in Australia. So you were given salary in the Philippines
and allowances in Australia. So where is the situs of the

income derived from Australia?
Ans. Australia
Q: are the allowances received in Australia subject to
Philippine income tax?
Yes
Answering a question of situs of the income is different from
answering the question whether or not it is taxable. Simply
determining the situs it know where should it be taxed. But the
question of IS IT TAXABLE, you not only answer the question of
where the situs is but you have to know what the status of the
person is. So you have to answer the two question in whether its
taxable or not and what is the status of the taxpayer because we
know that resident citizen are taxable on income worldwide.
Within and without. So even if that 2 month income has the situs
outside he has to be taxable in the Philippines.
Therefore we can conclude that determining the situs is very
important if the taxpayer s taxable only within. Because if the
taxpayer is taxable on his worldwide income you may even forget
where the situs is.
Who are these two tax payer taxable within and without
the Philippines?
RC and DC (Domestic Corporation) on its worldwide
income. So if the status of the tax payer is either of the
two you dont even have to know the situs of the income,
YOU SHOULD ONLY ANSWER THAT IT IS TAXABLE.
Reminder: aside from these 2, in cases of status of all
other tax payer, you would have to religiously know
where the situs of income is.
Business income- in the place of the undertaking
Gross Income from Business

XYZ Corporation is a foreign corporation doing business exclusively outside the
Philippines is not taxable because the situs of its income is outside the Philippines.
A resident foreign corporation with operations within and without the
Philippineswhere is its situs?
Student: Income from activity within the Philippines will be considered as having
situs in the Philippines and those income from activities outside the Philippines will
have situs outside the Philippines.
To answer on whether or not income is taxable in the Philippines, we take into
consideration the following:
1) Where is the situs (within or without of the Philippines)
2) Status of the taxpayer (Resident foreign corporation, domestic
corporations)
Resident corporations are only taxable for income generated within the
Philippines.
Professional Income
Student: Situs is the place where the profession was exercised or where the service
was performed.
Real Properties
Student: Situs: Where the properties are located
But a resident citizen will be taxed for income generated by sale of real properties
even without the Philippines even though the situs of the Real Property is not with
the Philippines. (Because taxability is different from situs)
Where is the Situs of the sale of personal property?
Student: Place of sale.
IF a domestic corporation sells manufactured products in the Philippines,
where is the situs?
Student: Philippines.
If sold outside?
Student: Outside the Philippines.
Which part of the income is taxable?
Student: All of it.
If it is the sale of products in its original form, and sold without undergoing any
process, you consider the situs of that to be where the place of sale has taken
place.
But if its a manufactured product, its somehow different. You consider where its
manufactured and sold. If the product is manufactured and sold in the Philippines,
then the situs of that sale is wholly within the Philippines. If manufactured and sold
outside, the situs is wholly outside the Philippines. If manufactured outside the
Philippines and sold here, then the situs is partly within and partly without.
There is no problem for domestic corporations because, income generated within
and without the Philippines is taxable. But for non-resident foreign corporations, we
really need to strictly determine the situs because income generated by these
corporations outside the Philippines is not taxable.
Take note of the question Im asking, whether its the taxability of the taxpayer or
the situs of the income.
What about transport documents?
Student: Situs is where the transport documents were sold.
These are tickets (airfare). Situs is where it is sold, regardless of the destination.
Where is the situs of interest income?
Student: The situs is the residence of the debtor.
Why?
Student: If interest is generated, it is presumed that it will have situs where the
activity related to its generation was conducted.
So if the debtor is a resident of the Philippines, we can assume that the money was
used in the Philippines and that income was generated in an activity conducted
within the Philippines.
ABC (domestic corporation) and XYZ (non-resident foreign corporation)

XYZ lent ABC $1million
ABC will need to pay $1million + interest
Where is the situs of the interest?
Student: Situs: Philippines because debtor corporation is a resident of the
Philippines.
Is the interest taxable in the Philippines?
Student: Yes
Taxable in the Philippines?

Student: Yes, because I am a resident citizen.
Other examples: Franchise. McDo, etc. Situs of income from franchise will be where
it is used.
What about Dividends?
Student: It depends on whether the dividends are coming from a domestic or
foreign corporation.
IF from domestic: Situs purely within
Balihon nato:
ABC (domestic) lends $1m to XYZ (foreign corp.)
XYZ will need to pay ABC $1m +interest
Where is the situs of the interest?
Student: Situs is residence of debtor, XYZ
If from foreign: consider the income of the foreign corporation in the

Philippines during the last preceding 3 taxable years:
(1) The income is purely within if the income derived from Philippine
sources is more than 85%
(2) It is purely without if the proportion of its Phil. income to the total
income is less than 50%
(3) if it is more than 50% but not exceeding 85% it is partly within and
partly without.
$1M
ABC Corp.
Domestic
So if YOUR book is distributed outside the country and banned in the

Philippines, where is the situs?
Student: Outside the Philippines.
XYZ Corp.
Non-Resident
$1M + interest
w/in & w/o
Taxable in the Philippines?
Student: No
IT IS TAXABLE IN THE PHILIPPINES! Because the income earner is a domestic
corporation, and just like a resident citizen, it is taxable for income generated within
and without. Again, the difference between situs and taxability.
Where is the situs of rental income?
Student: Where the property rented is located.
But if property is rented outside of the Philippines but is owned by a resident citizen,
it is still taxable because all income, within and without, of a resident citizen is
taxable.
What about Tax on royalty income
Royalty income is the income derived from the use or exercise to the right of an
intangible property. (copyright, patent, etc)
Student: Situs of income from royalties is the place where the intangible properties
are used.
Dividend
a. received from domestic corporation income purely within

b. received from foreign corporation consider the income of the
foreign corporation in the Philippines during the last preceding 3
taxable years:
(1) The income is purely within if the income derived from the
Philippine sources is more than 85%
(2) It is purely without if the proportion of its Phil. income to the
total income is less than 50%
(3) There should be an allocation if it is more than 50% but not
exceeding 85% (partly within and partly without)
Example: ABC Corporation is a foreign corporation. Its total worldwide gross income
is 100M. Its gross income from the Philippines is 84 million for the last preceding 3
years; while from outside of the Philippines is 16 M. It declared 20 Million stock
dividends and it has 5 stockholders so each will receive 4M each.
Total
GI
100M
ABC Corp
Phil
GI
84M
20 Declared
(Foreign)
Other
GI
16M
Stockholder
A
Status of the
income earner
Resident citizen
Non-resident citizen
Resident alien
Situs of the
dividend
Partly
within/partly
without
Partly
within/partly
without
Partly
within/partly
without
Taxability
Taxable
Taxable in the
within part
Taxable in the
within part
D
E
Non-resident
alien
doing
trade
or
business
Non-resident
alien
not doing trade or
business
Partly
within/partly
without
Partly
within/partly
without
Another example: if less than 50 percent from the Philippines

Total
GI
ABC Corp
Phil
GI
(Foreign)
Other
GI
Stockholder
Status of the
Situs of the
income earner
dividend
A
Resident citizen
without
B
Non-resident citizen
without
C
Resident alien
without
D
Non-resident
alien
without
doing
trade
or
business
E
Non-resident
alien
without
not doing trade or
business
Taxable in the
within part
Taxable in the
within part
100M
84M
20 Declared
16M
Taxability
Taxable
Not Taxable
Not Taxable
Not Taxable
Not taxable
Prizes and Winnings

Prizes- given on account of services rendered place where the services were
rendered
If not given on account of service rendered-place where the prize was
given
Winnings- not given on account of services rendered place where the same was
given
Winnings are those not given on account of services rendered while Prizes
maybe given on account of services rendered or not given on account of
services rendered.
Every time you receive something and it is attached to a service that you
have rendered, its like a compensation for services you have rendered so
you back to the first rule, a compensation given is taxable where the
service has been rendered. So prizes given for services rendered is taxable
on the place where such services were rendered while prizes and winnings
not for services rendered is taxable on the place where the same was
given.
If you won in the US 1M, are you taxable in the Philippines if you were just
on vacation?
Yes, it is taxable in the Philippines even if it has situs outside because the person is
a resident citizen of the Philippines (taxable for income within and without the
Philippines). So I suggest that you convert yourself to a non-resident by not
coming back to the Philippines. Stay in the US for more than 183 days.
A non-resident citizen is:
Category 3: A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be physically
present abroad most of the time during the taxable year.
Pension
Tax Situs: place where this may be given on account of services

rendered
-
Since pension is something that is more related to a service such as that

you have rendered in the past and youre given retirement or pension pay
then the situs is the place to where the services were rendered.
Professional income of professional partners

Tax Situs: place where the exercise of profession is undertaken
-
Since it is more on the exercise of a profession, its an activity, so its

where the activity or the profession is undertaken. It follows the place
where such profession is exercised.
EXCLUSIONS FROM GROSS INCOME

Are less of income which would have otherwise been taxable had they not been
excluded. They are income or wealth which flows to the taxpayer but because for
some reason, they are exempt. They will never form part of the gross income that
will be taxed.
To encourage socially desirable activities
Query: Are they the same as deductions to gross income as they have the
same effect of reducing the gross income?
Deductions are expenses which are an outflow of money coming from the taxpayer.
They are expenses which are deductible.
Whats the principle behind the exclusion?
Dying is not a business. You insure yourself with the expectation, and if it is a
traditional life insurance policy it will only mature if the insurer will die, and you
make someone as your beneficiary, you will never get the proceeds, it will be your
heirs/beneficiaries. So its not a business, like you insure yourself then die insure
yourself again then die.. That is why it is an exclusion. In the hands of the heir or
beneficiary receiving the proceeds will not be subject to income tax. This is an
exclusion from gross income, I am not saying that proceeds from life insurance
policy is not taxable, it may form part of the estate of the deceased and may be
subject to estate taxation. In the hands of the heirs or beneficiary is not subjected
to taxation.
Exceptions to the rule:
If the proceeds were used to secure a monetary obligation - Tiu: really not an
exception, because there is an agreement with the insured and the insurer to
withhold the release of the proceeds up to a certain point in time, in the forbearance
of money rule if you use the money of someone else you pay usually on top of it an
interest, so that the insured and insurance company agreed that only to a certain
point in time will the proceeds be released even after maturity even after death
because the heirs might still be too young or the insured would like the heirs to
receive it when they reach a certain age, any interest earned within that period will
be considered as income already, because it is the fruits of the proceeds already,
but the proceeds itself is not taxable.
If the proceeds are transferred for a valuable considerations. I.e. before insured die,
he sells his insurance probably because he can't afford the premium anymore. If
there is a transfer of policy from one person to another, what will occur is that there
would be a transaction.
The transferee purchase it for a price, if she has already paid a certain
amount of premium you may set it at a lower price, what is the cost to the
transferee?
The cost to the transferee is the amount that she had given up in order to get the
policy plus the remaining premiums that she will have to pay in order to finish the
policy or to satisfy all the requirements, the taxable portion there is the difference
between what the proceeds will be, less the consideration paid upon purchase of the
insurance policy and the premiums that was subsequently paid.
You know the concept between buying and knowing how much your cost is
and selling it to another person?
You naturally dont want to sell it at a lower price. For someone who wants to buy a
policy, what you will give up plus the premiums that you will pay should never be
equal to the face value of the proceeds. So any difference is already taxable
because they are subjecting the transfer of the policy.
Return of premiums
Is not taxable for the sole reason that its a returns of capital. If you obtain
insurance you will have to pay premiums, and premiums as expected will be lower
than the face value, even if we total the premiums. If even before the maturity you
like to return the policy, cancel it, any return of premiums will not be taxable since
this is only a return of capital and in fact you will have some loss because not the
whole premiums paid. But if you receive the premiums after the maturity,
expectedly, you will not only receive back the premiums paid but on top of it the
interest from the investment because most of the policy that we have now has an
investment aspect of it. So for example you took out a life insurance policy which
requires you to pay premiums of 100,000 every year for the next ten years, thats a
total of 1M, the face value is 2M, your accidental insurance benefit is 4M which is
double the face value. You can receive the 2M if you have lived the policy on the
20th year from the first year of payment. If you cannot outlive the policy your heirs
will receive the entire 2M, 4M in accidental death. If for example you reached that
certain age or you have lived the 20 year maturity period you received the 2M, you
spent it for vacation, how much is taxable how much is excluded? In this case, the
whole amount of proceeds after deducting the premiums paid as this are mere
returns of capital shall be taxable. So if he has received the face value amount of
2M, 1M for premiums is an exclusion, the difference is taxable.
But if he cannot outlive the policy for example he expires on the 19th year, the
heirs will receive the entire amount of 2M or 4M in accidental death it will not be a
taxable income on the part the heirs under category number 1 of exclusion.
The value of the property acquired by gift bequest devise or legacy.
Item number 3 refers only to gratuitous transfers either by virtue of an inter vivos
transfer or mortis causa transfer. If you talk about gift giving by virtue of a service
rendered it does not fall under the exclusion because its the payment for the
services.
Why do you think that gift giving are not considered as income on the part
of the recipient donor?
The reason why its an exclusion from gross income is because it is already taxed in
the estate and donors taxation, since we have already eliminated donees tax and
inheritance tax, and also there is no sense in burdening the recipient of this gifts,
bequests, devises or legacy. so long as that which is given or transferred does not
in itself also earn income then its fully exempt from income tax on the part of the
recipient, otherwise stated, if the gift would earn income, any income from the gift
is already taxable. example, i would give a gift of an apartment unit, that apartment
unit that i have given as a gift i will pay donors tax, the recipient will not pay any
income tax, will not pay any donees tax, if that which i have given is already
earning income in the form of a rent, there is already a tenant, and i have also
assigned everything to that donee, then direct income generated will be taxable.
Retirement benefits, pensions and gratuities.
When would retirement benefits, pensions and gratuities be excluded from
the gross income of the retiree?
2 types:
Retirement under republic act no. 7641 which is art. 287 of the labor code.
Reasonable retirement benefit plan under the tax code - 50 years of age 10
years of service.
(Or collective bargaining agreement, or employer-employee company policy etc.)
What are the requirements for a retirement pay under reasonable
retirement benefit plan to be exempt?
There must be a reasonable retirement benefit plan set up by the company
The employee must at least render 10 years of service
The private employee or official must be at least 50 years old
They must be availed only once. If you take a 2nd job, after retirement, if
you work on the government your 2nd retirement will still be exempted but
if you work on the private sector your retirement benefit will not be
exempted.
Reasonable retirement benefit plan must be approved by whom?
Must be approved by the BIR. And the employer on his own or together with his
employee must give contribution to the retirement benefit plan.
Gifts...
So long as that which is given or transferred does not in itself earn income, then it's
fully exempt from income tax
OTHERWISE stated, if the gift earns an income, any income from the gift is already
taxable, example:
An apartment unit being donated. The donor will pay donor's tax. The recipient will
not pay donee's tax. But if the apartment unit will be earning an income in the form
of rent, that income will be taxable.
Income Exempted from a Treaty
Self-explanatory...
Retirement Benefits
When would retirement benefits be excluded from the gross income of the
retiree?
Two types:
1. Retirement under R.A. 7641, Art. 287 of the Labor Code and the
Reasonable Retirement Benefit's Act under the Tax Code
2. Retirement under the Collective Bargaining Agreement or the Employer
Company Policy
Yes, you can retire under the Labor Code provision on retirement. You can retire at
the age of 60 as long as you rendered a minimum of 5 years in service.
But even if you retire in the age of 50 while rendering 10 years of

service you cannot get your retirement pay, but may rather get a
separation pay.
What are the requirements under the reasonable private benefit plan to be
exempted?
1. There must be a reasonable private benefit plan that is set up by the company
(You must first check the Private benefit plan first, in default; the provisions in the
Labor Code on Retirement shall apply)
Separation
* The Private benefit plan must be approved by the Bureau of Internal Revenue
(BIR)
May be in the nature of pension plan, profit-sharing plan, stock-bonus plan

or simply gratuity payments.
The employer, on his own or together with the employee must give contribution to
the private benefit plan. The plan must be general and not just applied to a specific
person and retirement benefit can be availed of in time of the retirement. It must
be establish for the benefit of all the officers and employees of the company.
The Retiree must be at least 50 years of age. And must rendered at least 10 years
of service and it is the first time that one must availed of a retirement that is tax
free. The next retirement must be taxable already unless the next employer is the
government for which, government retirement is non-taxable.
Situation. You retire at the age of 50 after rendering 10 years of service. The
terms of the CBA is that you can retire upon reaching the age of 40 OR after
rendering 15 years of service.
Exclusion from gross income or taxable?
Yes, still exempted. The terms of the CBA is complied. The word OR renders the
term selective. It is favorable to the employee.
Atty. Tiu's comment: It may be favorable bec. If you are hired in the age of 45,
then you may retire the next day but of course, retirement pay is computed based
on the number of years you rendered service.
The CBA can be made burdensome but not more burdensome than what is provided
in the Labor Code- 60 years of age minimum retirement or 65 years of age
Compulsory retirement.
Situation: There is no CBA, no Company Policy on Retirement and no private
benefit plan.
At the age of 60 while rendering 10 years of service, can you retire? What
is your legal basis?
pay is Taxable unless

