TAX PART 1 Compiled PDF

PART 1 Taxation Law
Notes by: Justice Dimaampao
These notes are meant to be shared to all who may benefit from it, provided, that THE
USER SHALL NOT IN ANY MANNER WHATSOEVER DELETE, DIMINISH, OR OTHERWISE
REFUSE TO GIVE CREDITS TO THE PEOPLE WHOM MADE THIS. Whoever does such
ungrateful and dastardly acts shall most definitely suffer the consequences under the
law of karma and no amount of prayer can save them from its effects. This was made
available through the collective efforts of the following UST bar examinees and
friends:
aaa
henry
lord V Marj
leo rob dk
nick g. tracy bryan louie levie

julan rommel claudette dennis m.
myrtle
TAXATION Part 1
Justice JaparDim aampao
(page 1 missing)
j. Substituted Fuling of Income Tax Return

A. SCHEDULAR SYSTEM OF TAXATION and GLOBAL SYSTEM OF TAXATION:
1. TAN vs DEL ROSARIO - 237 SCRA 324
> Landmark case that was asked twice already in the Bar Exams
> The two recognized systems of income taxation:
a. SHEDULAR SYSTEM OF TAXATION
-> Is the system of taxation adopted in imposing taxes on the income of individual
Taxpayer
SC: The Schedular System of Taxation is the system employed wher e income tax treatment
varies and made to depend on the kind or category of the taxable income of the taxpayer.
It is a system that provides for different tax rules or treatments.
By making it depend on the kind or category of taxable income, it means that it classifies or
categorizes income
1997 Bar: discuss the meaning of Schedular Tax System. Possible modification: How does
the Tax Code impose tax on the income of individual TP?
These features are incorporated in the present tax code.
IMPORTANT CHARACTERISTICS OR FEATURES
i.
Income is classified or categorized
Section 32 A gives 11 categories (actually 13)
Sec 32. Gross Income (^). General Definition Except when otherwise
provided in this title, gross income means all income derived from whatever
source, including but not limited to the following items:
1. Compensation for services in whatever from paid, including but not
limited to fees, salaries, wages, commissions, and similar items;
--------------------------------------------------------- Page 1 of 114 --------------------------------------------------------retyped and compiled by: Calvan, Cayaban, Federio, Jumalon, Lacap, Macaraeg, Quinto, Tecson, Santos, Villanueva (May 2012)
PART 1 Taxation Law

2.
Gross income derived from the conduct of trade or business, or the

exercise of a profession;
3. Gains derived from dealings in property
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities
9. Prizes and Winnings;
10. Pensions; and
11. Partners distributive share from the income of the genera l partnership
ii.
It provides for different tax rules or treatment

1. How are dividend income, royalties, prizes and winnings taxed? Correlate
with Sec 24 and 25 where you will find the different tax rules and tax
treatments that may apply
2. Do not memorize 24 and 25. Just try toi read
. Sec 24
. Sec 25
So, to answer the question, How does the tax code impose tax on income of
the individual taxpayer?, Just state the 3 characteristics. The answer ther efore
is: the income of the individual taxpayer is taxed under the schedular system of
taxation. Under this system, it operates as follows or has the following
characteristics:
1.
2.
3.
The income of the taxpayer is categorized or classified;

It is subject to different tax rules or treatment; and
The tax code imposes different tax rates on these different categories of
income
There are 3 basic rules / formula that you should remember here:
A.
Where income is derived from the performance of services, Sec 35

applies. From gross compensation income is deducted personal and
additional exemptions. Also to be deducted under Sec 34(10) are
premiums on hospitalization and heal; Insurance (2001 Bar). After
such deductions, you arrive at Taxable Compensation Income
B.
Where income of individual TP partakes of the nature of business

income, different tax treatment applies. The formula is as follows:
Gross Income fro m th e conduct of trade or business or the exercise of
the profession less allo wable deductions under Sec 34.
Personal and additional exemptions may not be deducted as these are
allowable only in compensation income.
C.
Where income is derived solely from income subject to final tax, as in

dividends received from a domestic corporation, such is not included
in gross income. The tax withheld will constitute a final settlement on
the tax liability on that particular income.
. Fringe benefit is subject to final tax under 33A. The individual
TP is not report this as part of gross income because the tax
Withheld which is a final tax will serve or constitute a final
PART 1 Taxation Law

settlement on the on the tax liability on that particular
income.
. Other income subject to final tax royalties, interest on bank
Deposits, prize and winnings.
iii.
It imposes different tax rates

. Sec 24 and 25 provide for different tax rates which are known as
The progressive rates of income tax.
b. GLOBAL SYSTEM OF TAXATION

-> one adopted in imposing tax on income of corporate taxpayers
ROSARIO. The SC said it is the system where the tax treatment views
indifferently the tax base, and generally brings in one (?) form a. categories of
Income of the taxpayer.
. Indifferently views the tax code - means uniform tax rules or tax treatments
. generally brings in one form all categories of income of the taxpayer means that
It does not classify or categorize income
Global system is really the opposite of Schedular Tax System
Secs. 27 & 28 are the 2 important provisions as far as Corporate Taxpayers are concerned.
These are classifications similar to 32A.
. In 32 A it classifies income into 11 categories. Here in Secs. 27 & 28, the rules are
uniform as far as Domestic Corporations are concerned, subject to certain exceptions. Also,
the rules are uniform as far as Non Resident Foreign Corporations are concerned. And also
uniform as applied to NRFC
. Sec 27
. Sec 28
So, uniform corporate tax rules, subject to certain exceptions. No classification of income
and also imposes a uniformed or fixed corporate rate of 35%. The 32% has been amended to
35% by RA 9337 (EVAT LAW) which took effect on July 1, 2005.
B. INCOME TAX SITUS: (Relevant Provision in Sec 23)
Sec. 23. General Principles of Income taxation in the Philippines. Except when otherwise
provided in this code.
A. A citizen of the Philippines residing therein is taxable on all income derived from
Sources within the Philippines;
B. A nonresident citizen is taxable only on income derived from sources within the
Philippines;
C. An individual citizen of the Philippines who is working and deriving income from
Abroad as an overseas contract worker is taxable only on income from sources
Within the Philippines. Provided, that a seaman who is a citizen of the Philippines
PART 1 Taxation Law