It is occasioned by death.
By sickness
disability
Any authorized causes under the labor Code ( bec. it is beyond the
control of the employee)
Situation: You are part of the 5 in-house Lawyers of a company. As part of their
labor saving measure, you were offered a separation pay.
Is that separation pay exempt?
Yes. Separation is occasioned by the labor saving measure. Such authorized cause
is beyond the control of the employee hence exclusion from gross income.
Situation: Non-resident citizen immigrant in the U.S. You reached the age of
retirement. You want to make Philippines your retirement country. You're bringing
with you pension money plus monthly money given for retirement.
Is that subject to income tax in the Philippines?
No, it is not subject to income tax. Retirement benefits, pensions or gratuities
received by resident citizens, non-resident citizens and resident aliens from foreign
institutions (private and public) will be exempt from income tax in the Philippines.
Prizes and winnings
Situation: You were shopping in Ayala. You were in a hurry. You let other fill up
your coupon. You did nothing aside from shopping. You won 1 million pesos. It is
akin to receiving a text message telling you that you won.
Is it taxable assuming you receive the 1 million?
Yes, it is taxable. Prizes and winnings to be exempt must be received on the
occasion of:
3 Requirements
1. on an achievement that is related to: scientific, artistic, literary,
charitable
2. no act to enter on your part to such contest or proceeding
3. Not performed any substantial service as a pre-condition to
receive such amount.
Example: The CNN award received by Efren Penaflorida.
Exclusions of Gross Income
In sports competitions
When would a prize in sports competitions be exempted?

It will be exempt if it is authorized or confirmed by the National Sports Association
or Philippine Olympic Committee, whether held locally or abroad.
So the winnings of Manny Pacquiao, his already a professional boxer, so he is
subject to tax. So long as your situs of taxation and your status... If the winner is a
resident citizen, hence it is taxable in the Philippines.
Compensation for injuries and sickness
Student: Compensation for injuries and sickness, specifically, must be related to
injuries and sickness. It may be thru health insurance.
Any compensation for injuries and sickness suffered by an employee is not,
generally, subject to tax because the reason of it is to indemnify the injured.
Damages awarded by the court
Will Damages awarded by the court be subjected to tax?
Generally NO. There are many kinds of damages actual, moral, etc. Actual
damages given by the court is totally non-taxable because it is a return of capital. It
is equivalent to the loss that you have suffered. But for moral, exemplary damages,
you have to know whether it arises from injury or sickness because, if it is NOT, it is
not covered by the exclusion.
Income derived by the government or its political subdivisions
It is not taxable, so long as it is in the exercise of essential governmental function
and public utility.
Income derived in the PH by a foreign government or financing institution
Is it taxable?
Example:
ABC Domestic Corporation (Debtor)
XYZ Foreign Corporation (Creditor)
Loan is given
Situs in the PH because the debtor is domestic corporation.
Tax exempt?
NO. The foreign company has to
Requisites:
1. The Income earner must be a foreign government, or a financial institution
owned, financed and controlled by the foreign government, or a regional
financing institution still established by the foreign government.
2. The income must be an investment, not a business. Example: by investing
in stocks it generates dividends so any form of investment in the PH
generated by foreign government or financial institution owned, financed
and controlled by the foreign government is excluded in gross income.
Gains from the redemption of shares of stock issued by mutual fund
company
Contributions to GSIS, SSS, Pag-Ibig and union dues
Example: If you have Php10,000 income monthly and your monthly contribution is
Php1,000. You are only taxable to the amount of Php9,000.
Benefits in the form of 13th month pay and other benefits
Separation pay so long as the separations is received due to causes beyond the
control of the employee, regardless of what age he received it or the number of
years of service, that is excluded from gross income.
13th Month pay How much is exempt? Any benefit that is not considered as a
regular salary every month is exempt only to the extent of Php30,000 only.
Gains derived from the sale, exchange, retirement of bonds, debentures or
other certificate of indebtedness with a maturity of more than 5 years
If it has a maturity period of more than 5 years (example: certificate of time
deposit), it is exempt.
Under Special Laws
e.g. PEZA-registered enterprises...
Deductions from Gross Income
Distinguish deductions from exemptions and exclusions.
The return of capital is actually a deduction. Its proceeds plus return of capital you
have the gross income. Gross income is the difference of the proceeds and the
return of capital.
Basic principles governing deductions
a. The taxpayer seeking a deduction must point to some specific
provisions of the statute (law) authorizing the deduction.
Example: Section 34 of tax code.
b. He must be able to prove that he is entitled to the deduction
authorized or allowed; and
Meaning to say, he satisfies the requirement. We know that salaries are
deductable. Any payment that you pay to your secretary is deductable.
Now, there you are, an individual (not engaged in business) but you give
salary to your yaya. Can you deduct the salary of your yaya from your
sweldo in order to lessen your taxable income? No. You must be able to
prove that you are allowed to deduct that one.
c. Deductions are strictly construed against the taxpayer claiming it
Different Kinds of Deductions...
Itemized deductions are usually allowed to those taxpayers who are actually
engaged in a trade, business or profession. While engaging in business, you incur
business expenses. As a professional, you incur business (expenses?) as a
professional (?) you hire secretaries, workers, rent a space etc. So if you are strictly
an employee without any other source of income, you cannot claim (?) itemized
deductions.
What are the general rules for itemized deductions? (Discussed extensively
in Corporate Income Taxation)
A) Must be ordinary, necessary and reasonable
B)
C)
Must be paid or incurred in connection with the taxpayers trade, business

or profession
Must be supported by adequate receipts or invoices
Optional Standard deductions (discussed extensively in Corporate Income

Taxation)
As a default for a taxpayer engaged in a trade, business or profession, you
are allowed to deduct your business expenses. But you have the option to
forego the deduction of item per item of business expenses, in lieu of that,
deduct the 40 % from you gross income without question (?). if you have
sales of 1M and 500k return of capitals from the inventory and gross
income of 500k, 40% of 500k (200k; gross income) can be availed as a
deduction. So you only have a taxable income of 60% (300k).
If you cannot provide for adequate receipts or invoices for your expenses,
do not bother with itemized deductions. Such will be disallowed. You can
opt for the Optional Standard Deduction of 40%. The Government will not
be checking on your expenses, it will only check your income. That will be
favorable also if you cannot or do not have expenses more than 40%. For
example, you rendered services but you do not have puhunan. You do not
rent a space because you conduct your business at home with a secretary.
Summing up all the expenses incurred, you can only come up with 100k,
you decide to claim for the optional standard deduction
But such can only be availed by specific tax payers.
Once chosen, it will be irrevocable during the year of option. Because every
taxpayer engaged in trade, business or profession is required to report
their income every quarter and consolidate it at the end of the year. If in
the first quarter, you opt for the OSD. The second quarter you realized that
itemized deduction is more advantageous, can you change? No.
Itemized Deductions vs. OSD
Sales
Return/Cost
GI
Deduction
P1,000,000
(500,000)
P 500,000
200,000
P 300,000
ID or OSD
Who can avail?

A) Individuals EXCEPT non-resident aliens
a. But an individual who purely earns compensation income under an EEER relationship cannot avail such for the reason that OSD is only in
lieu of itemized deductions. Since they are not engaged in a trade,
business or profession, they cannot claim itemized deduction
B) Corporations, EXCEPT non-resident foreign corporations
a. Old law says that corporations are not allowed to claim OSD but now
with RA 9504, corporations are already allowed
b. Old law OSD is 10%
Personal and Additional exemption (discussed extensively in Corporate
Income Taxation)
Every individual, whether he is simply an employee or earning income from
trade, business or profession or earning both types of income, because he
is an individual, he is always allowed the basic personal exemption of 15k
and for every qualified dependent (not exceeding 4) 25k each. But you will
reach a point where you will know that for non-resident aliens, they do not
have dependents in the Philippines, that is why they are not allowed to
claim for the said exemption.
Health and Hospital Premiums (discussed extensively in Corporate Income
Taxation)
Only available to individual tax payers
Non-deductible items
A) Personal, living or family expenses
Why are these not deductible? Not related to business, trade or profession.
E.g. grocery expenses, night life expenses etc.
The travel expenses to and from the office? It is already included in the
estimate of 50k (which is not reasonable) for personal, living or family
expenses per year.
B) Amount paid for new buildings or permanent improvements or betterment
to increase the value of the property/estate (capital expenditures)
So if you have a corporation and you will purchase a new building, it will
operate as an expansion, you cannot be expected to entirely deduct the
cost of the building from your operations. It is a capital expenditure and
will benefit you in the future years. Therefore, its cost should also be
deductible or distributed over time.
If you have a building in which you expect to live for 50 years, the cost will
be made deductible every year because it is not ordinary to purchase a
building every time unless you are in the business of selling buildings
EXCEPTION: when it is allowed to be deducted in full (purchase of new
bldgs.)
o
Educational institutions
C) Amount expended in restoring property or in making good the exhaustion
thereof for which as allowance is or has been made (major repairs)
Other term for major repairs = extraordinary repairs
These are repairs that are expected benefit future years or extend the life
of an existing asset. Same principles with B.
Reason why it is not deductible in the year of its incurrence? This will
distort the current operational income of taxpayers. You will pay higher
taxes in the future years
You are only allowed to deduct expenses for a year which are incurred on
the said year.
D) Premiums paid on life insurance policy covering life of any officer or
employee or of an person financially interested in any trade or business
carried on by the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy
Its not deductible since it will basically return back to the company.
Whenever a company gets a life insurance for its key officers and
employees etc, the premiums that it will be paying to the insurance
company for the life of its officers may or may not be deductible. It is
deductible as a rule if the beneficiary is the employee or his heirs. Why?
Nothing can revert back to the company. The premium it paid, after the
maturity or after the occurrence of the event (death) proceeds will go to
other people. But if it is the other way around, for the benefit of the
employer, there is an expectation that company will benefit, not only the
premiums, but also the face value (difference of premiums). There is no
loss.
DATE: 07/28/12
20%
B
Between dealings or exchanges of property between family members are not

allowed because they are not entered into in arm's length. It is not the same terms
and conditions if they could have been entered into by other parties not related or
third persons.
10%
C
50%
A
10%
D
10%
E
Who are considered members of the family?

Brother or sister whether in full or half blood, spouse, and ascendants and lineal
descendants.
Are there other dealings? The losses existing between or simulated losses, it will
not be deducted, or otherwise, it will distort the taxable income of the taxpayer and
deprive the government of the tax that will be given. All these items enumerated in
letter e from 1 to 6 are transactions between related taxpayers. Although it is only
in #1 are related by blood except the spouse, all others are related how?
#2?
Losses from sales or exchanges of property, directly or indirectly between an
individual and a corporation - more than 50% in value of the outstanding stock of
which is owned directly, by or for such an individual.
So are you saying all sales or exchanges of property between an individual
and a corporation is not deductible if the individual owns directly more
than 50% of the outstanding stocks of the corporation in all cases, no
exceptions? We are not talking of sales but we are talking of an exchange.
What's the opening phrase?
Except (it does not include) in cases of distributions of property in liquidation.
What is liquidation?
When business is (?) and the transactions or the winding up of business affairs of
properties and dealings. The non-deductible loss does not include this.
ABC Corporation owned by Mr. A, B, C, D, and E entered into a transaction of sale
where it sold property to Mr. A for P100M. The cost of the property is P150M
resulting to a loss of P50M.
Is the P50M loss deductible in the books of the seller ABC Corp. so that it
will reduce its taxable income?
In order for the loss to be considered as non-deductible, the individual with whom
the corporation is transaction with should own more than 50% in value of the
outstanding capital stock of the corporation. In this case, the ownership of Mr. A in
ABC Corporation is only 50%; therefore the loss is still deductible. But if Mr. A
owns 51% of ABC Corporation, then the loss will no longer be deductible.
ABC Corp.
Mr. A
Sale of Property
GSP
Cost
Loss
100M
150M
50M
*Deductible
If the transaction is between 2 corporations? Is there an exception to

distributions in liquidation?
Except in case of distributions in liquidation where the transaction is between 2
corporations and the individual owns directly or indirectly each of the corporation
owning more than 50% of the value of the outstanding capital stock, the law says
NOT deductible. So there must be an individual who owns both corporations more
than 50% in order for the loss to be consider NOT deductible in order to make the 2
corporations related taxpayers as well.
ABC Corporation is owned by individuals A, B, C, D, and E. Majority owner is B, 60%
holder. While XYZ Corporation is owned by W, X, Y, Z, and B. B is a controlling
stockholder in XYZ Corporation owning 60% interest.
If the transaction resulted into a loss with the sale of property, is the loss
deductible?
So in this case, direct ownership of B in ABC is 60% while direct ownership of the
same person B in XYZ Corporation is 60%. Both ownerships is more than 50% in
value of the outstanding capital stock in both corporations. The loss is NOT
deductible because only one individual controls both corporations and the result,
that controlling the sale transaction.
60%
B
10%
C
10%
A
10%
D
10%
X
10%
Y
10%
W
But it says here that the ownership of the same individual in both corporations may
be direct or indirect. We have illustrated direct ownership.
10%
Z
10%
E
60%
B
ABC Corp.
If B owns the entire DEF Corporation, can we say that these 2 corporations
are related taxpayers and the loss not deductible?
In this example, the ownership of B, direct ownership is 10%, indirect ownership is
30%. The total of only 40%. Still not related taxpayers.
XYZ Corp.
Sale of Property
GSP
Cost
Loss
100M
150M
50M
10%
A
*Non-Deductible
10%
C
10%
A
10%
D
60% 10%
10%
B
C
10%
D
E
0%
If we change this 40%, the other 40%, is the loss deductible?

Student: If that is Ma'am, the loss is deductible because B's ownership in XYZ
Corporation is less than 50%.
60%
B
What do you mean by indirect ownership?

Let's say, it should only total 100%. If B owns only 10% here, we give DEF 30%. If
Mr. B owns 100% of this one while the other stockholders only own 1 share each
resulting to 0% of ownership, it is possible class, because you can fully own a
corporation consisting 1 share to other 4 individuals to make up the minimum 5
members of the Board.
10%
X
5%
Y
40%
W
10%
E
0%
10%
W
Sale of Property
40%
B
100M
150M
50M
5%
10%
Z
B
0%
30%
DEF
Corp
ABC Corp.
GSP
Cost
Loss
5%
Y
0%
100%
B
5%
Z
10%
X
ABC Corp.
B direct
B indirect
10%
30%
40%
*Still Deductible
ABC Corp.
XYZ Corp.
Sale of Property
GSP
Cost
Loss
100M
150M
50M
In ABC Corporation, it is Mr. B who controls the corporation - 60% direct ownership.
In XYZ Corporation, there are 5 individuals and 1 corporation who owns XYZ.
Majority owner of XYZ is DEF Corporation. Individual stockholders own 5 or 10 or
5%. Mr. B owning 10%. DEF Corporation is owned by 60% Mr. B and 10% by
other individuals; let's say S, T, U, and V.
If that is the structure, will the loss sustained by the sale of property be
deductible?
Student: Not Deductible.
*Deductible
Will the ownership in both corporations be more than 50%?
Student: Yes Ma'am.
In XYZ Corporation, the ownership/the controlling stockholder is not B alone, so the
transaction is not between related taxpayers in accordance with Sec. 36 of you Tax
Code. Therefore, the loss is deductible.
Why? Who is the common stockholder in both corporations?

B. B's ownership in ABC is more than 50%. We need to establish that he has more
than 50% in XYZ to make the loss non-deductible.
Does he own more than 50% in XYZ?
Student: No Ma'am.
Therefore the loss is?
Student: Deductible
10%
A
You're changing your answer?

Student: Yes. Deductible.
60% 10%
10%
B
C
10%
D
E
10%
The loss is deductible because the ownership of B is not more than 50%.
So what is the combined ownership of B in XYZ Corporation? What's his
total share? Direct ownership is?
10%
60% 10%
10%
B
C
10%
D
E
10%
10% 10%
10%
X
5%
Y
25%
10%
Z
B
70%
B
60%
DEF
Corp
ABC Corp.
Sale of Property
100M
150M
50M
25%
10%
Z
B
5%
60%
DEF
Corp
ABC Corp.
GSP
Cost
Loss
5%
Y
XYZ Corp.
B direct
B indirect
10%
42%
52%
*Non-Deductible
10%
60%
B
GSP
Cost
Loss
10%
W
10%
X
5%
Sale of Property
Indirect ownership is?

36% (equals 46%. Deductible)
10%
A
10%
10%
W
So tracing indirect ownership may go as high as 5 layers of corporations. All you

have to do is compute what is the indirect ownership.
XYZ Corp.
B direct
B indirect
10%
36%
46%
100M
150M
50M
*Still Deductible
If I change this to 70%, will that change your answer?
If B owns 70% of DEF, his indirect ownership in XYZ is actually 42% which is 70%
of 60%. That makes it a total of 52% making the loss NOT deductible because
ownership in the 2 corporations is more than 50% in value of the outstanding
capital stock.
XYZ Corporation is owned 60% by ABC Corporation and W, X, Y, and Z at

2%. If a P50M loss is sustained, will the loss be deductible? The owner of
XYZ is 90% is ABC. Stockholders of ABC is still A, B, C, D and E. Forgot
about this one lang. Because the stockholders of ABC is still the same. It's
the same corporation.
Student: Deductible Ma'am
Why deductible?
Student: Non-deductible Ma'am
Why NOT deductible?
So you're basing your answer on B's presence.
Knowing B owns 60% in ABC Corp. and B owns more than 50% in XYZ Corp. Not
deductible.
60%
B
10%
C
10%
A
2%
X
10%
D
10%
E
2%
Y
2%
W
Between fiduciary of a trust and the fiduciary of another trust, if the same
person is a grantor with respect to each trust;
Between a fiduciary of a trust and a beneficiary of such trust.
2%
Z
90%
ABC
Fiduciary
B direct
B Indirect
Sale of Property
GSP
Cost
Loss
100M
150M
50M
Transactions between two corporations, look into the status; look into the
relationship of the other corporation to the other party. If the other party is the
holding company of the 2nd party, then automatically that is not deductible. It will
just result in the same thing. The loss is simulated. The transaction is simulated.
The 2nd corporation in passing huge income and few expenses to deduct, they enter
into simulated transactions to suffer losses and deduct the losses. In order to
control that, losses on related party transactions are not deductible.
(Additional Figure/Drawings for us to compute mentally during our class!)
20%
A
2%
X
20%
D
20%
E
2%
Y
2%
W
2%
Z
2%
B
90%
ABC
Sale of Property
GSP
Cost
Loss
100M
150M
50M
*Deductible
And the last two related part.
Between grantor and fiduciary of any trust;
B direct
B Indirect
2%
18%
20%
Fiduciary/trustor
Beneficiary
This occurs in trusts relationship! The transactions between the grantor or trustor,
between the trustee or fiduciary. Loss resulting from this transaction is not
deductible. You are saying the transaction between the fiduciary and the
beneficiary. Diba, a trustor will trust a property into a trustee in favor of a
beneficiary. If the transaction is between these two parties, the loss is not
deductible and the transaction between two fiduciaries with the same grantor is not
deductible.
Interest expenses and bad debts between related parties are not deductible. As
a general rule, interest expenses and bad debts form part of the itemized expenses
of Section 34. But if the transaction resulting to the interest expenses, for example,
the loan is obtained from a related party, then interest expense is not deductible. As
to who are related parties is exactly the same as what we have discussed. That
would result to losses. Interest expenses between family members are not
deductible. Interest expense between an individual owning a corporation more than
50%, not deductible. Interest expense between two corporations where one
individual owns more than 50% of both corporations, the interest expense and bad
debts are not deductible.
Losses from wash sales of stock securities are generally not deductible because
these are simulated transactions that are intended to make the stock exchange
active in trading. That is generally not deductible except if the seller is engage in
the sale of securities.
And others, such as non-deductible interests, taxes and losses will be
discussed when we reach itemized deduction.
I.
XYZ Corp.
ABC Corp.
2%
54%
56%
*Non-Deductible
Still non-deductible for it is not the stocks of a stockholder that we are talking
about.
20%
C
XYZ Corp.
ABC Corp.
20%
B
Grantor/trustor
2%
B
Kinds of Income taxpayer, is simply an introduction. (Reiteration of the

Syllabus)
1. Individual Taxpayers
a. Citizens
b. Aliens
c. Special Class of individual employees.
2. Estates and Trusts - taxed similarly as individuals
3. Corporations
a. Domestic
b. Foreign
c. Joint ventures and consortiums
d. Exempt corporations - such as schools, cemetery
4.
5.
Partnerships - taxed similarly as corporations except general professional

partnerships because these are exempt from tax
Co-ownership - may be taxable or not taxable depending on income
derived from the co-owned property.
Our next outline refers to individual income taxation.

What are the general principles applicable to individual income?
Section 23
1. A resident citizen is taxable on all income derived from sources within and
without the Philippines.
2. A non-resident citizen is taxable only on income derived from sources
Sec. 22(E) enumerates who are non-resident citizens
3. An overseas contract worker is taxable only on income from sources within
the Philippines; a seaman who is a citizen of the Philippines and who
receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in the international trade shall
be treated as an overseas contract worker.
4. An alien individual, whether a resident or not of the Philippines, is taxable
only on income derived from sources within the Philippines.
5. A non-resident alien individual is taxable only on income derived from
Resident citizens are taxable on all income derived from sources within and without
the Philippines. The other class recited, resident citizens are taxable on all income
from sources within and without all others are taxable on all taxes within. But we
have to enumerate into resident citizens, non-resident citizens, resident aliens, nonresident aliens engaged in trade or business and non-resident aliens not engaged in
trade or business. Yes it is true that they are only taxable of income derived from
sources within. Later on we will discuss who are resident citizens, non-resident
citizens, resident aliens, non-resident aliens engaged in trade or business or nonresident aliens non engaged in trade or business.
Overseas contract workers are considered non-resident citizens because their
physical presence is in abroad and they are employed abroad.
How about "seamen"? (Ma'am was laughing while saying the word!)
All those seamen, they are always considered as non-resident citizens? Non-resident
but where do they reside? In the boat or vessel. These boats travel; we cannot say
that they are always non-resident. If the boat is docked here, they are considered
resident citizens. I did not say international.
We have to distinguished!
In order for a seaman to be qualified as a non-resident overseas contract worker.
He has to be a member or a complement of a vessel that is exclusively engaged in
international shipping. And he has to be away from the country most of time during
the year. Otherwise, he will be treated as a resident, taxable on income derived
from sources within and without the Philippines.
There is no need to discuss who is a resident citizen. It is a Filipino who resides in
the country and does not qualify as a non-resident citizen. They are purely receiving
compensation under an employer-employee relationship or purely in trade or
business and one who is engage in both.
Why do we have to classify these individuals?

Because later on, we will have to know who are allowed to deduct certain expenses
or not.
Who is a non-resident citizen?
There is an enumeration in Section 22!
Sec. 22(E), the term nonresident citizen means:
(1) A citizen of the Phils. who establishes to the satisfaction of the Commissioner
the fact of is physical presence abroad with a definite intention to reside therein
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income from abroad and
whose employment thereat requires him to be physically present abroad most
of the time during the taxable year.
(4) A citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of his arrival in the
Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his intention of
leaving the Philippines to reside permanently abroad or to return to and reside
in the Philippines as the case may be for purpose of this Section.
Why do we have to distinguish a non-resident to a resident citizen?
Because an income of a non-resident earned outside of the Philippines is not
taxable.
First type of non-resident citizen. A citizen of the Philippines who establishes to the
satisfaction of the Commissioner the fact of is physical presence abroad with a
definite intention to reside therein!
Why is there a necessity to inform the Commissioner or your local district
office the fact of your physical presence abroad and the fact that you are
not intending to make the Philippines your residence?
In order to close or make inactive your BIR Registration for the Philippines.
Otherwise, for example, you have been practicing law in the Philippines and made
tax returns every year. You decided to migrate without informing the BIR. They will
continue to expect you submit your tax returns every year. In fact, they will,
wherever your last address was, sending over a letter asking you to file your tax
returns that you have not submitted. This is so because based on the records you
are still a resident of the Philippines and you are still taxable on income within and
without.
2nd type and 3rd type of non-resident! (Opinion of student: Basically those who are
working abroad! XD)
What's the difference between number 2 and number 3?
Let us say you got your visa today, and you are required to leave the Philippines
and live in abroad as an immigrant within the year. You got the ticket and you are
required to live in the States as an IMMIGRANT there. November 1, 2010 you
arrived there!
Are you considered as non-resident citizen?
YES!!! (Immigrant or permanently abroad - paragraph 2, Sec 22)
Ok, so when youre a nurse you will be considered as a non-resident citizen because
you have to complete the 183 period. If you have an income from Jan. until today
of P1 million, and prepared to leave on Nov 1 then you earned income in USA from
Nov.2 to Jan. 31 $100,000.
How much income is taxable?
Student: $100,000
$100,000
P1M
Jan. 1
1.
2.
Nov.
How much is taxable income in the Phils?

The income is compensation income and its situs is outside of the Phils. In 2013
the service is rendered abroad, no matter where the income is paid its situs is still
outside the Phils.
In 2014?
Student: He is a non resident citizen. He will already belong to the 4th category.
Since for 2013 he was considered a non-resident citizen.
Stopped
Working
July
28
In 2013 what is his status?

The entire year he was abroad so he will be considered non-resident citizen for that
year.
Dec. 31
Status NRC
Income to Phil P1M(derived from
sources within)
NRC
She applied as immigrant for USA scheduled to depart Nov. 1. During this period
she earned P1 million. In the USA arrived Nov 2, she earned $100,000.
What is the status of the taxpayer, and how much is subject to Philippine
tax?
This is different than when you leave the country for employment where you should
spend more than 183 days to be taxable here. In this situation she is considered a
non-resident alien from the time she left as an immigrant and even though she
spent more than 183 days in the country.
How much is taxable in the Phils.?
Taxable only for 1 million. It doesnt mean that a person is already an immigrant he
cant be taxed anymore in the Phils. As long as the income is gained here, he can be
taxed.
What is his status in 2014?
Fourth classification.
NRC says that a citizen that has previously
considered as a non-resident citizen and who arrived in the country
anytime during the taxable in order to reside permanently in Philippines is
considered as NRC at the day of his arrival.
So he is considered as a NRC up to July 7 only. So during this period an

income within is taxable. But from the point that he has arrived he will be
considered already a RC and taxable already for income within and without
the Philippines.
Situation: If your training contract for 2 years in the US would start July 1
2012 till June 30 2014, so you left the country June 29, 2012.
Salary for half of the year $150,000...
USA
2012
Jan. 1
P1M
Category number 3
What if he stayed exactly 183 days?
Already considered as most of the taxable year. Half of the year is 182.5 days.
RC
July
Aug
Sept
Oct
Nov
Dec
Employee of ABC corp. you have to leave the country for a 2 year training
agreement. Leaving July 28, you will come back July 27 (2014). You will be
continually receiving you salary plus allowances for living abroad. If you have
salaries totaling P1 million, then your allowances and other income totaling
$100,000.
In 2012 what is your status - resident or non-resident?
In 2012 he is still a resident citizen.
How much is taxable? He will be taxed for both P1 million and $100,000 because
he is still a resident citizen. His work abroad is only permanent, he cant be
considered as an immigrant or that his job is permanent, he is under category 3.
Therefore his stay here of 183 days already qualifies him still as a resident citizen
and being such he is taxable for income earned from within and outside the country.
$100,000
RC
31
31
30
31
30
31
184
*P1M is taxable
Jan.
Jun 29
NRC
2014
2013
July 27
Jan.
$300,000
NRC
150,000
NRC
P1M
Dec.
31
RC
(NRA previous
year)
*$150,000 is
NOT taxable
*P1M is taxable
Since he left the country earlier and his stay outside of the country and his
stay outside of the country would total to 184 days. Thats more than the
183 days. He will be considered as NRC even if it is only a temporary
employment, (under the category number 3?? Not sure.) During the entire
taxable year of 2012.
As we said under Sec. 23 general principle a NRC is only taxable for income
from sources within. So only 1 million would be taxable. So you have to
leave the country earlier under the category number 3 because during that
year because only income earned from sources within will be taxable.
Income on 2013?
Income will not be taxable since you are NRC and the source of income is
without. Those income from within will be taxable.
Income on 2014?
At the year or arrival he will be considered as NRC up to the day of his

arrival on the condition of that he was treated as a non-resident in the
previous taxable year. As a NRC from January 1 to June 30 only income
within are taxable. From July 1 until December 31, the income whether
within or without are taxable because he reverted back to his status of
being a RC.
Are taxable year always starts with January 1?
For individuals YES.
Corporations have options to choose whether to have the calendar year or

the fiscal year.
o
Calendar year- starts January 1 and ends December 31
o
Fiscal year- starts any day except January 1 and ends 365/366
days thereafter.
What if you arrive late, with less than the 183 days here in the Philippines,
will you still be considered as a RC?
Yes, same with the example earlier, he came back to the Philippines July
28 and he was abroad most of the time. He will only be considered as a
NRC up to the point of his arrival not for the entire year. The year of his
arrival is divided into NRC and RC.
(I cant hear jaspers question jud. Lang akong ibutang)
Except for category 4 if you are a returning resident, because it is unfair, if

you are previously considered as a NRC then in the year of arrival would it
matter if you came back earlier or later if income of the year of arrival is
still a continuing income in the previous taxable years you are considered
as a NRC. BUT this will only happen if in the previous taxable year you are
considered as a NRC.
You have to indicate in your tax return that you are a non-resident citizen.
Returning resident mean that you have stayed out of the country for more
than 6 mos.
If he arrives June 30 but he still continued to receiving salary from his
work outside of the country. What will be the treatment of that delayed
salary?
If the income is sources from outside then the situs is where the service is
rendered. So that salary is for the services he rendered while he was
outside of the country. You have t consider your income up to the point of
arrival. So that is only considered as delayed payment and not delayed
service. So that income is NOT TAXABLE because it is income without.
Remember: WHEN THE SERVICE IS RENDERED NOT WHERE THE SERVICE