and who receives compensation for services rendered abroad as a member of the
the complement of a vessel engaged exclusively in international trade shall be
treated as an overseas contract worker;
D. An alien individual, whether a resident or not of the Philippines, is taxable only on
Income derived from sources within the Philippnes;
E. A domestic corporation is taxable only on all income derived from sources within
The Philippines; and
F. A for eign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the Philippines.
1996 Bar: Basis on imposing income tax (RPN): (Tan vs Del Rosario)
1. R residence
2. P place where the income was derived; and
3. N nationality or citizenship
Residence:
Resident-Alien can be taxed on his income derived from sources within
RFC basis of the imposition of tax is the conduct of business in the Philippines
Place :
NRA come can only be taxed from its income derived from sources within the
Philippines
NRFC can be taxed from its income derived from sources within the
Philippines
Nationality:
- The place is not basis, it is the nationality. Thats why even the income
derived from sources without can be taxed.
- you know that Resident Citizen (RC) and Domestic Corporation) can be taxed
(Sec 23 (A&E) on income derived from sources within and without the
Philippines.
. please be reminded of the amendment because this has been the subject
of misleading 2002 bar Q: #1 regarding NRC and NRA. Take note of the
effectivity of RA 8424, Jan. 1, 1998.
. These rules in Sec 23 about NRC (that they can only be taxed on Income
Derived from sources within, and so is with Resident Alien, took effect on
Jan. 1, 1998
. therefore, if the income was derived in 1997, within and without, it is sub -
PART 1 Taxation Law

ject to tax.
Without of a seaman or NR Citizen. Severa l examinees answer the Q. under the new rule. This is
Not correct. What they have in mind is that the 1997 Comprehensive Tax Reform Act took effec t
In 1997. This is not correct. This RA 8424 took effec t on January 1, 1998.
. Please be reminded about this. That these individual taxpayers (Nonresident Citizen
and Resident Alien) have been the subject of the amendment introduced by RA 8424.
. they could only be taxed on their income derived from sources within and without
in 1997, or before 1998. But starting 1998, they could only be taxed on their
income derived from sources within the Philippines.
. the word used by the SC in describing the present income tax situs, and this is also
provided under the present tax code is COMPREHENSIVE. The SC said we have
adopted a Comprehensive Income Tax situs xxx because we have practically
adopted all the possible criteria in imposing tax on income (residence, nationality or
citizenship, and place).
Q: Why is that the income derived by Resident Citizen from sources within and without is subject to
Tax? What is the rationale behind this? What is the basis for this?
CIR vs Lednicky (re: Partnership Theory) GRN L-18160 July 31, 1964:
Issue: Right of the Philippine Government to tax the income of r esident from outside the
Philippines.
Held:
the right of a government to tax emanates from its partnership in the p roduction of in come,
By providing the protection, resources, incentives, and proper climate for such production, the inter pretation given by the respondents to the revenue law provision in question operates, in its applica tion, to place a resident alien with only domestic sources of income in an equal, if not in a better,
position than one who has both domestic and foreign sources of income, a situation which is mani festly unfair and short of logic.
NOTE:
This case was decided during the OLD Tax Code
Under the principle of Personal Jurisdiction, wherever you go, citizens in the Philippines, you are
Entitled to the protection of the Philippine Govt. This is in relation to Partnership theory between
The Taxpayer and the State- The State will provide protection but in return you have to pay taxes. The right of the Govt therefore, to impose taxes on income must be based on its capacity to extend protection. In other words,
If the Phil. Govt cannot provide protection, then it has no right to impose taxes. As simple as that.
This is the reason why the income derived by the Resident citizen from sources without can be
subject to Philippine income tax.
PART 1 Taxation Law

SUMMARY:
KIND OF TAXPAYER
CRITERIA or INCOME TAX SITUS
RC
Residence and Nationality
NRC
Place
Residence
SOURCES of TAXABL E INCOME

Within and without
Within
Ws incomeithin
They can claim personal and

additional exemptions and as well
as deductions
NRA
Place
Within
In certain cases, they are not

allowed to claim deductions
DC
Nationality
SFC
Residence
NRFC
Place
Within and Without