IS RENDERED.
Who is a non-resident alien? Why is a RA treated as a resident for tax

purposes?
Came to Philippines for a definite purpose which in its nature maybe

promptly accomplished.
Mere transient
Whether he is a transient or a sojourner or not is not determined by his

intentions with regards to the length and nature of his stay.
IF his intention to stay here in the Philippines is for a definite purpose, for
example Rachel Weiss, she is considered to be a NRA for tax purposes. But
as NRA we have to classify if they are ETB or NETB.
Is there is a benchmark for the number of months of stay to become a RA.
For RA do not use the 180 or less because thats not for RA.
Who are resident aliens?
RA are those who make the Philippines their temporary home country even
they have in the future the intention to go back to their home country.
Either their intention to stay is indefinite or definite but for longer periods
of time to make the Philippines their temporary home country. They will be
considered as RA for that purpose.
Not a mere transient or sojourner
If the purpose is extended temporarily even if it is definite.
So we cant say that there is no fix measurement of days or months of

stay. But for practical purposes usually the tax authorities would require
that there is at least a continuous stay of more than a year for foreign
individual to be considered as RA. Because RA are taxed more similarly to
RC than NRA.
o
Ex: RA allowed to deduct personal exemptions while NRA-NETB
are totally not allowed basic exemptions. However NRA-ETB are
allowed only certain exemptions.
Distinguish between a NRA-ETB and NRA-NETB?
NRA-ETB
NRA-NETB
An alien who stays in the Philippines An alien who stays in the Philippines
for more than 180 days (Whether for 180 days or less. (Whether
continuous or aggregate.)
continuous or aggregate.)
5 32% schedular rate
25% final tax
Entitled subject to the rule on
Not entitled
reciprocity
tax base is his gross income
The distinction between NRA-NETB OR NRA-ETB has no bearing as to his

activities here in the Philippines. So whether or not he is ETB OR NETB so
long as he stays in the country for more than 180 days during the year he
will be treated for tax purposes as a NRA-ETB. But for those stay is 180
days or less even if they actually performed profession for a month but
because their stay is 180 days or less they will be considered as NRANETB.
So what is really important the total number of days that they have in the
country. Usually their passports are checked for the number of days that
they have stayed.
Who are special employees?
Are those employed by a special corporation:

1. RAHQ of a multinational corporation
2.
3.
4.
ROHQ of a multinational corporation

Offshore banking unit
Petroleum service contractor.
Resident alien
Even if there is no number of days for an alien to be considered as a resident, for
practicality, the BIR would require an alien to have stayed in the Philippines for a
continuous 1 year in order for him to be considered as a resident alien.
Because for aliens, individuals, they are considered on a year to year basisFrom
Jan 1 Dec 31
So for example:
Client came to the country under a special working permit which he intends to
renew every 6 months. He came to the country on December 2010. His employment
is more than a year (indefinite).
But for the close of 2010, can we already consider him as a resident alien?
Not as yet because in 2010 he only stayed for one or less than a month. But for the
close of 2011, he has stayed continuously for the entire 2011. By the time he files
his tax return, he can already be considered as a resident alien allowed to deduct
expenses because at the point of 2011 when he has filed his income tax return, he
has already stayed in the Philippines for a continuous period of more than 1 year (1
month for 2010, and the whole of 2011)
If he decides to go back to his home country by 2012, then he can still be
considered a resident alien up to the point of his departure.
Special employees
Are they always alien employees or can they be Filipino employees?
Generally: only alien employees occupying managerial, supervisory, technical
positions can be special employees
Except: : in cases where no alien individual can fill up that requirement would a
Filipino individual be allowed to become a special employee subject to the
preferential, special tax rate of only 15%.
Special employees are those employees employed in special corporations employees
occupying managerial, supervisory, technical positions.
Special corporations are the following:
(1) Regional Area Headquarters (RAHQ) of multinational corporations, defined
in Sec. 22
(2) Regional Operating Headquarters (ROHQ) of Multinational Corporations,
defined in Sec. 22
(3) Offshore banking units
(4) Petroleum service contractors
What do you understand about RAHQs and ROHQs?
Student: RAHQs do not earn income. It is exempt from tax because it is nonoperational (does not earn anything).
ROHQs, render services, earns income thus taxable.
Taxability of resident citizens and non-resident citizens income

Same: Graduated tax rates
Same: Taxable on NET income (deductions allowed)
Same: Income within Philippines taxable
ONLY: Resident Citizens are taxable for their income generated outside the
Philippines
Possible income that individual taxpayers may earn:
Compensation income
It is defined as all remuneration for services rendered by an employee for his
employer unless specifically excluded under the Tax Code. Graduated tax rate of
5%-32%.
Requisites:
1. There must be ER-EE relationship.
2. Payment must be made for services rendered
Must be reasonable and for services rendered otherwise it wont be deductible on
the part of the employer (Because business expenses must be ordinary, necessary
and reasonable).
Doctrine of Cash Equivalent
If the income goes to the tax payer or employee in the form of property or any
other kind other than the standard of measure of value which is cash, then there
must be equivalent to every property that is given. For every value received by the
tax payer or employee as a benefit for being hired or as compensation for service
rendered, there will be an equivalent tax on that income, even if it is received in
kind. So, the equivalent value of the property of the property or benefit received will
be taxable as a rule. Thats as a rule because we will encounter some exceptions to
the rule.
What are fringe benefits?
Fringe benefit is any good or services or benefits given by the employer to the
employee, except for rank and file employees.
Fringe benefits are subject to fringe benefits tax. Its not subject to the regular
compensation tax that we have.
What are the different kinds of fringe benefits?
Housing, expense account, vehicle of any kind, household personnel, interest on
loan at less than market rate, membership fees, dues and other expenses borne by
the employer in social and athletic clubs or other similar organizations, expenses for
foreign travel, holiday and vacation expenses, educational assistance to the
employee or his dependents, and life or health insurance and other non-life
insurance premiums or similar accounts in excess of the law allows. (Under Sec. 33
of tax code)
List is not exclusive.
Fringe Benefits- 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
employee) such as but not limited to the following:
1.
2.
3.
4.
5.
Housing
Expense account
Vehicle of any kind
household personnel, such as maid, driver and others;
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 born by the employer for the
employee in social and athletic clubs or other similar organizations
7. Expenses in 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.
Every item here is the general rule and each item has an exception.
Example of housing benefit:
You are the president of ABC Corporation. You are from abroad and as part of your
package, you are given a monthly housing allowance of 100K on top of your
monthly salary. Can we consider this fringe benefit? Yes. Will we add the 100K in
the computation of 5-32% income taxation from your compensation? NO, but it is
subject to fringe benefits tax which is a final tax which means that it will no longer
be part of anyones gross income for the purpose of taxation. So being subject to
final tax, who is responsible for paying this tax? The employer.
If this is given to rank and file employees, this shall form part of compensation
hence subject to income tax.
Fringe benefit does not form part of the gross income of the non-rank and file while
if it is received by a rank and file employee, it is ordinary income which shall form
part of his gross income subject to income taxation at the end of the year.
NON-RANK & FILE (NR & F)
FRING BENEFIT
Not part of GI
32% tax on GMV
Paid by ER
RANK & FILE (RF)

BENEFITS
Part of GI
5%-32% tax on compensation
Paid by EE
50% - Other P68K is
Rent expense to ER
HOUSING ALLOWANCE
P136,000
Subj. to FBT
50% - Only goes to EE
32% of GMV of FB
1. FB (68%) Monetary
value to the EE
+
P68,000/68%
2. Tax (32%)
68K - EE
100-32=68%
GMV 100%
P100,000
x32%- Govt
FBT
FB
=
=
P32,000
_68,000
P100,000
P68,000
(100%-32%)
How to compute:
The fringe benefit actually received by the employee is in this case, 68K. In order to
determine the fringe benefit tax (FBT) paid by the employer, we need to find the
Grossed-up Monetary Value (GMV) [the amount actually paid by the employer that
is Monetary Value (68 %) + Fringe Benefit Tax (32%)]. To determine the GMV, we
divide .68 to the Monetary Value of the fringe benefit received by the employee
which in this case is 68K. 68000/.68 = 100,000. So, 100,000 is the Grossed-up
Monetary Value or the actual outflow of money of the employer in order to give you
the fringe benefit. So, it is always presumed that whatever is given to the
employee, it is 68% of what the company actually suffered. FBT on the other hand
is GMVx.32 which in this case is 32K.
The reason why we only considered 68K is because it is presumed that only half is
for the benefit of the employee while the other half is for business purpose. This is
true only with Housing and Vehicle allowance.
What if you are given a house helper? 20,000K?
SALARY of househelper
FB
FBT
P20,000 68%
9,412
32%
P29. 412 100%
32% of GMV of FB
P20,000/68% = P29,412 x 32% =P 9,412
FB=20,000 net of tax

GMV= FB/.68=29,412
FBT=GMV/.32= 9,412
The company may be giving you a motor vehicle:
1. For your use but ownership is not transferred to you
2. It may lease a motor vehicle but ownership is not with you or the company
3. The company may buy a vehicle, 50 % shouldered by you and 50 %
shouldered by the company
General rule, in all these cases, since the employee was benefited, it is subject
to fringe benefits tax. But if the user employee is engaged in sales and
marketing, is it not part of the trade, business or profession of the employer?
In this case, it is exempt from FBT because its job description calls for the use
of motor vehicles.
Housing allowance.
Does not give you money but you were allowed to stay in the staff house
for free. Is it subject to fringe benefit tax?
If rank and file employee, no. if non-rank and file, yes.
Common allowances the general rule are subject to fringe benefit tax if received by
the non-rank and file employee. subject to the following exceptions
1. If it is for the convenience of the employer. Example, the employer is a
doctor and he is on call 24 hours a day and he has an employee that is
non-rank and file. And they were given free housing benefit beside the
hospital, then that is exempt from fringe benefit tax because it is for the
convenience of the employer.
2.
3.
If the housing benefit given is within 50 meter proximity on the company

premises then it is exempt from fringe benefit, it may be more than 50 if it
can be proven that the company premises is hazardous.
Short travels by the employees not exceeding 3 months are also exempted
from fringe benefits.
You were allowed emergency loan by the company, the emergency loan of 1 million
was interest free. You are required only to pay the principal.
You are the president of the company; will there be fringe benefit tax due
on the loan?
Yes
If the loan would only last for one year, and its one million in amount,
interest free or 0 interest, how much fringe benefit tax should be paid by
the company?
The fringe benefit insofar as interest is concerned is when you are granted a loan
with an interest of less than the market rate is the difference between the market
rate and the interest charged by your employer is the fringe benefit that you have
received, its your benefit. So in this case since it is 0% versus the market rate of
12% the difference is 12%, then 12% of 1 million per annum is a total of 120,000.
INTEREST
Principal P1,000,000
0% interest
Market
Value
@12% = P120,000
FB
FBT = 32% of (P120,000/68%) = P56,471
So how much is the fringe benefit tax due in formula?

The fringe benefit is 32% of the grossed up monetary value of the interest forgone
by the employer.
If the employer would charge 6% interest, then the fringe benefit would be 60k ra,
and the grossed up monetary value would be 60k divided by .68.
How do an expense account be considered a fringe benefit?
Any personal expense shouldered by the employer is considered as fringe benefit.
When an employer would pay for the personal expenses for the employee, it is said
that the employer is giving additional salary or compensation to the employee so he
can purchase those items, but since the employee is non- rank and file is therefore
subject to fringe benefit tax. So if he give his employer every month 100k worth of
grocery receipts and the employer gives him 100k in exchange for the receipts that
is fringe benefits, thats the monetary value and any tax will be computed 32% of
the grossed up monetary value of 100k. The only way the employer can escape
fringe benefit tax is when the expenses are incurred in relation to trade business or
profession and it is fully supported by official receipts and invoices.
If youre the sales representative or med rep. and you are given an
allowance of how much to spend for during a month, lets say 20k; is 20k
subject to fringe benefit tax?
Its not because it is related to the nature of the business or profession, and It will
be supported by official receipts and invoices.
Vehicles, if it is leased by a company in order to be used exclusively by the officer it

will be subject to fringe benefit tax and the monetary value is based on the rental
value. But if the motor vehicle is given to the employee the monetary value or
fringe benefit is the acquisition cost of the motor vehicle. Whatever is the outflow
from the company, its the monetary value to the employee, so if the company pays
monthly rent thats the monetary value to the employee but if the company buys
the vehicle for the use of an officer then the monetary value to the employee is the
acquisition cost if the car is brand new. Same formula should be followed, 32% of
the grossed up value.
Membership fees.
If you join golf clubs etc. if the membership is still in the name of the company the
stock certificate. Its not a benefit exclusive to the employees. But if the
membership is exclusively in the name of the officer or employee then that would
be subject to fringe benefit tax, these are the social and athletic clubs, these are not
for example lawyers who pay their IBP dues because they are exempted from fringe
benefits.
Expenses for foreign travel.
If the travel is for business purpose then the cost for the plane ticket etc. will not be
subject to fringe benefit tax but if the travel is for personal purpose shouldered by
the employer, entire cost will be subject to fringe benefit tax. If the employee will
travel on a business trip the company shoulders the employees cost plus that of his
family, then only the portion relating to the other members of the family is
subjected to fringe benefit tax.
In order to make an exemption, make sure that it is related to business, and there
is an invitation from abroad to travel. Exception to the exception is when the ticket
purchased by the employer is for first class, 30% of the cost of the ticket is subject
to fringe benefit tax, even if it is for business purposes. If it is for business class
ticket 100% exempt from fringe benefit tax. Vacation expenses, all the time,
subject to fringe benefit tax because it is not for business purpose.
What type of employer is subject to fringe benefit tax must it always be a
corporation, partnership? Or can it be an individual employer?
For fringe benefit tax the employer may be individual, partnership or corporation,
exempt or not exempt. So regardless of the status of the employer, fringe benefit
tax will have to be paid. Why? The tax is supposed to be collected from the
employee but because of the scheme of withholding its as if the employer did not
give the full 100% it only gives 68% withheld the 32% to remit it to the
government. Still the burden is on the employee because fringe benefit is part of
the compensation and compensation an income of the employee not that of the
employer not of the individual company or partnership. So if the employee is a
taxable individual the fringe benefit is payable regardless of their employer is.
Educational assistance.
You are given free scholarship of the company to study law.
The educational assistance as a general rule is subject to fringe benefit tax, the
exception is when it will redounds to the benefit of the business of the company or
employer, and for the employee to render a certain period of service to the
employer as to compensate for the assistance given to the employee. It may not be
just any educational assistance program that will be given it has to be related to the
trade business or profession of the employer company by contract that the
employee will render future services in exchange for the educational assistance
given.
So if he is employed by a law office and he is given an educational assistance to be
a chef, its subject to fringe benefit tax because it is in no way related to the
business of legal profession.
How about educational assistance to dependents, are these subject to
fringe benefit tax?
Educational assistance to dependents are subject to fringe benefits tax.
1.) Because the dependents are not giving services to the benefit of the
business of the employer
2.) It cannot be in relation to the trade business of the employer
3.) And the dependents cannot in anyway sign a valid contract to render future
services to the employer.
Exception: when the giving out of the educational assistance to the dependents is
through a competitive scheme, cannot just be arbitrary or rendered by anyone who
can get an educational assistance and by maintaining a certain grade or a passing
grade then that would be considered as exempt from fringe benefit tax.
And finally the insurances, are insurances subject to fringe benefit tax?
If the beneficiary is the employee or his heirs, it is subject to fringe benefit tax.
If it is the company itself is the beneficiary, it is not deductible, if it not deductible it
is not taxable... Two way thing... If its not deductible then it is not taxable. If its
taxable then it is deductible.
Exclusions of Gross Income
Student: What if the ownership is transfer to the employee?