Within
Within
They are not allowed to claim

deductions
C.
DETERMINATIVE TEST OF WHETHER THE INCOME IS TAXABLE Doctrine

Of Constructive Receipt of Income:
.
This is cited in the case of Filipinas Fiber Corp. vs CIR. The SC said that it is not the actual
receipt of income but the right to rec eive that determines when to include an amount as
income in the gross income. This is the most important pronouncement of the SC in this case
which you should remember. This is consistent with the Doctrine of constructive receipt of
income.
FILIPINAS SYNTHETIC FIBER vs. CA - GRN 118498 October 12, 1999
Under the accrual basis method of accounting, income is reportable when all the events have
Occurred that fix the taxpayers right to receive the income, and the amount can be
determined with reasonable accuracy. Thus, it is the right to receive inco me, and not the actual
receipt, that determines when to include the a mount in gross in come whether then income is
taxable.
->
In title ii, there are specific rules regarding Constructive Realized Cash or Property
Dividends. The rule is provided in Rev. Reg. #2 Sec. ____ . It gives us 2 requisites:
1.
The income or the amount must be credited to the account of the taxpayer
PART 1 Taxation Law

Or set apart or set aside for the taxpayer, and
2.
It must be unconditional; that it is, not subject to any limitation or restrictIon. The right to rec eive must not be subject to any contingent event
Examples:
a.) Dividend income perceived to be r eceived from Domestic Corporation it
is not required that the stockholder must actually receive the dividends before the 10% tax must be imposed. As long as it is set apart for the stockholder and the latter could demand the same without any limitation, the
10% tax may be imposed to the corporation
b.)
As cited in Rev. Reg #2 , the Partners Share in the Income of the Partnership it is not required that the share of such partner as actually received
or distributed. As long as the partner could demand the same without any
limitation or restriction, such share is already taxable.
Classic example using the word credited - interst income on Money Deposit
->
If you have money deposit in the bank that earns interest, such interest
Income is credited to your account. So, constructive receipt of income. An
Example of an income that is constructively in your hand, you have yet to
Receive the same, no actual receipt, but i t is already subject to 20% tax. The
20% Final Tax already applies because the 2 requisites are present (1) credi ted to your account and (2) you can withdraw the same anytime during the
taxable year without any limitations or restrictions.
Case: Limpian Investment vs. CIR (?) What is the income considered as constructively received here? It is the rentals deposited in court by the lessee as a result of the unjustified refusal
of the lessor to accept the same. The rentals were consigned in court. The r entals deposited in
court is considered as constructively received by the lessor because the lessor can withdraw the
same without any restriction. So, take note of this constructive receipt of income.
D.
BASIS FOR THE COMPUTATION OF TAXABLE INCOME:

->
If you have not read Sec. 43, you cannot answer this.
Sec. 43.
General Rule the taxable inco me shall be computed upon the basis of th e taxpayers
Annual accounting period (fiscal year o r calendar year, as th e case may be) xxx
->
If we try to analyze, it uses the words basis, than taxable income, then computed. It shall be
computed on the basis of what? Answer: your taxable income shall be based on either of these
accounting periods: 1) fiscal year period or 2) calendar year period
PART 1 Taxation Law

1990 Bar. There was a Q. on the distinction between these 2 accounting periods. The importance of
This Q. is that it tells us that there is a basis in the computation of the taxable income. These terms
Are defined in Sec. 22 P & Q.
Sec 22.
Definitions (P) The term taxable year means th e calenda r year, or the fiscal year ending during
Such calendar year, upon which th e net in come is co mputed under this title. Xxx
(Q) the term fiscal year means an accounting period of twelve (12) month s ending
on the last day of any month oth er than Decemb er.
->
You must know these terms because individual taxpayers can only adopt the calendar year
Period. Starting January 1 and as defined under Sec 22 Q. Fiscal Year Period is that Accounting
Period of 12 months ending on any month other than December. Ther efore, Fiscal year Period
Can only be applied to corporate TP. Corporate TP have the option either to adopt the calendar
Year period or the fiscal year period.
.
Correlate with Sec 77B. Youll find therein that Corporate taxpayers have the option
To adopt calendar year period or fiscal year period. But in the case of individual tax payers, there is no choice but to adopt the calendar year period. So the taxable
period will cover only from Jan. 1 up to Dec. 31. You must master this so as to corre
late with Sec. 229
->
Under Sec 229, and you are Familiar with this Doctrine the 2 year period
Shall commenc e to run from the filing of the final adjustment corporate tax
Return;( __________ vs. CIR 205SCRA184). You ought to know whether the Cor poration adopted the fiscal or calendar period.
There is no problem if the corp. has adopted the calendar period because it is April
15. What if it adopted the fiscal year period? When can you apply this 2 year period?
Sabe, the 2 year period of filing the tax refund shall commence to run from the filing
Of the final adjustment corporate tax return.
->
if the corporation has adopted the fiscal year period, then it is not April 15. Sec.
th
th
77B says on the 15 day of the 4 month, following the end of the taxable
period. So if the fiscal year ended on June 30, you count 4 months --- July, Aug.,
th
th
September, and October. On the 15 day of the 4 month following the end of
the fiscal year period. So that would be on October 15. So correlation
.
It is really very important to correlate because questions will be asked on the appli cation of the 2 year period and the problem will state that the corporation has adopted the fiscal year period. Take note of sec. 77B, it is not April 15.
PART 1 Taxation Law

E & F.
NET INCOME TAXATION and GROSS INCOME TAXATION:
NET INCOME TAXATION (NIT) vs. GROSS INCOME TAXATION(GIT):

.
NIT one generally adopted under the present tax code. Bases are Secs. 34 & 35
-> Under Sec. 34 (Deduction from Gross Income) . NIT allows deductions. It also grants
Exemptions, basic and additional personal exemptions under sec. 35.
GIT can be applied or adopted under exceptional cases.

->
It is really correct to say that we have not adopted GIT
->
Sec. 25 B, C, D, and E, speak of gross income
->
Sec 25 B: the provision says the income tax is imposed on the entire income. That
Means that the basis is Gross income. The subsequent paragraphs (C,D, and E) consis Tently say or provide or use the word gross income.
Who are these individual taxpayers whose income shall be taxed at gross , and therefore the
Method of taxation is GIT? NRA-NETB
->
The income of these individual taxpayers is taxed at Gross, therefore, the method or
System that apply to whom is GIT
Who are these individual taxpayers who cannot claim any deductions/exemptions?
NRA-NETB
As regards Corporate taxpayers:

->
Sec 28 B (1,2,3, & 4) provide for those corporations tax under GIT
->
Sec 28 B (1) the 35% corporate income tax is imposed on Gross Income
(2) the 25% corporate income tax shall be imposed on gross income on
Rentals
(3) the 45% corporate income tax shall be imposed on gross income on
Rentals or charter fees
(4) the 7.5% corporate income tax shall be imposed on gross income on
Rentals or fees.
Corporations covered by Sec. 28B (1,2,3, &4) are nonresident foreign corporations. So,
Corporate taxpayers who cannot claim deductions are NRFC. The method of taxation applied
To these corporations is no doubt, GIT.
Simply put NIT is the Rule. GIT is the exception to the rule. Exception in the sense that it
Applies only to these 2 kinds of taxpayer:
1.
Individual NRA NETB; and
2.
Corporate Nonresident foreign corporation
1997 Bar:
Explain NIT
2000 Q. 10: Define Net or Taxable Income (the word taxation is not present here)
PART 1 Taxation Law

1983 Bar:
Explain the meaning of GIT
1995 Q. #1: Define Gross income

--- the use of the word taxation really matters
.
In 1995 Q.#1 Define Gross income. 1 examinee answered: One where the tax is imposed at
gross. This is not really correct. This maybe partly correct if the Q. asked was that of 1963
Bar, because if we speak of GIT, that is really the method or system
If the Q. is the Definition of Gross Income, then you really have to enumerate the items
Under Sec. 32. A.
GIT is a method or system that allows no deduction; it grants no exemptions. In other words, the tax
base or the basis of the tax rate is Gross Income.I n other words, the tax base or the basis of the
tax rate is Gross Income.
NIT not the same with Net Income or Taxable income. Sec. 31 (one sentence provision) defines Net or
Taxable Income. Do not confuse this with the concept of NIT because the word taxation con notes methods or system
.
Sec 31 Taxable Income Defined The term taxable income means the pertinent items of
gross income specified in the tax code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this code or other special laws
So what then is Net Income Taxation? How does it operate? --- NIT allows deductions and
grants exemptions. The basis of the tax rate is taxable net income as defined under Sec. 31
. Probable Bar Q. here: What are the distinctions between GIT and NIT?
->
Answer:
1. As to the claim for deductions or exemptions: GIT No exemptions/deductions; NIT
allows deductions and grants exemptions ;
2. As to the basis of the tax rate: GIT Gross Income; NIT Net Taxable Income
3. As to the applicability under the tax code:
GIT applies to 2 taxpayers: 1) NRA-NETB (Sec. 25 B, C, D, & E) NRFC (Sec. 28B
(1, 2, 3, & 4))
NIT applies to the following taxpayers: 1) RC; 2) NRC; 3) RA; 4) NRA-ETB; and
And Corporate 1) DC ; 2) RFC
Q.: Are you in favor for the adoption of GIT? Congress is proposing a change from NIT to
GIT
->
This maybe a bonus Q. but your answer or opinion must be based on tax. Point out sig nificant advantages. Theres no such thing as perfect system because both have their
own disadvantages.
As regards NIT, it allows deductions and grants exemptions. Therefore, the tax paid is less.
I think we can develop advantages on this
PART 1 Taxation Law

->
Try to recall these, as these are the characteristics or features of NIT.

1)
To the taxpayers, they may consider this as fair, just and equitable system of taxation. One or two sentences will suffice and you have to explain that. Favorable/
fair in the sense that taxpayers can claim those business connected expenses as
deductions, and taxpayers can also claim exemptions;
2)
This brings us to the nex t advantage, as cited in Sec 2 (State Policy) of RA 8424. This
is one of the underlying purposes of the amendments. It says that it provides for
equitable relief to a greater number of taxpayers in order to improve levels of dis posable income and increase economic activity.
.
Equitable relief may refer to those allowable deductions under Sec. 34 and personal exemptions under Sec. 34. The effect of this is that it will increase the
levels of their disposable income. If taxpayers can claim these business related
expenses as deductions, they may file their income tax return religiously and
they may encouraged to engage in income producing activities. This is the amplification of the provision under Sec 2 of RA 8424when it says increase economic
activity. That will be the effect of that grant of deductions and exemptions.
3)
We can also cite as an advantage, that NIT minimizes fraud. In what sense?
.
Through this tax audit examination of the taxpayers books of accounts. The
Taxpayer cannot just claim expenses not supported by receipts. BIR will check
Whether these expenses are indeed business connected or not. This is what we
Called counter checking. If you incurred expenses, make sure that it is supported by rec eipts or is connected to business otherwise the BIR will disallow the
same. So it minimizes fraud in this context.
The r esult of this is that, if we have fair, just and equitable tax system, taxpayers will reli giously file their income tax return and fraud will be minimized. This will generate mor e
revenues to the Govt which is really the objective of every system of taxation.
.
Q.: if you are against NIT (in effect you are for the adoption of GIT) what must be your reasons
Here?
->
Take note of the 2 salient features of GIT:

a) No deductions are allowed and no exemptions may be granted; and
b) The tax base is the gross income. Have these in mind.
->
Reasons:
1) The complaint of showbiz people under the present system is that, we have a compli cated system because there are so many requirements that must be complied with
and they could not just determine taxable income services of CPAs are still needed.
PART 1 Taxation Law