I think there are scenarios for fringe benefit on motor vehicle. The easiest that we
can think of is that the company will lease some motor vehicle for your use. So the
monthly rentals paid by the company will be the fringe benefits on the employee.
But there are times that the company would purchase the vehicle. The entire cost is
shouldered by the company; the ownership stays with the company. Use is for the
employee. Is there really monetary benefit for the employee? The answer is none.
But there is a monetary VALUE. The value there is that the employee is enjoying for
their use. What is the value to the employee? Motor vehicles have life of five (5)
years. So whatever the acquisition cost is, divided by five (5) years, is the annual
benefit received by the employee.
VEHICLE
Acquisition Cost =P1,000,000
Life of motor vehicles = 5 years
Benefit = 200,000 /year (P1,000,000/5 years)
Quarterly Benefit = P50,000 (P200,000/4)
Qtrly FBT = 32% of (P50,000/68%) = P23,529
Example:
Acquisition Cost: 1,000,000
Life: 5 years
Annual Benefit: P200,000/year
50% Business
50% Personal (Exclusive): 100,000 (Subject to FBT)
It must be exclusive!
Fringe Benefit Subject Tax...

Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows
As a rule, you have to determine whether the beneficiary is the company itself. So if
the beneficiary is the company itself, (it is not deductable diba on part of the
company) therefore it should not be taxable on part of the employee. Thats a twoway thing. If it is not deductible, then it should not be taxable. If it is taxable, then
it should be deductible.
FBT = 32% X (100,000/68%) ;for the entire year

KIA 50% use
EXCLUSIVE USE (OF PRES.)
Ownership (Co.) P1,000,000

P200,000/YEAR
50% Personal
So you have an insurance policy taken up by the company in favour of its employee
and the company itself is made a beneficiary. There is really no benefit there to the
employee nor his heirs or estate. Therefore, it is not taxable. If the beneficiary is
the estate or heirs of the employee, it may be taxable to fringe benefit tax UNLESS
if it falls under group insurances.
Group insurances are not subject to any type of tax, why?
Because the benefit is not directed to any employee of the company. In group
insurance, you cannot claim unless your heirs will use it to claim if there is
something happen to you.
Fringe benefit tax is paid on a quarterly basis by the company. It is actually a tax
for the benefit of the employee but held by the company.
50% Business
= P100,000
FBT
= 32% 0f (100,000/68%)
= P47,059
Example: The Globe Case
Listed in Stock Exchange; 1000 shares
FMV = 5.00/share
Offer = 2.00/share
Benefit = 3.00/share; difference between the fair-market value and the rate offered
by the company
FB = 1000shares X 3.00/share
FBT = 32% X (FB/68%)
If promissory note is given up, it is based on the discounted value of the promissory
note. It is extreme cases lang.
STOCK OPTIONS
Stocks
Where to get the FMV?
If listed in Stock Exchange Philippine Stock Exchange
If not listed refer to the financial statement of the corporation. FMV is equivalent
to the book value of a non-listed corporation.
Listed in Stock Exchange

FMV = P5.00/share
Stock Option Offer = P2.00
R&F buys = P1,000 -(P5-P2)
= P3,000
FBT = 32% of (P3,000/68%) = P1,412
Diff.
BOOK VALUE = (CAPITAL STOCKS + PROFITS)/TOTAL NUMBER OF SHARES

It is not fixed, but based on yearly operation.
Is the fringe benefit deductible expense on part of the company? The answer
is YES, because it is simply part of the entire package of compensation. The 68%
goes directly to the employee, the 32% is withheld by the company and as a
withhold agent, it remits to the government. So the entire 100% is part of the
entire compensation package. So it part of the expenses deductible.
Example: Company shoulders 50% of the acquisition cost
You are the president and you asked the company to shoulder the 50% of the price
of the motor vehicle that youre going to purchase. So if the motor vehicle is
1,000,000, you pay 500,000 and the company shouldered 500,000. So there is a
fringe benefit of 500,000 - to be computed as:
Company Subsidy: 500,000
Life: 5 years
Annual Benefit: P100,000/year
50% Business
50% Personal (Exclusive): 50,000 (Subject to FBT)
It must be exclusive!
FBT = 32% X (50,000/68%); for the entire year
OWNERSHIP IS YOURS
Ownership
P500,000
100,000/yr
50% Business
50% Personal
= 50K FBT
= 32% of (P50,000/68%)
= 23,529
Property
IF you are given property by your company, lets say Manny Villar
distributed houses to the employees, how much value should be declared
for FBT?
Student: Fair-market value of the property.
Promissory note
Cancellation of indebtedness, in favour of services rendered

If you have an existing indebtedness to the company that is cancelled, is that
considered taxable compensation? Lets say you have an indebtedness of 1,000,000
to the company, the company thru BOD decided to cancel your indebtedness.
Taxable? To what type of tax? Income tax or not income tax?
Student: I think it is income tax, maam.
Can forgiveness be considered as a gift? So income tax or donors tax?
As a general rule class, forgiveness of a debt or cancellation of indebtedness is
subject to income tax because the debtor is no longer required to pay, his assets
would no longer be decreased by the payment, and it is as if he gained something.
If the reason for the cancellation of indebtedness is because service rendered in the
past or future, that is consider part of the compensation. BUT if it is purely
gratuitous in nature, it is subject to donors tax.
Who pays donors tax?
The donor.
Premiums paid
If the beneficiary of the life insurance policy is the estate or the heirs of the
employee, it is possible on the part of the employee that it is a deductible expense
on the part of the employer. But if the beneficiary is the employer, the premium
payments made by the employer is not taxable on the part of the employee because
there is no benefit on the part of the employees estate or heirs and is not a
deductible expense because it will boil down to the benefit of the employer. You will
see that if it is taxable then it is deductible; if not taxable then not deductible as
well.
Premium: Estate/heirs
ER
Taxable EE
Not taxable EE
Deductible - ER
Not deductible - ER
Exclusions from fringe benefit tax
1) 13th month pay and other benefits and payments
a. Not exceeding 30k are exempt from tax
2) Fringe benefits not subject to tax
a. Benefits granted to rank and file employees
i. Not subject to tax but it does not mean that these
benefits will not at all be subject to tax. It may not be
subject to fringe benefit tax but it may be subjected to
compensation tax
ii.
b.
c.
d.
e.
Copy paste from RR 3-98 Although the benefit may be

exempt from FBT, it may, however, still form part of the
employees gross compensation income which is subject
to income tax, which is required to be covered by the
withholding tax on wages
Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization
benefit plans
i. In short, group plans or policies
Fringe benefits which are authorized or exempted under
special laws
Employers convenience rule as required by the nature of
the trade, business or profession of the employer
(See under 3-98)
De minimis benefits, benefits relatively of small amount,
limited to facilities or privileges furnished or offered by the
employer to his employees merely as a means of promoting
health, goodwill, contentment or efficiency of the
employees
i. These are of relatively small value intended to promote
health, goodwill, contentment or efficiency of the
employees
ii. Question: Are de minimis benefits given to rank and file
and non-rank and file employees exempt from tax?
Assuming that it is in the range of the minimum allowed
by law. Whether or not the recipient is a rank and file or
non-rank and file employee, is always exempt from tax
provided that it is in the range (minimum) allowed by
law. It is not subject to income or any other tax.
iii. Different kinds (Below: Revenue regulations mentioned
by Atty. Tiu by date. Highlighted ones were mentioned by
Atty. Tiu)
RR No. 2-98
The following payments or benefits paid or provided by the employer are taxexempt, and thus, not subject to withholding tax:
1. Retirement benefits received under Republic Act 7641 and those received by
officials and employees of private firms under a reasonable private benefit plan
maintained by the employer which meets the following requirements:
a. The plan must be reasonable;
b. The benefit plan must be approved by the BIR;
c. The retiring official must have been in the service of the same
employer for at least ten (10) years and is not less than fifty (50)
years of age at the time of retirement, and
d. The retiring official or employee should not have previously availed of
the privilege under the retirement benefit plan of the same or another
employer.
2. Any amount received by an employee or by his heirs from the employer due to
death, sickness or other physical disability or for any cause beyond the control
of said employee, such as retrenchment, redundancy or cessation of business.
Amounts received by reason of involuntary separation will be exempt from
income tax even if the employee, at the time of separation, had rendered less
than ten (10) years of service and/or is below fifty (50) years of age.
3. Social security benefits, retirement gratuities, pensions and other similar
benefits received by residents or non-resident citizens or aliens who come to
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
reside permanently in the Philippines from foreign government agencies and

other institutions, private or public.
Payment of benefits under the law of the United States administered by the
United States Veterans Administration.
Payment of benefits made under the Social Security System Act of 1954.
Benefits received from the GSIS Act of 1937, and the retirement gratuity
received by government officials and employees.
Remuneration paid for agricultural labor
Remuneration paid for domestic services. However, the services of household
personnel furnished by the employer to an employee who is holding managerial
or supervisory position, shall be subject to the Fringe Benefits Tax.
Remuneration paid for labor which is occasional, incidental or irregular, and
does not promote or advance the employers trade or business
Compensation for services by a citizen or resident of the Philippines for a
foreign government or an international organization
Actual, moral, exemplary and nominal damages in connection with a final
judgment or compromise agreement arising out of or related to an employeremployee relationship.
Life insurance proceeds paid to the heirs or beneficiaries upon death of the
employee. However, interest payments agreed under the policy for the
amounts which are held by the insured will be included in the gross income.
Amounts received by the insured as a return of premium
Compensation for injuries or sickness
Income exempt under any treaty obligation binding upon the Philippine
government
Facilities or privileges are of relatively small value which are offered or
furnished by the employer merely as a means of promoting the health,
goodwill, contentment or efficiency of his employees. Thus, if living quarters or
meals are furnished to an employee for the convenience of the employer, the
value of such benefits need not be included as part of compensation income.
Advances or reimbursements for travelling, representation and other ordinary
and necessary expenses incurred by the employee in the performance of his
duties, if the employee is required to account/liquidate for said expenses. The
excess of actual expenses over advances made shall be treated as taxable
income if such amount is not returned to the employer.
The monetized value of unutilized vacation leave credits of ten (10) days or less
which were paid to the employee during the year.
GSIS, SSS, Medicare and Pag-ibig contributions and union dues of individual
employees
Thirteenth (13th) month pay and other benefits such as Christmas bonus,
productivity incentive bonus, loyalty awards, gifts and other benefits of similar
nature to the extent that the total amount thereof does not exceed P30,000.
RR 3-98
However, the following benefits are not covered by the FBT.
a. Fringe benefits which are authorized and exempted from income
tax under the Code or under special law. Separation benefits
which are given to employees who are involuntarily separated
from work are not subject to FBT.
b. Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans;
c. Benefits given to the rank and file, whether granted under a
collective bargaining agreement or not;
d. De minimis benefits
e.
f.
Benefits granted to employee as required by the nature of, or

necessary to the trade, business or profession of the employer
Benefits granted for the convenience of the employer
Although the benefit may be exempt from FBT, it may, however, still form part of
the employees gross compensation income which is subject to income tax, which is
required to be covered by the withholding tax on wages.
"De minimis" benefits refer to facilities or privileges furnished or offered by an
employer to his employees that are of relatively small value and are offered or
furnished by the employer merely as a means of promoting the health, goodwill,
contentment or efficiency of his employees, such as the following:
Monetized unused vacation leave credits of employees not
exceeding ten (10) days during the year;
Medical allowance for employees dependents not exceeding P125
per month;
Rice subsidy of P350
Uniform allowance
Medical benefits
Laundry allowance of P150 per month
Employee achievement awards in the form of a tangible property,
with an annual monetary value not exceeding of the basic salary
of employee;
Christmas and major anniversary celebration for employees and
their guests;
Company picnics and sports tournaments in the Philippines
exclusively participated in by employees
Flowers, fruits or similar items given under special circumstances,
e.g. illness, marriage, etc.
In addition, the following fringe benefits are also not subject to FBT because
they are necessary to the business of the employer, or granted for the convenience
of the employer:
o Housing privilege of military officials of the AFP located inside or
near the military camps.
o A housing unit which is situated inside or at most 50 meters from
the perimeter of the business premises.
o Temporary housing for an employee for 3 months or less.
o Expenses of the employee which are reimbursed by the employer
if they are supported by receipts in the name of the employer and
do not partake the nature of a personal expense of the employee.
o Motor vehicles used for sales, freight, delivery service and other
non-personal uses
o The use of aircraft (including helicopters) owned and maintained
by the employer
o Business expenses which are paid for by the employer for the
foreign travel of his employees in connection with business
meetings or conventions. The expenses should be supported by
documents
proving
the
actual
occurrences
of
the
meetings/conventions, or official communications from business
associates
RR 10-2008
Monetized unused vacation leave credits of employees not exceeding ten

(10) days during the year and the monetized value of leave credits paid to
government officials and employees
Converted leave credits?
Differentiate from private and government employees
For Government employees: always exempt from tax
For private sector: any conversion of leave credits is always
subject to tax. What is only subject by the de minimis benefit is
the first 10 days of the said leave credit, the rest are taxable
already.
If you have 100 vacation leaves, 10 days are exempted, remaining
90 is taxable
Medical cash allowance to dependents of employees not exceeding
P750.00 per employee per semester or P125 per month
MAM TIU: w/o requiring any official receipt evidencing that you
used it for medical cash allowance of your dependents.
But for EMPLOYEES themselves? 10k for Actual Medical Allowance,
company cannot give 10k cash to the employee, it must be by way
of reimbursement.
Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month
amounting to not more than P1,500.00
Uniforms and clothing allowance not exceeding P4,000.00 per annum
Actual yearly medical benefits not exceeding P10,000.00 per annum
Laundry allowance not exceeding P300.00 per month;
Employees achievement awards, e.g., for length of service or safety
achievement, which must be in the form of a tangible personal property
other than cash or gift certificate, with an annual monetary value not
exceeding P10,000.00 received by the employee under an established
written plan which does not discriminate in favor of highly paid employees
The catch here is that the said award should be in the form of a
tangible personal property
If said award is given in cash, even if it is below 10k, the whole
value is subject to tax
Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000.00 in cash per employee per annum
Flowers, fruits, books, or similar items given to employees under special
circumstances, e.g., on account of illness, marriage, birth of a baby, etc..
Not repeated sa 2011 RR but Ma'am Tiu thinks na this is still
included
Daily meal allowance for overtime work not exceeding twenty five percent
(25%) of the basic minimum wage.
Things to consider in treating de minimis benefits:
De minimis benefits within the limit prescribed above shall not
be considered in determining the PhP30,000 ceiling of other
benefits.
The excess, if any, shall form part of the PhP30,000.00 ceiling,
and any excess over PhP30,000.00 shall be taxable.
The above guidelines are applicable for both minimum wage
earner and non-minimum wage earner employees.
Under RR 10-2008, income payments to minimum wage earners are
exempt from withholding tax on compensation as follows (amending RR 2-98):
The MWE working in the private sector is paid the Statutory

Minimum Wage (SMW) as fixed by the Regional Tripartite Wage
and Productivity Board (RTWPB)/National Wages and

Productivity Commission (NWPC), applicable to the place where
the worker is assigned.
Holiday pay, overtime pay, night shift differential pay

and hazard pay earned by the aforementioned MWE shall
likewise be covered by the above exemption. PROVIDED:
If the MWE earns additional compensation income

such as commissions, honoraria, fringe benefits, benefits
in excess of the allowable statutory amount of P30,000.00,
taxable allowances and other taxable income other than
the SMW, holiday pay, overtime pay, hazard pay and night
shift differential pay shall not enjoy the privilege of
being a MWE and, therefore, his/her entire earnings
are not exempt from income tax and, consequently,
from withholding tax.
MWEs receiving other income, such as income from
the conduct of trade, business, or practice of
profession, except income subject to final tax, in addition
to compensation income are not exempted from income
tax on their entire income earned during the taxable
year. This rule, notwithstanding, the SMW, Holiday
pay, overtime pay, night shift differential pay and
hazard pay shall still be exempt from withholding
tax.
From the foregoing, it would seem that if you are a MWE and you have
other income from work, all your income will be subject to tax. However, if you
are MWE and you have income from business, your compensation income will
still be exempt from tax but your business income will be taxable.
In order for hazard pay given to MWE to be exempted from tax, the
employer is required to attached to the Monthly Remittance Return of
Withholding Tax on Compensation (BIR Form No. 1601C) for return periods
March, June, September and December a copy of the list submitted to the
nearest DOLE Regional/Provincial Offices Operations Division/Unit showing the
names of MWEs who received the hazard pay, period of employment, amount of
hazard pay per month; and justification for payment of hazard pay as certified by
said DOLE/allied agency that the hazard pay is justifiable.
REVENUE REGULATIONS NO. 5-2008 issued on April 23, 2008 further amends
Revenue Regulations (RR) Nos. 2-98 and 3-98, as last amended by RR No. 102000, with respect to De Minimis Benefits.
Rice subsidy of P 1,500.00 or one (1) sack of 50 kg. rice per month
amounting to not more than P 1,500.00 (if it exceeds, the excess
will be taxed unless it will be accommodated under the 30k benefit
exempted by tax)
As explained: if you have an income of 10k and your rice subsidy is
2k, 1.5k is exempt as de minimis benefit while the other 500 is
exempt too since it is accomodated by the 30k exemption.
uniform and clothing allowance not exceeding P 4,000.00 per
annum are considered as de minimis benefits,
which are not subject to the fringe benefit tax (per Section 2.33(C) of RR No. 3-98)
and Income Tax as well as withholding tax on compensation income of both
managerial and rank and file employees (per Section 2.78.1 (A)(3)(c) and (d) of RR
No. 2-98). The benefits provided in the Regulations shall apply to income earned
starting the year 2008.
Advice from Mam Tiu: if all of your salary is considered as taxable, what
you have to do or tell your employer that is to re-characterize a portion of
your salary. If you are receiving, for example, 10k a month, request your
employer that a part of it be classified into the different allowance/s.
Its a form of tax avoidance, which is legal.
How about bereavement allowance?
o
No. Not being part of the de minimis benefit and tax exemptions
are construed against tax payers, so therefore, it is taxable.
Gross income from trade, business or profession

Rental income
Is it subject to the ordinary income tax or a passive income subject to final
tax?
o
As a GR, since the leasing out of the property is on a regular
basis, it is considered as an active income in pursuit of a business.
It is subject to the ordinary income tax. Unless the income earner
is a non-resident alien not engaged in a trade or business
(WEIRD) since they are subject to a final income tax of 25%
instead of the 5-32% rate.
a) Lease of personal property
b) Lease of real property
c) Tax treatment of
a. Leasehold improvements by lessee
What if lessee introduces leasehold improvements? What

if the contract states that ownership will belong to the
lessor after the expiration of the contract or lease term?
i. The benefit will be received by the lessor in the form
of the improvements and expenses were incurred by
the lessee, so it will be considered as part of the
income of the lessor, so taxable against the lessor.
b. VAT added to rental/paid by the lessee
As a rule, whoever the lessee is, he is considered as a

customer. He can be passed on by the VAT. On top of the
rent, there is VAT collected. The VAT collected is not
considered as part of the lessors income, since this will
be remitted to the government.
c. Advance rental/long term lease
Considered as income? YES
For long term leases wherein advance rentals

are paid, even if the lease is not yet undertaken
for the next (n) years, at the time of the receipt
of the advance rental, it is already taxable
EXCEPT for security deposits. Security deposits
are not income, it is considered as a refundable
amount at the end of the year. Security deposits
will only be taxable once these are applied to
the rent.
DATE: 08/11/12
Distinguish an ordinary asset from a capital asset
Ordinary Assets
1) Normally, it forms part of the inventory of the taxpayer at the end of year.
2) Those real properties held by the taxpayer in the ordinary or primarily held for
sale to customer in the ordinary course or business such as one engaged in
developing properties. These are properties primarily held for sale.
3) Real properties that are used in trade or business subject to depreciation
4) Real properties used in trade or business
All of these ordinary assets are directly related to trade or business.
Now, if you have a parcel of land owned by your corporation or business. Other
than that, is used as a parking area beside the manufacturing plant.
Is that an ordinary asset or a capital asset?
Student: It is an ordinary asset.
Why?
Student: Because it is used as parking lot and in the ordinary course of business.
Hence, it is also used in your regular business.
Even if it is not used in the manufacturing, hence it is an ordinary asset?
Student: Yes ma'am
What is the difference between selling ordinary real property from the
capital real property?
Student: The selling of ordinary real property differs in tax paid.
Differs in tax paid? How?
Student: Because the tax paid, it is under the ordinary asset, if it is a corporation,
then it is...
We are talking of individuals.
Student: It will be subject to 5%-32% tax and if it is a capital asset it is subject to
6%.
6% of?
Student: Gross Selling Price.
While the 5%-32% is based on what?
Student: Income derived from the proceeds of the sale.
The proceeds or the income?
Student: The income.
The income which means proceeds less?
Student: the expenses
Less the cost and the expenses.
2) Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business
3) Real property used in trade or business of a character which is subject to the
allowance for depreciation
4) Real property used in trade or business
What type of property is subject to depreciation?
Student: Personal Property
But there are real property that are subject to depreciation.
What type of real property not subject to depreciation?
Student: Land
So give me an example of a capital asset?
Student: Selling your land.
What type of land?
Student: For example, your residence ma'am.
Agricultural if it includes poultry business.
A capital asset - is that laptop a capital asset?
Student: Yes ma'am
If that is sold, is it subject to tax? What do you think?
Student: 6%
Do you agree with the 6%? If she sells the laptop, she's saying that the
laptop, if the sale results in a profit, it is subject to 6% capital gains tax?
6% still?
Student: No.
Why not 6%? It is a capital asset?
6% Capital gains tax would apply if the property must be a real property. That will
qualify as a capital asset. If the property is a personal property even if it is classified
as a capital asset, the 6% will not apply. It is still 5%-32% subject to the rules of
capital transactions which we will discuss before the end of the semester. At this
point, you have to know that 6% only applies to capital assets that are real
property.
Let's you have property-land located in (?) Is the property you are hold to
prospective purposes that if the price rises, you would sell it at a huge profit. You
sold it at twice its cost. You purchase it at P10M, you sold it at P20M. You have
P20M in cash.
1) Is it a capital asset?
2) Is it subject to Philippine tax?
3) At what tax rate?
Student: It is a capital asset ma'am
Because?
Student: It is a real property, not for the ordinary course of business.
Again, what are ordinary assets?

1) Stock in trade of a taxpayer or other real property of a kind which properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year
Is it subject to Philippine Income tax?

Student: Yes
Because?
If you are a resident citizen, taxable within and without Philippines.
What type of income tax? Is it the 5%-32% income tax or the 6% capital
gains tax?
Student: The 5%-32% because the property is not located in the Philippines.
Then it should be located in the Philippines in order for the 6% capital gains tax
would apply.
Is it subject to 5%-32% and not to the 6% capital gains tax?
student: No ma'am
No. So subject to 6%? Real property classified as capital asset or used in
trade in business?
Student: Same
So you now agree with Ms. Cabergas. Do you agree class? So that means you are
ready for midterms.
Class: (resounding) NO!
For 6% capital gains tax to apply, must be a real property classified as capital asset
located in the Philippines. If those requirements are not present, it will be subject to
the 5%-32% tax.
So if you have a real estate business, would all your real properties be
classified as ordinary assets including those that have not been used in the
business?
Student: It depends on the taxpayer whether capital asset or ordinary asset...
So are you saying that you have the option on the ordinary income tax
rates based on net income after deducting the cost of the property and the
expenses and if it based on gross selling price subject to the agreement of
the parties or?
Student: Fair market value
Fair market value whichever is?
Student: Higher
The zonal valuation provided by the BIR and the Fair market value provided by the
City Assessor's Office
5% - 32%
OIT
Net income
6%
CPG
All real properties are considered as capital assets. I didn't say that you were
engaged in real estate business or real estate development. You purchase parcels of
land....
e. Capital gains derived from the sale of real property classified as capital
assets, 6%
You are engaged in a business of real estate development. You purchased parcels of
land and developed them into subdivisions. You have a long outstanding of land
which was not used for number of years.
Will you consider that as a capital asset or an ordinary asset?
NOTES:
Based on the regulations issued by the BIR, that if a taxpayer is engaged in realestate business real estate developer, real estate dealer, and real estate lessors,
all these will always have real properties classified as ordinary asset. It will always
be subject to 5-32% tax on net income if individual or 30% if corporation.
If a business or entity is registered, which you can verify from the articles of
incorporation and registered as real estate business. Whether real estate developer,
real estate dealer or real estate lessor. All of these real properties will be treated as
an ordinary asset and if sold, it will be subject to 5-32% based on the net income.
And we said if its net income, the basis of taxation is basically not the proceeds of
the sale but rather from the proceeds less the cost of the property less the
expenses in order to derive the profit. It is only the profit that is subject to 5-32%.
You will notice if the 5-32%, a higher rate is used but the basis of taxation is a
lower amount (net income). If 6%, a lower rate but the basis is a higher amount
(selling price).
This is an exception to income tax because 6% Capital Gains Tax is a presumed
gain regardless of the outcome of the transaction.
It goes without saying that you won't have the option of identifying your property in
the real estate business. The problem with ordinary asset that you sold is that you
don't only pay the 5-32% tax but you also pay the Value Added Tax as well of 12%.
But you can pass it to the buyer, a total of 32% plus 12%.
And for non-real estate business, if the real property is used in trade and business it
will be ordinary asset. If not used in business for at least 2 years from the
consideration of the sale, then it is considered as a capital asset. So if you're into
manufacturing business, furniture making business and you have this parcel of land,
if you want to dispose it and avail of the 6% capital gains tax, it must be idle or
inactive for 2 years. If you sell it which is not idle, it will be ordinary asset and you
will pay 5-32%.
GSP
Or
FMV
1.
2.
So you are saying that it is up to the taxpayer to choose what type of

property he has so that it is beneficial to him. So the choice is beneficial if
6% for capital then 5%-32%?
Student: All real properties are considered as capital assets if engaged in real
estate business.
Zonal Value BIR

FMV Assessors Office
For individual sellers who are not really in real estate business but engaging in buy
and sell transactions, example are architects and engineers (Engineer Lim). Each
capital transaction is subject to capital gains tax unless during the calendar year
you entered into at least 6 transactions, that is already considered engaging into
real estate business.
Exceptions:
Sale of principal residence
Principal residence, let's say you have a house, a residential house, and you sold it.
Is it a capital asset?
YES, but exempted with the 6%!
Requisites:
1. There must be a certification from a barangay captain that such property is a
principal residence. Since you are dealing with an exemption from tax, the default
really is what your registered address is.
2. Sale or disposition of the old actual principal residence;
3. By a citizen or resident alien; (Reason: non-resident alien will not have his
principal residence in the Philippines)
4. Proceeds from which is utilized in acquiring or constructing a new principal
residence within 18 calendar months from the date of sale or disposition;
5. Notify the CIR within 30 days from the date of sale or disposition through a
prescribed return of his intention to avail the tax exemption;
6. Can be availed of once every 10 years;
7. The historical cost or adjusted basis of his old principal residence shall be carried
over to the cost basis of his new principal residence;
NOTES FROM BALLADA:
Sale of principal residence
- exempt from the payment of capital gains tax due on the sale of certain
conditions:
1. Escrow Agreement the 6% capital gains tax otherwise due shall be deposited
in cash or managers check in interest-bearing account with an Authorized
Agent Bank under an Escrow Agreement.
2. Capital Gains Tax Return the seller shall file, in duplicate, his Capital Gains
Tax Return and other doc requirements w/ concerned Revenue District Office
w/in 30 days from date of its sale or disposition; however, not required to pay
any capital gains tax during 18-month period.
3. Post Reporting Requirement proceeds from sale, exchange or disposition of
old principal residence must be fully utilized in acquiring or constructing a new
principal residence within 18 months. 30 days from lapse of said period,
transferor must submit, a sworn statement that total proceeds from sale or
disposition of his old principal has been actually utilized in the acquisition of his
new principal residence; if construction is in progress sworn statement that
amount shall be fully utilized for materials, labor and other expenses.
4. Within 15 days from submission of the documentary requirements, concerned
RDO shall release the escrow on the bank deposit in favor of the
seller/transferor.
How soon are you required to inform the tax authority to be exempted from
tax?
Within 30 days from transaction and simultaneous with when to file the Capital
Gains Tax Return.
Atty Tiu's version of requirements:
1. You must be an individual other than a non-resident alien whether or not
engaged in trade or business;
2.
3.
4.
5.
6.
7.
8.
Certification from barangay captains that such residence is your principal