But her e in GIT, since no deductions are allowed, this will simplify our income tax
system. In what sense? You can easily compute your income tax due or payable. Just
multiply your Gross income by the tax rate and that is the income tax due. It dispenses with these several requirements on the claims for deductions. And this is consis tent with or in harmony with the sound fundamental principle of ADMINISTRATIVE
FEASIBILITY. GIT makes our system sound in the sense that it is capable of effective
enforcement or implementation.
2) So what would be the effect of this? If we have a simplified income tax system which
can be easily understood by common citizens, more will be religiously filing their
income tax returns because they can claim deductions. Because they can easily understand the system, they can easily file their tax returns without the assistance of
a CPA or tax experts.
3)
The most important about GIT, as cited by the sponsor of the proposed Bill is that
It minimizes (we cannot use the word eradicate because this is next to M 13; it
Minimizes graft and corruption.
-> How do we explain this? The evil of NIT, is that theres that abuse of discretion; margin of discretion on the part of the BIR examiner. They abuse it by collaborating with
the taxpayer and allow deductions not supported by receipts. This reduces the taxpayers liability. Because of this margin of discretion, theres that measure to the
effec t that this should not be the source of graft and corruption. So, no more deductions and no more exemptions must be allowed so that the BIR cannot make use of
the same. Her e, it can no longer be the source of graft and corruption, so it minimizes
the same.
-> The result of this GIT is that,. It will generate more revenues to the Govt. which is really
the objective of every system of taxation.
.
NIT vs GIT (As regards the objective of generating more revenues ):

1. In NIT, more r evenues may be brought by these 3 factors:
a. favorable system
b. system that provide for equitablerelief
c. minimizes fraud
2. In GIT, more r evenues may be brought by these 3 factors:
a. simplification
b. easy to understand system
c. minimization of graft and corruption
You should also know the disadvantages of these 2 systems. In case of NIT, #1 disadvantage
PART 1 Taxation Law

Is that it really is vulnerable to graft and corruption because of the margin of discretion.
(BIR can allow or disallow the grant of discretion). #2 is that it is a complex or complicated
System. It is very complicated and there are so many requirements to be complied with.
->
.
the effec t of this graft and corruption is tax evasion

The disadvantage of GIT is that theres always tax evasion. In NIT, tax evasion may be
brought about by graft and corruption. In GIT, it is the employment of the fraudulent
methods; schemes or devices to understate Gross income. Also, if you are a businessman
cannot claim those business expenses as deductions, you may find the system as unfair. In
what sense? Even legitimate expenses cannot be classified as deductions.
Sec. 24 A. youll fi nd 32% progressive rate in 2000. If we will formally adopt this GIT, do
You think this tax rate will be retained?
->
If this will be retained, that would make the system unjust. These tax rate are quite high
up to 32% but it allows deductions, so theres a balancing feature. But once we formally
adopt GIT, we cannot retain the same. W e really have to reduce the rates to make this
sytem just. In my view, it must not exceed 10%. Eliminate deductions. No more Sec. 34,
but we have to r educe the rates.
In my view, it should be modified income tax system. Im not really in favor of pure Net
income or pure Gross income taxation. It should be modified income ta x system.
G. FILING OF INCOME TAX RETURN AND PAYMEN T OF TAX:

. The system that we have adopted is PAY AS YOU FILE
-> In the case of individual Sec. 36 A (1) states that the tax shall be paid upon the filing of income tax
return
-> Sec. 36 A. Payment of Tax (1) In general the total amount of taxed imposed by this title shall be
Paid by the person subject thereto at the time the r eturn is filed. X X X
-> In the case of Corporation, Sec. 77 C provides that Corporate taxpayers shall pay their corporate
Income tax upon the filing of corporate income tax return.
-> Sec. 77 C. Time of Payment of income tax the income tax due on the corporate quarterly returns
And the final adjustment income tax returns computed in accordance with Sec. 75 and 76 shall
Be paid at the time of the declaration or the return is filed. X X X
2001 Q. #4. This will test the knowledge about the filing of tax return by a corporation. I will
modify : How often does a Domestic corporation file its Income Tax Return for income earned
during a single year. Explain the process. What must be the r eason for such procedure?
Answer: LIFEBLOOD DOCTRINE --- Hehehehehefunds
-> Refer to secs. 75 and 76. Is it annually? No. How often, Once? No.
PART 1 Taxation Law