residence;
It does not need your physical presence at the time of sale but rather it is your
domicile where are you intend or to go home to (temporary absence will suffice
like studying away from your residence);
Must inform the Commissioner of the BIR within 30days and that is
simultaneous with the filing of the tax returns;
Within 18 months from time of sale, you must be able to dispose of the
proceeds to purchase another principal residence or to construct another
principal residence;
Once the principal residence is there, historical cost or adjusted basis of the old
principal residence shall be carried over as the new cost of the new principal
residence. Whatever the cost of the old principal residence, it will be used for
future transactions.
If ever from the proceeds and not all of it is utilized, what remains will be paid
with the 6% capital gains tax. And if the payment of the 6% capital gains tax is
beyond the 30 day requirement for paying the capital gains tax return, of
course interest will have to be paid or the forbearance of money on the part of
the government.
Availed once every 10 years.
So if your principal residence is used as collateral in order to pay your loan. It will
not be exempt from payment of capital gains tax because the purpose of the sale is
to pay the loan and not to acquire a new residence.
Sale to the government or any of its political subdivisions, agencies or GOCCs,
options
How about selling a principal residence or a real property to the
government? What is its taxability?
It is also one of the exceptions under payment of capital gains tax.
The taxpayer has the option to either:
1. Include as part of gross income subject allowable deductions and personal
exemptions, then subject to the schedular tax (5-32% ordinary tax rates); or
2. Subject to final tax of 6% on capital gains. (Sec. 24 [D], NIRC)
The other party of the transaction must be the government (local or national), any
of its political subdivisions, agencies or GOCCs. The individual seller has the option
to pay 6% Capital Gains Tax or the 5-32% ordinary income tax, whichever is more
favorable to him. That option will only come in if you already know how much the
selling price is. And usually, the government will not pay you more than the zonal
value. So probably the cost is close with the selling price, then opt for 5-32%
because your marginal profit is very minimal. But if youre selling price and your
cost has a wide gap or difference, then opt for the 6% capital gains tax. Although
this is an exception the general rule, it does not mean that the transaction is
exempt. Whether the transaction is an expropriation or a voluntary sale, that option
will still apply.
A question was raised regarding historical cost.
There is an old principal residence, there is a historical cost already. You sold it a
value at the time it was sold. And you purchased another house and you got an
exemption. The government will not benefit any tax from the transaction. If in the
future that new principal residence will eventually be sold not exempt from tax or
converted into ordinary asset subject to the 5-32% tax, this is the time where
historical cost will come in handy.
if in the future that new principal residence will eventually be sold, not exempt
from tax, or converted from ordinary asset subject to the 5-32% tax when historical
cost will come in hand, the old historical cost of the old principal residence will be
the new historical cost of the new principal residence, it will have a lower cost, and
if sold at a higher price in the future, there is a wide difference between the selling
price and the cost and this time the govt. will then get the full value of the tax. the
5-32% tax. For me its actually useless if eventually after 10 yrs. it will again be
sold as a capital asset still exempt, but it is converted to ordinary asset or sold to
the govt. subject to the 5-32% tax..that cost is compared to the selling price and
the net income is subject to tax and the old historical cost is used because the lower
the historical cost the lower the cost and if sold in the future there will be a wide
difference between the selling price in the future and the very old historical cost.
That is the way the govt. recovers tax not collected in the first transaction.
Student question: To avail of the exemption for sale of the principal
residence should the sale be after the acquisition of the new residence?
like if you sell the old principal residence while your new residence is still
in construction and when it was completed you sold your old principal
residence, can we still avail of the exception?
In the requirement it states that it has to come after the sale.
Let us say you own shares of stocks, sold at 37 dollars per share, you bought 1000
shares so a total of 37,000 dollars worth of shares. The prices of the shares
plummeted and you want to dispose of the shares so you sold it at 20 dollars per
share, losing 17 dollars per share.
CPG on sales of shares of stock (foreign shares to resident citizen)
Cost
$37 x 1,000 shares = $ 37,000
GSP
$20 x 1,000 shares = 20,000
LOSS
$ 20,000 * Not taxable for CGT but subject
to 5%-32%. However, at a loss,
not taxable
Would it be taxable in the Philippines? Where is the situs of intangible
assets?
It is where the seller is but there are exceptions, where the situs follows where the
foreign corporation is. When the foreign corp. is outside the country.
You were a resident citizen when the transaction happened, is that
transaction taxable in the Philippines?
Ok ____________ only applies to shares of stocks sold through the stocks
exchange are not (is that) of a domestic corporation, if it is not going from
domestic or not issued a domestic corp. the capital gains tax rules will not apply,
the ordinary income tax rates will apply. Here the issuing corporation is a foreign
corp., so CGT will not apply, the 5-32% rate will apply. She is a resident, so taxable
for income within and outside the Philippines., it must be taxable but only if..in
applying the 5-32% tax in the net income..did she earn from the transaction? No,
because she sold it at a loss the transaction is not taxable. That is so if that is the
only transaction within the year, because being only ordinary income tax, if there
are other transactions it will be added or lumped together and the net outcome will
be determined.
Now lets talk about shares of stocks issued by a domestic corp., what is
the taxability of the stocks issued by a domestic corp.?
Student: if it is listed in the stocks exchange it is of 1% of the gross selling price
or the gross value. if it is not listed or traded in the stock exchange it is 5% for the
first 100,000 and in excess of the 100,000 it will be 10%.
So of 1% stock transaction tax based on gross selling price or gross value and
monies provided in section 127 of your tax code will only apply if the shares of
stocks are both listed and traded in the Philippine stocks exchange. Even if it is
listed but it is not traded over the counter or through the Philippine stocks exchange
then the of 1% will not apply, what will apply will be the 5 and 10% capital gains
tax. The 5 and 10% capital gains tax will apply when the stock is listed but not
traded in the Philippine stock exchange or if not listed and not traded in the
Philippine stock exchange, and the basis of the 5 and 10% tax rate is not the selling
price but rather the net capital gain of the transaction.
So let us assume that the share is issued by a domestic corp. if the
domestic corp. and the stocks are listed and traded in the Philippine stock
exchange, will the transaction be taxable? At what rate?
Student: yes, at of 1%.
If it is not listed and traded in the Philippine stock exchange, will it be
subject to capital gains tax?
Student: no capital gains.
So the capital gains class.. assuming that the gross selling price of the
shares is 5 million, and the cost of the shares _________, this one is the
selling price in the deed of sale, where do you get the cost? the acquisition
cost? If the net capital gain is 1 million is not listed and traded in the
Philippine stock exchange, how much is the capital gains tax?
Student: 5% for the first 100,000 and in excess of the 100,000 it will be 10%.
If it is above 100,000 class dont automatically apply the 10%, you only apply it to
the excess of the first 100,000 after it has been subjected to the 5% tax. Ok, these
gross selling price is easy to get..it is what you have agreed with the other party,
but in reality there is already a regulation issued by the BIR that for purposes of
computing the capital gains tax in the sale of shares they use the gross selling price
but if the gross selling price is not the same with the fair market value, the
difference is subject to donors tax because it is as if you have donated that portion.
These Gross Selling Price (GSP) is what you have agreed with the other party. But
in reality there is already a regulation issued by the BIR that GSP for purpose of
computing the capital gain stocks in the sale of shares may use the GSP. But if it
turns out that the is different from the FMV or the book value of the shares of
stocks that had been sold, the difference will be subjected to donors tax, because it
is as if you have donated the portion. So if the FMV of the Shares of stock is 10M
and you sold it only for 5M. So the difference between the FMV and the GSP will be
subjected to the 30% donors tax rate. That would be considered as a indirect
donation even if you have no intent to donate. So it will be best in selling the shares
of stocks is to know the FMV to avoid paying additional donors tax.
Where do you get the FMV of the shares of stocks?
If it is listed in the stock exchange then get it at the rate on the day of
sale.
If not listed in the stocks exchange the FMV is the book value which can be
readily computed using the net worth of the corporation divided by the
number of shares issued at that time.
Take note of the 5% capital gains tax can only be avail once every 3 years.
So that if you want to avoid the 10% you cannot opt to sell it every month
with 100,000 for 10 mos. Diba you have a total of 1M capital gain. If you
want to avoid the 10% you may think on selling it on different (branches?)
at that time in order to have 100,000 CGT in every month so it will be
subjected to 5000 CGT. Total of 15k instead of paying 95 thousand that
will not happen because 5% CGT are only given once a year because every
tax payer enter into different capital transactions during the year shall be
require to consolidate all the capital transactions at the end of the calendar
year.
GSP
Cost
Net capital gain
P 5,000,000
4,000,000
P 1,000,000
Deed of Sale
Acquisition Cost
100,000 @ 5% = 5,000
900,000 @ 10% = 90,000
95,000
If you have a 3 year time deposit in the bank in Sweden, you earned
income interest in 1 million pesos. Will it be subject to Philippine income
tax and at what rate?
The situs is in Sweden because in interest income the situs is where the
debtor(bank) resides.
It is subject to Philippine income tax if the owner of the deposit is a RC

since they are taxed with income within and without the Philippines.
Not subject to final withholding tax but subject to 5-32
The bank in Sweden has no authority to withhold the interest since the BIR
has no jurisdiction over them.
The passive income that we going to discuss are subject to final withholding taxes
meaning that these income will no longer form part of the income at the end of the
year to be subjected to 5-32%, the reason there is that the income subject to final
withholding tax has already been taxed with finality. So whatever that maybe
withheld is the exact amount of tax due to the government.
So in saying that the interest income is subject to 20% withholding tax, then thats
it. Somebody has to be a withholding agent and the payor are usually the
withholding agents.
The income earner is the tax payer, the other party is the payor has the obligation
before paying the income earner to deduct the final withholding tax and as a
withholding agent of the government after deducting will remit it to the
government. So in order for these final withholding tax scheme to apply it has to
take into consideration that that withholding agent should be within the jurisdiction
of the Philippines, because if not we cannot ask whoever the payor is to withhold
the tax.
So what we are taxing subject to the final withholding tax are passive incomes that
are earned in the Philippines, THOSE THAT HAVE SITUS WITHIN THE PHILIPPINES
or earned in the Philippines.
What types of interest income are subject to the 20% final withholding
tax?
Those interest having situs in the Philippines

Ex. Interest earned from bank deposits.
How about interest earned from lending to EEs? Because sometimes EE
avail loans from their ER. Will the EE who is subject to Philippine
jurisdiction may pass a withholding agent and withhold the tax from the
interest which is 20%?
No, only banks are allowed to be withholding agents.

Lets say you are a NRC and has a deposit in Sweden, is this subject to
Philippine income tax?
If NRC incurs deposit abroad will not be subject to Philippine income tax
not the 5-32% and not even the 20% final withholding tax because the
income is earned outside of the Philippines. NRC are only taxable on
income within.
How about dollar deposits? Are they subject to the 20% final withholding
tax?
FCD: subject to 7.5%, but it will no longer be subject to the 7.5% if the
FCD are deposited in banks outside of the Philippines. So situs should be
Deposits under FCD, its not automatic that your deposit are subject to the 7.5% all
the time. That deposit must be made in the foreign currency deposit unit system of
the bank if the not (meaning its regular) then its subjected to the 20 % final
withholding tax. So the deposits:
1. The types of deposit that are subject to the final withholding tax: any
currency bank deposits in banks located in the Philippines
2. And they are subject to the 20% FWT
3. For FDCU they are subject to 7.5%
4. Long-term deposits
If a NRC, placed in money in a FCDUS in a Philippine bank or an offshore

bank in the Philippines is it subject to the 7.5% tax?
Special rates on Royalties:

works etc
Youre a NRC, youre working abroad. But you put in dollar deposits in the
Philippines. You asked your relative to put in your dollars in a Foreign Currency
Deposit Unit (FCDU) system in the Philippines.
Prizes and winnings, 20% or exempt
Will it be subjected to the 7.5% Final Withholding Tax?

FCDU follows a special rule, following the revision to the Tax Code: Only Residents,
both Citizens and Aliens (RA and RC ra) subject to the 7.5% rate. The rest are
categorized as non-residents, whether citizens or aliens. When they make deposits
under the FCDU system, these are considered as a deposit outside the country
therefor it is not subject to the 7.5% FWT. This is a special rule and this does not
apply to the other types of deposits.
Long term deposits, what are the rules?
Student: 5 years or more = exempt
Preterminated within 4 - less than 5 years = 5% FWT
Preterminated within 3 - less than 4 years = 12% FWT
Preterminated below 3 years = 20% FWT
What is royalty income? Definition from previous transcripts (wala nag i discuss
kaau kay example2 ra gihatag ni Dinsay, sala ni ni Dinsay haha)
20% FWT on Royalty Income only applies to passive activities. So, if Jollibee is
earning income from giving out franchises, the royalty payments every now and
then will form part of its gross income subject to 30% tax. It will not be withheld by
the franchisee of 20% final withholding tax because it is an ordinary income to
Jollibee.
Example: You used Facebooks logo for Facebuko shake in the Philippines. You are
required to pay regular monthly payments to Facebook.
1) Where is the Situs of the Income?
2) Is it subject to Philippine Income Tax?
3) At What Rate?
1.) Situs = Philippines. Situs is where the right is exercised. Here, the Facebook
logo is used in the Philippines for the Facebuko shake business
2.) Subject to Philippine Income Tax. Even though Facebook is a Non-Resident
Foreign Corporation, the situs is within the Philippines
3.) Subject to 20% FWT because the withholding agent, the payor, is a Resident
Citizen therefore within the control of the Philippines.
If somebody outside the Philippines will be paying royalties to Mr. J, he will derive
royalty income and the situs of the income would be where the royalty is exercised
(Outside gi exercise). It will not be subject to the 20% FWT because the withholding
agent is outside of the Philippines. It will be subject to income tax if J is a resident
citizen and the rate would be 5-32%. But if J is a Resident Alien, it is not subject to
tax because Resident Aliens are only taxed on their incomes within the Philippines.
Here, Js royalty income comes from outside.
applies to books, musical compositions and literary
GENERAL RATE: 20% Final Withholding Tax for prizes and winnings above P10,000.
EXEMPTIONS:
1.
PCSO and lotto winnings
2. Prizes and winnings to be exempt must be received on the occasion of:
3 Requirements:
a. on an achievement that is related to: religious, charitable, scientific,
educational, artistic, literary, or civic achievement
b. no act to enter on your part to such contest or proceeding
c. The recipient is not required to render substantial future services as a
condition to receiving the prize or award.
3. Prizes and Awards in sports competitions
It will be exempt if it is authorized or confirmed by the National Sports
Association or Philippine Olympic Committee, whether held locally or
abroad.
Example: You won lotto outside of the Philippines, will it be subject to
income tax? Where is the situs of winnings?
In the place where it is given. It was given abroad. If resident citizen, subject to
income tax 5-32% because there is no withholding agent.
In the tax code, prizes or winnings below 10,000 are not subject to the withholding
tax of 20%. If you won 10,000 in a raffle draw, it will not be subject to FWT but it
will still be subject to ordinary income tax of 5-32%.
If you won in a raffle draw in SM and it says that you will be given 1M tax
free, how much will you receive?
I will receive 1M, the tax being shouldered by SM, FWT of 20%.
Although we say that it is tax-free, is it really exempt from tax?
It is not really exempt from tax because SM shoulders the FWT of 20%. In
determining how much SM paid as tax, we determine the grossed-up monetary
value just like in determining grossed up monetary value in fringe benefits tax. So
since SM pays 20% as FWT, then what was received by the recipient of the winnings
is actually only 80% so 1M/.80=1.25M. So, SM actually paid 250,000 tax to the
government.
Hence,
SM
has
actually
spent
P1.25M
by
advertising
it
as
tax-free.
Without the advertisement of tax-free, with your P1M, how much will you
receive?
P 800,000.
Prizes & Winnings

1,000,000
.80
= 1,250,000
So the shares of stocks are given out as property dividends will it be

subject to tax or not?
Yes, at the rate of 10%.
BIR 250,000
20%
But if it is stock dividends?