. Sec 75 explains the process. It says every corporation shall file in duplicate a quarter ly summary declaration of its gross income and deductions on a cumulative basis for
the prec eding quarter or quarters, upon which the i ncome tax, as provided in Title.
collected and paid. X X X
-> So, four times, the word used is Quarterly. All Domestic Corporations file their incme tax
requires the filing of Final Adjustment Return (Sec. 76)
-> What are the words that you should say in your answer aside from Quarterly? You should say
in your answer, that under Sec 75, it requires the Quarterly declaration of gross
th
income and deductions. As regards the 4 quarter, it rquires the filing the Final Adjus tment tax return.
-> Now, what do you think is the reason for the procedure? LIFEBLOOD. (hehehehe). If we allow
the Corporation to file their income tax returns annually, what would be the effect?
The effect is that the Govt would run out of funds before it can collect. Thats the
reason --- the timeliness of collection of corporate income tax because (lifeblood na)
taxes are the lifeblood of the Govt.hehehehe. Ther e should be undue delay.
. What if it is an individual? How often does an individual taxpayer file his income tax return?
4X? Hehehe
-> Only Once (Annually) (Sec. 56)
-> what is the reason why individual taxpayers are only required to file their ITR Annual ly? Lifeblood na naman, hehehe. Iba na cguro to. If we allow them to file their ITR
quarterly, sa tingin mo kaya? The BIR can check compliance with such? Millions of
individual taxpayers will be filing their ITR quarterly. The reason here is to make our
system capable of effective implementation or enforcement consistent with the
sound principle of Administrative Feasibility.
. This is modified by these 3 systems:

1. Creditable withholding tax system
2. Final withholding tax system
3. Substituted filing of ITR
H & I. CREDITABLE WITHHOLDING TAX SYSTEM:
PART 1 Taxation Law

. Medyo mahirap to. 1995 Bar Q. on these: creditable Withholding tax system (CW TS) vs. Final
Withholding Tax System (FWTS):
- the common feature with these withholding systems is that there s a withholding agent
authorized by the Govt to deduct and withhold the tax
1) As to Income subject of the system
- classic example of this system is Compensation Income. The employer is the withholding agent, the employee is the recipient of the income. Under this system, the
employer will deduct and withhold the tax on that compensation Income. Remember
that the employee is required to include the income in his gross compensation in come.
- On the other hand, classic examples of Income subject to FWTS are dividends received
From Domestioc Corporation, Royalties, Prizes more than 10,000. Winnings and inteterest income on bond deposit. If you are the recipient of these, you are no longer required to include these incomes in your gross income.
- The word final connotes that the tax withheld will constitute as a final and
full settlement (FAFS for brevity) of the tax liability on that income
2) As to whether o r not the Inco me should be reported as part of gross in come:

- According to CWTS, since the income will not constitute as a FAFS of the tax liability on
that income, the recipient should report the said income in his gross income.
- This is provided for in Rev. Reg. 2-98. It is said therein under Sec 2-54, that an
income subject CWT must still be reported by the recipient as part of his gross
income.
- On the other hand, the said Rev. Reg. 2-98 also provides that in the case of FWTS the
recipient may not report income as part of his gross income because the tax withheld
will constitute as a FAFS of the tax liability
PART 1 Taxation Law

3) As to the Effect of the Tax Withheld.
- The tax withheld under the CW TS can be claimed as tax credit or may be deducted
from the Income tax due or payable.
-> If you are compensation earner, and you have other sources of income. Let
us assume that your income tax due is 150,000. The tax withheld by your
employer can be claimed as a tax credit. It may be credited against or deducted from your income tax due or payable. Say, if the tax withheld is 50,000,
deduct this to your income tax due or payable of 150,000, the final income
tax due is 100,000.
-> Again, Creditable implies that the tax withheld by the employer can be
claimed as a tax credit or may be deducted from income tax due or payable.
- On the other hand, in FWTS, the tax withheld cannot be claimed as a tax credit. The
Final Tax Withheld will constitute as a FAFS on the tax liability on said particular
income.
- For instance, the stockholder is not required to report as part of the gross
income the dividends received from a domestic corporation. The reason is
because the 10% tax withheld on the a mount will constitute as a FAFS of
the tax liability on the dividend income.
- Fringe Benefit under Sec. 33 A is subject to Final tax, therefore this is also
Governed by FWTS. This is another example of income subject to FWT
- 2003 Bar: Who is obliged to pay Fringe Benefit Tax? This Q. is not the about
delinition of FB but requires your knowledge about withholding tax. Rev.
Reg. 3 98 Sec. 2 (2) say that the employer is the one lega lly obliged to pay
the tax.
- Person legally obliged to pay the tax is the one who in case of nonpayment
may be legally demanded to pay the tax. If the Final tax on FB will not be
paid, the BIR will not go after the employee but to the employER. This is the
same in the case of interest on bond deposit. In case of nonpayment,, the BIR
will not run after stockholder but to the corporation. The Corporation being
the withholding agent is the one legally obliged to pay the tax. The rule is that
it is the withholding agent that is legally obliged to pay the tax
4) As to the Filing of Tax Return.

PART 1 Taxation Law

- In the case of CWTS, the compensation earner reports the income received as
part of his gross income. Necessarily, he has to file an ITR
- Whereas if the only source of income is subject to Final Tax, you need not file
An ITR
> These are provisions on individual whose sole income is one that is subject to Final tax (Sec.
51 A (2C)):
1. 25% final tax under Sec. 25 B NRA-NETB
2. 15% final tax under Sec. 25 C, D, and E (Alien employed by Multinational
companies, offshore banking unit and petroleum service contractor or sub
contractor
> So they are NRA-NETB
> Bar Q.: Why are NRA-NETB not required to file ITR? This can be answered by 1 sentenc e. It
is because their income is already taxed as a Final tax.
> So as to the 2 Questions:

1) Who are these individual taxpayers who are not required to file ITR? NRA-NETB
2) Why are NRA-NETB not required to file ITR? Because they are subject to a Final Tax
rate. Final tax withheld will constitute as a FAFS of the tax liability
> How about Corporate taxpayer?