Stock dividends are exempt . thats the difference.
Dividend income
Are interest or earnings from investments in shares of stocks.
Dividends may come in many form, such as?
Cash dividends, property dividends, stock dividends and liquidating dividends.
If you have share of stocks, in GMA network, will the dividends that you
receive in cash or in property be subjected to Philippine income tax?
The place of the issuing corporation and its a domestic corporation it has situs here,
you being a resident citizen you have taxable income within and without.
Subject to withholding tax and rate:
Cash dividend 10%
Property 10%
Stock dividend exempt
Liquidating dividend 5-32%
You receive cash dividends from investment in Facebook?
Since Facebook is a foreign corporation, its operations are not within the Philippines
therefore it cannot be a withholding agent. But if the tax payer is a resident citizen,
the income he obtain from such cash dividend or property dividend forms part of his
gross income subject to ordinary rate of 5-32%.
Property dividends, it can be any type of property that may be given other than
cash, it is an be inventory, cans of goods, promissory notes, script dividends (its for
the stockholder to collect from the receivables), houses, furnishings, etc.
If shares of stocks are given out as dividends, will it always be called stock
dividend? Or may it be a property dividend?
If the stocks issued by the issuing corporation are the stock are the stocks of the
issuing corporation then it would be considered as a stock dividend, but if the
shares of stock issued by the issuing corporation are stocks of another corporation
then it is a property dividend.
In what way can a corporation can give out stocks as dividends that which
is not called a stock dividend? As a corporation why will you give out share
of stocks to stockholders when you are not the issuing corporation of those
shares of stocks?
If a corporation, owns share of stocks in another corporation as an investor it may
opt to give out these stocks instead as a dividend. So let us presume, here is ABC
Corporation, if it issues its own share of stocks to its stock holders its called stock
dividends, but if ABC Corporation is also a stockholder in XYZ Corporation, ABC
holds shares in XYZ. If it decides to give out the shares held in XYZ Corporation to
its stockholders its not called a stock dividend but that is called property dividend.
Why? The XYZ shares of stocks held by ABC Corporation is part of its property. And
its when you can give out stocks of another corporation, by this act ABC Corporation
is making its stockholders also stockholders of XYZ corporation.
Why are stock dividends are not subject , as a general rule, to income tax?
Stock dividends are exempted because these stock dividends are really inchoate,
they are actually surplus added to the capital. Stockholders possess mere inchoate
rights on these dividends.
Why is it inchoate?
Because it is not yet realized. Stockholder has not yet received such stock dividend.
But when a stock dividend is declared by the members of the board of
directors of a corporation, what can the stockholder expect?
Stockholder can expect an addition to or an increase in his capital or number of
share but he cannot expect to receive any money, property etc.
Merely a transfer from the surplus or profit account to the capital, no money is
given no property is given to the stockholders. Its merely an entry in the books
increasing the number of shares held by that stockholder in the corporation in
proportion to its original percentage of stockholding. So let us say for example, you
create a corporation 40 of you here putting 1 million peso to the corporation. If the
share or the value of each share is 1 peso, thus each stockholder each own equally
1 million share. For stock dividends, the corporation will simply transfer its surplus
profits to the capital, if it decides to give you 1 million capital each in addition you
will now have 2 million, and you will have 2 million shares, will it be taxable? Not as
yet because you will not be given physically. Stock dividends are only being
represented by your stock certificate wherein it will give you the additional 1 million
shares on top of the original 1 million shares.
Where would dividends come from?
Usually its from the profits of the corporation.
Illustration:
RM 404
40M Total Capital
1M Capital/per SH (stockholder)
1/share
Day 1
Assets
40M
Liabilities
-0Net Worth
40M
Capital
40M
Profit
0
5 Years
500M
400M
100M
40M
60M
RM 404
40M Total Capital
1M Capital/per SH (stockholder)
1/share
Day 1
5 Years After SD
After SD
500M
400M
100M
80M
20M
Cancellable/Redeemable
Assets
Liabilities
Net Worth
Capital
Profit
40M
-040M
40M
0
500M
400M
100M
40M
60M
500M
400M
100M
80M
20M
(40M)
40M
20M
Stock Dividends
GENERAL RULE: Thats the general rule, tax dividend declarations are not subject
to income tax.
EXCEPTIONS:
First Exception - A stock dividend constitutes taxable income if it gives the
shareholder a higher interest compared with what his former stockholdings
represented.
So when tax dividend declaration would result to change in interest or benefit of any
tax holder, then the differential shall be subjected to the income tax.
Illustration of SD with no change in the interest or ownership:
Stockholder
A
B
C
D
E
TOTAL
20%
20%
20%
20%
20%
100%
Before
SD
8M
8M
8M
8M
8M
40M
SD
After
Final
SD
5M
13M
20%
5M
13M
20%
5M
13M
20%
5M
13M
20%
5M
13M
20%
40M
80M
Diff: 5M-5M = 0 (not taxable)
Illustration of SD with CHANGE in the interest or ownership:
Stockholder
A
B
C
D
E
TOTAL
20%
20%
20%
20%
20%
100%
Before
SD
8M
8M
8M
8M
8M
40M
SD
After
Final
SD
5M
13M
16.25%
5M
13M
16.25%
5M
13M
16.25%
5M
13M
16.25%
20M
28M
35.70%
40M
80M
Diff: 20M-5M = 15M (taxable)
15M is taxable because it increases the interest of the tax holder.

Its very easy, right?
Scenario: It is when the board of directors favoured E, thats why he got 28M.
Second Exception: - In cases where the stock dividends are given in the guise of
cancellable and redeemable shares issued by the corporation, if the time and
manner of giving it is really in the guise of cash dividend declaration just so to avoid
taxes.
If I am a member of the BOD of the corporation of which you are a
stockholder and I gave you cancellable and redeemable stock dividends,
what do you expect from me?
Student: I can cover it to cash!
Instead of directly issuing it as cash dividends, it went to the route of giving it as
redeemable shares.
So if, in order, the manner in the filing of the stock dividend declaration by the
corporation would amount to the evasion of tax on dividend declaration, para lang
to evade the tax due of 10%, it gives out stock dividends which are cancellable and
redeemable but the holding period of such stock holder is so short of time that it will
be cancelled and be redeemed and exchanged for cash by the corporation. Its just
like cash dividends subject to 10% tax. So long as it can be or the requisites there
are:
1. The manner of giving it
2. The time of giving it, and
3. The time of redemption
IF it would amount to a cash dividend declaration, then it would be subjected to
just like any cash dividend declaration (10%)
The purpose of giving redeemable and cancellable shares is to avoid the 10% final
withholding tax.
But if what is redeemed is not only the shares of stock given as stock dividend but
also your initial capital. Then the redemption of your initial capital is not an income,
it is a RETURN OF CAPITAL which is not subject to income taxation.
Lets say for example, by next week (short period), you will return back your shares
of stock, and then the corporation will issue cash. Thats taxable!
It is somehow a mode of evading tax.
Are liquidating dividends taxable?
It depends. If it amounts to an income to the Stockholders.
When does it amount to income?
Now showing: JAREDs Illustration (with 5 minimum stock holders)
Assets
Initial Capital
After Dissolution
Gain
A
5M
10M
5M
B
5M
10M
5M
C
5M
10M
5M
D
5M
10M
5M
5-32%
E
5M
10M
5M
No FWT
If you have a net asset after liquidation, which is paying off the liabilities of the
corporation, you distribute that to the stock holders in accordance to their interests.
In that example (referring to Jareds) you placed them in equal footing, they get
20% of the remaining net asset of the corporation.
How much is the taxable income?
Only the (KKKKKKKK, nagtabi sila) received at the end of the line less the capital
investment that he has, whether initial or additional capital investments since there
may be capital investments during the operation, in that example a total of 5
million.
The difference is that it has gained how much?
5 million. To get the 10 million, the income is subjected to tax as a liquidating
dividend. And what tax rate? 5 to 32% ordinary tax rate. Will it be subject to final
withholding tax? No, because at the time of the dissolution, the corporation now
cannot become the withholding agent, rather any difference or any gain from the
investment will be reflected as part of the stock holders gross income at the end of
the year, paid at 5 to 32% together with other income.
If it is the other way around, you had an initial investment of 10 million
and the distribution is only 5 million, is it a taxable income?
No.
How about partnerships?
Partnerships are not really corporations. But for tax purposes, corporation includes
taxable partnerships.
Will the income of the partnership be considered at the end of the year (the
net income) dividend to the partners and subject to final withholding tax?
How do you classify partnerships for tax purposes?
Taxable partnership and a non-taxable partnership (General Professional
Partnership or GPP in this case) Any income derived by a GPP is proved to be
constructively received by the partners and will form part of their gross income.
Subject to final withholding tax? No.
Taxable partnerships. You (2 or more) formed a partnership and you registered it at
SEC. Any income that you earn in this type of partnership will be taxable, just like in
any other corporation. At the end of the year, after your taxes has been paid as a
partnership, any share in the net income that goes to the individual partner will be
considered as dividend and will be subject to 10% final withholding tax. So the 10%
final withholding tax does not only rely from dividend given by corporation, but also
the shares of the partner in a taxable partnership, the share of a person in a joint
venture or concession.
Annuities, proceeds from life insurance or other types of insurance.
Just remember to relate it with what you learn from exclusions from gross income.
If it is excluded, then it is not taxable. If it is not an exclusion then definitely it will
be taxable at 5 to 32% ordinary tax rate since there is no withholding in annuities
etc.
Pensions, retirement benefit or separation pay
Also check with the exclusions from gross income. If it falls under the non-taxable,
then not taxable. If it is taxable then it is subject to the ordinary rate of 5 to
32%.
Income from any source whatever.
I can put any type of income, which income is taxable and which income is not
taxable.
Forgiveness of indebtedness.
If it is given because there is service rendered, then it is subject to income tax. If it
is gratuitously given, then it is subject to donors tax.
Recovery of accounts previously written off.
If you have a receivable from the customer, and that customer has been judicially
declared as bankrupt, what will happen to your receivable? It will be written off the
books now. It is no longer a collectible, worthless. Because of that fact, you are
allowed by law to deduct whatever collectible as an expense. Now if you deduct it to
the expense, what will be the result? You diminish or lower your income tax liability
to the government. That is the first event that took place.
When we talk about recovery, it means subsequent collection. If that amount which
you have considered already as worthless and uncollectible, and you have deducted
it as an expense which lowered your income tax liability, such will be collected in
the future, for example the said person judicially declared as bankrupt won the lotto
and is now willing to pay you, will that payment be taxable? Yes, to the extent it has
benefitted the tax payer. What is the said extent that benefitted the tax payer? To
the extent that it reduced the income tax liability of the tax payer.
MAM TIUs 1st Illustration
Sales, Cost or Capital. From your sales, you deduct any cost you have spent = gross
income. And you are allowed as a business to deduct expenses. And youre allowed
to deduct collectibles that are already worthless and net taxable income. This is
where you apply your 5 to 32% rate. This will result to your tax due
If in 2005, you have sales of 10,000 and you have capital of 5,000 so your gross
income is 5,000. Your ordinary and normal expenses is actually 3,000. But during
this year, your customer who owes you 2,000 was judicially declared bankrupt. So
you claimed this as your ordinary and normal expense, this is not something you
claim every year. How much is your net taxable income? 5,000 plus the said
deductions (in short, subtract them), so you have zero.
Did the government benefit?
No.
In 2012, same amount. No improvement in the business same type of expense. You
have a net taxable income of 2,000. Your debtor suddenly presented himself and
gave you the 2,000 as payment. Will it be a taxable income in 2012? YES. The
reason why it is taxable in 2012 is that you were benefitted in 2005, resulting to
zero taxes. The recovery of previously written off debts is taxable only to he extent
that it has benefitted the tax payer.
Assets
Costs/Ret. Capital
Gross Income
-Expenses:
Ordinary
2005
10,000
5,000
5,000
2012
10,000
5,000
5,000
3,000
3,000
Bad Debts
Net taxable income
x 5% 32%
Tax Due
2,000
-0x 5% 32%
-0-
2,000
2,000
4,000
MAM TIUs Edited Illustration (when it will not benefit the tax payer)
Lets go back to 2005. If your ordinary expense is 5,000 and you have 2,000 as bad
debts, it still results to zero tax. In 2012 you recovered, will it be taxable? No. even
if you have not deducted the bad debts, you will still have zero tax.
Assets
Costs/Ret. Capital
Gross Income
-Expenses:
Ordinary
Bad Debts
Net taxable income
x 5% 32%
Tax Due
2005
10,000
5,000
5,000
2012
10,000
5,000
5,000
5,000
-0-0x 5% 32%
-0-
4,000
-01,000
2,000
3,000
MAM TIUs Illustration of Partial

Lets go back again to 2005, you have ordinary expenses of 10,000. If you had no
bad debts to deduct, you have to pay 1,000 (taxable. But since you have 2,000 to
deduct, you pay zero. If you recover the 2,000 in 2012, will it be taxable as a
recovery? Yes. To the extent of 1,000 only (extent that you benefitted)
Assets
Costs/Ret. Capital
Gross Income
-Expenses:
Ordinary
Bad Debts
Net taxable income
x 5% 32%
Tax Due
2005
10,000
5,000
5,000
2012
10,000
5,000
5,000
3,000
2,000
-0x 5% 32%
-0-
3,000
-01,000
1,000
2,000
Receipt of tax refunds or credits.

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TAXATION 1

Taxation is inherent in ever sovereignty, exercised by the legislative branch of the

We were saying that the power of taxation is inherent in every sovereignty.

Student: Yes maam, as long as there is compliance to the substantial and

Student: Income tax, excise tax... etc. (di maklaro)

But it should be within our taxing jurisdiction

Bureau of Customs (same with BIR, headed by its commissioner, under

Basic Principles of a Sound Tax System

Theoretical justice or equality

What does theoretical justice mean?

Supreme in character- supreme only up to the extent to the selection of

The scope and limitation of taxation:

Can a non resident alien be subjected to community tax?

And who really determines the public purpose?

Unlimited in the sense that even courts scarcely venture in declaring it

NO, because it is a guaranteed right of the Supreme Court. Otherwise

Is the senior citizens act granting exemption (20%) on the

Inherently legislative, non delegation unless expressly stated by

within the framework of the national development program of the

It is inherently legislative, we all agreed to that. Only the legislative branch?

If you remember, the 10% VAT was increased to 12%. Where

How will territorial jurisdiction limit on the power to tax?

What is the situs of taxation? An example?

So in the Philippines, we being resident citizens, we are subject to the jurisdiction of

Residence, capitation or cedula is based on the residency not on nationality or

Student: only up to the real property is exempted.

Are REGRESSIVE taxes prohibited?

Regressive taxes are not prohibited however the constitution encourages

The constitution does not directly prohibit the imposition of regressive

entity. But by virtue of constitution, non-stock, non-profit educational institutions

Why is it different with granting?

Substantive and Procedural.

In order to make a valid classification, the classification must be:

What does it say?

Taxation distinguished from police power and eminent domain

What are the requisites to make the tax law valid?

Taxpayer may be imprisoned

Generally payable in money

Does not draw interest unless

Imposed by public authority

Prescriptive periods for tax are

What do you understand of capitalization?

200M 90M = 110M x 30% = 33M

Was there avoidance or evasion of the tax?

Is difficult to prove because it is a state of mind. It builds on a thought of

The declared income was very minimal, so those which he defended as

Therefore his failure to declare for taxation purposes for 2 consecutive

It is BASED ON CONTRACT, so it cannot violate the non-impairment of

Are tax exemptions transferable?

of eliminating double taxation:

What do you understand on mandatory and directory provisions of the tax

What type of rulings should always be issued by the Commissioner and no

What are rulings of first impression?

With respect to the prospectivity and retroactivity of our tax laws?

Can the secretary of finance issue an opinion?

It can only be allowed if it is not harsh and oppressive.

Student: I think the Secretary is restrained in promulgating regulations and rules

When a regulation or an opinion is issued and subsequently revoked by the

Why do you think the secretary would give you an opinion?

When the taxpayer seeking exemption deliberately omitted/ misstated material

*In all cases, it is about the data presented by the taxpayer

General rule, there can be no retroactive application of a repeal of a regulation, a

Taxation is statutory in nature. Without tax law, no taxes imposed.

Construction and interpretation