- Sec. 52 A. It says except! nonresident foreign corporation. The rule is that corporate
Taxpayers must file their ITR, except nonr esident foreign corporations
- Why? The r eason is sec. 28 B (1, 2, 3, 4)
Sec. 28 B Tax on Nonresident Fo reign Corpo ration
1. FC not engaged in trade or business 35% FT
2. Nonresident Cin ematog raphic Film owner 25% FT
3. Nonresident O wner o r Lesso r of Vessel 4.5% FT
4. Nonresident O wner o r Lesso r of Aircraft, Ma chineries 7.5% FT
> These are all Nonresi dent Foreign Corporations. Apply the rule that they are not r equired
To file ITR because the tax withheld constitutes as a FAFS of the tax liability
PART 1 Taxation Law

J. SUBSTITUTED FILING OF INCOME TAX RETURN:
> Rev. Reg. 3-2002 (1, 2,. 3, 4). The effect of this system is that you are no longer required to
File ITR.
Requirements for one to avail of this system:
1. You must be a compensation earner. Meaning that your income is derived
derived solely on compensation. If you have other sourc es of income such as
business, trade or profession, you are still required to file an ITR;
2. You must have only 1 employer in the Philippines. So, if you have 2 or more
Employers, you are not allowed to avail of this system;
3. The tax withheld by the employer must be the same or equal to the tax due
Or payable after applying the tax rate.
- For example: tax due is 250,000. Make sure that the exact amount is
Is withheld by the employer. Otherwise, you will be required to file
ITR.
4. The employer must file an information return (BIR Form 1704) showing
Ther ein the income tax withheld on the compensation income.
> Rev. Reg. 3-2002 declares that is tantamount to a substituted filing of ITR by the employees
Hence they are no longer required to file ITR.
> Let us examine Sec. 51 A and B.

Rules lay down therein:
1. If your compensation income is not more than 60,000;
2. Only 1 Employer; and
3. Tax withheld is the same wi th the tax due.
- Then you are no longer required to file ITR. But if your compensation is more than
60,000even if you satisfy requirements 2 & 3, you are still required to file ITR
- These rules have been modified by Rev. Reg. 3-2002. Under 3-2002, it imposes no limi Tation as to the amount. What is important is that as long as the tax withheld is the
Same with the tax due, irrespective of the amount, this new system applies.
PART 1 Taxation Law

- Is this not an impermissible encroachment on administrative prerogative because it is
a mere regulation? BIR has the power to promulgate regulations for the enforcement
of rules as part of its administrative functions . Nobody questioned this.
Frey
II.
General Principles Of Income Taxiati on
This is precisely the title of Sec23 General Principles Of Income Taxiation In the Philippines
Sec.23 Principles Of Income Taxiation In the Philippines. Except when otherwise provided in this code:
A. A citizen of the Philippines resicing therein is taxable on all income derived from the sources
within the Philippines.
B. A nonresident citizen is taxable only on income derived from sources within the Philippines.
C. An individual citizen of the Philippines who is working and deriving income from ab road as an
overseas contract worker is taxable only on income from sources within the Philippines. Provided
that 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 international
trade shall be treated as an overseas contract worker.
D. An allien individual, wheather a resident or not of the Philippines is taxable only on income
derived from the sources within the Philippines.
E. A domestic corporation is taxable only on all income derived from the sources within and
without the Philippines; and
F. A foreign corporation, weather engaged or not in a trade on business in the Philippines is
taxable only on income derived from the sources within the Philippines.
Sec23 classifies taxpayers into two: individual and corpor al

Can only answer the Q: Can we tax the incomes derived from the sources w/n and w/o? Sec23 cannot
answer the Q on wheather the taxpayer can claim dedductions, (which also a gener al principle or basic
rule.) Theres a need to supplement the particular provision. Thats why under Secs.24 & 25, there are
provisions that apply to individual taxpayers that answer the Q on wheather they can claim deductions.
As regards corporate taxpayers: Q on wheather they can claimdeductions cannot also be answered by
Sec.23. We really need to refer to sec.27 & 28 which give us the tax rates and the base.
Bar Questions on general Prnciples

2000 Bar Q#8 , 2002 Q#1 & 1998 Q#2. Try to refer to these O because these are really questions
on thegeneral principles of Income taxation
2000 Q#8- the tenor of the Q was: How will this individual taxpayer, a NRA-NETB be taxed on his
income derived from the sources w/in an w/o?
In 2000 bar our suggested answer incl udes not only there 2 sources. 1) wheather
income from w/in and w/o can be taxed and 2)regarding tax bases; wheather the
taxpayers can claim deductions. 3) We also mentioned abou the applicable tax rates.
2002 Bar-The tenor of the q has been changed: What is the Rule of Income Taxation with respect to
the income of Mr. Sebastian, a NRC deriving income from sources w/in and w/o? 2002 Q#1 also
requires these 3 basic principle.
The answer to these Q are the same ever. If the examiner changed the tenor of the O .
However, 1098 Q#2 can be surely answered by Sec.23 alone.This is Q on sources alone.
So when we speak of general principles, these are not limited to sources alone under Sec.23 These
also include rules on tax base as well tax rates.
There are really different ways on how to ask Q on General Principles. Provisions regarding General
Principles: Sec 23, 24, 25, 27 & 28
PART 1 Taxation Law

1.
The tax code classifies the taxpayer as either individual or corporate. So this, General Principles may
be broken into 2:
o General Principles of Individual Income Taxation and
o General Principles of Corporate Income Taxation
General Principles of Individual Income Taxation:

RESIDENT CITIZEN
How will the Income of RC be taxed? RC can be taxed on his income w/in and w/o (Sec.23 A)
Can a RC claim deductions ? The income tax is imposed on the taxable income. That means that
RC can claim as deductions those expenses pold or incurred w/in ad w/o (Sec.24A(12)
The taxable income of RC is subjected to 5.32%. It is known as the progressive tax rate schedul e.
NONRESIDEN T CITIZEN
Can only be taxed on his income from sources w/in (Sec.23B,C) this has been the subject of an
amendment. This is a new rule (Took effect on Jan.1, 1898). So that if the income w/in and w/o
was derived in 1997. That income could be taxed under the old tax ccode. But beginning 1998,
we can only tax his income derived from sources w/in.
Can he claim those expenses incurred within the period? Sec.23is not clear on this. This can be
answered by Sec.24 A(1, b) it says that the income tax is based on the taxable income under
Sec.31.meaning, Gross income less allowable deductions. But the allowable deductions are only
those expenses paid or incurred w/in the Philippines because he could only be taxed on his
income derived from sources w/in.
This taxable income is subject to 5-32% progressive rate schedule.
2002 Q#1: Mr. Sebastian, a seaman received income in 1997 from sources w/in and w/o. What is
the rule with regard to the income of Mr. Sebastian in 1997?
o Some answered this Q under the rule. This is not really correct. This should be answered
under the old tax code because the pr esent tax code took effect only Jan.1, 1998.
RESIDENT ALIEN
Could be atxed only his income derived from the sources w/in.
Entitled to deduc tion (Sec.24 A(1,C)) because you can see ther ein the word taxable income. But
the allowable duductions are only these expenses paid or incurred w/in the Philippines.
Subject to 5-32% progresive tax rate schedule.
NON-RESIDEN T ALIEN ENGAGED IN TRADE OR BUSINESS
How do you know that 2 NRA is engaged in trade or business? Determinative test is Sec.25A(1) it
is considered engaged in trade or business if its aggregate satyed in the Philippines is more that
180 days.
Sec.25 A(1) X X X A nonresident alien individual who shall come to the Philippines and stay
therein for an aggregate period of more than one hundred eighty(180) days during any calendar
year shall be deemed a nonresident alien business in the Philippines X X X
o If it is exactly 130 days, then it is not engaged in trade or business because the law is
very clear. This must be strictly construed because of the tax benefit that may accrue to
this alien individual.
What is that tax benefit?
o If the alien is engaged in trade or business the tax benefit is not, he can claim deductions
because the tax base is taxable income under Sec.25 A(1). On the other hand, if he is not
engaged in trade or business, he is not entitled to this tax benefit because the tax base
is gross income under Sec.25B.
PART 1 Taxation Law

o
Refer to sec25, you will find therein the rule that NRA-ETB can claim basic personal
exemption subject to reciprocity. This is another tax benefit that can be availed of by
NRA-ETB to the exclusion of NRA-NETB.
2000Q#8-Mr. Corpuz, A NRA was based in Hongkon. In 1999 he stayed in the Philippines for more
than 180 days. Q: How will the income of Mr.corpuz derived the sources within the Philippines
and other countries be taxed?
o When it made mention about w/in and w/o then refer to Sec.23 O. NRA-ETB can only be
taxed on his income derived fron the sources w/in the Philippines. The rule has act been
changed. This is still the same under the old tax code.
Q: can he claim deductions?
o Yes, Sec.25A(2)- the income tax is imposed on the taxable income. Of course, only those
expenses incurred w/in the Philippines could be deducted. The tax base is subject to 532% progressive rate.
Authoritative answer. Youll know that the problem did not categorically state that he is engaged
in trade or business. So you should start with this: having stayed in the Philippines more than 180
days. Mr. Corpuz, is engaged in trade or business. Under the tax code (You need not cite the
provision). NRA-ETB shall be taxed under the following general rules/ principles:
A. Only his income derived from the sources w/in the Philippines can be taxed. We
cannot tax the income derived from the other countries.
B. Indicate also the rule regarding deductions. Mr. Corpuz can also claim deductions
because the tax base is taxable income. These 2 will suffice. But you can add this.
C. The taxable income is subject to the progressive tax rate schedule of 5.32%
Modifications: Supposed the examiner changed this to 9 months?
o In aswering this problem, Art 13 of the NCC will come in handy- one month is equal to
30 days, no multiply 9 (months) with 30(days) = 270 days. Mr. Corpuz, is a NRA-ETB.
What if its exactly months?
o The law says more than 180 days this is strictly contrued, so he is NRA -NETB. The rule
says he cannot claim deductions.
How about if the problem is specified in that it indicates the Specific months, for example from
April 15, 2004 to October. 15, 2004?
o Remember the boxer rule
April
15
May
31
June
30
July
31
August 31
Sept
30
Oct
15
183 days= NRA-ETB
So, remember that the problem may categorically state more than 180 days or will state the
number of months or will indicate specific months. Remember the rules applicable in each of the
situation.
NONRESIDEN T ALIEN NOT EN GAGED IN TRADE OR BUSIN ESS:
Under sec.23 D, NRA-NETB can only be taxed on his income derived from the sources w/in (same
with the old tax code)
Can he claim deductions? No. Under Sec. 25B the basis is entire income,meaning Gross income.
So, he cannot claim any deductions. This is the one that you should underscore.
As regards tax rate, it is not 5-32% the tax rate is applicable to NRA-NETB is 25% FT. That means
that this is subject to Final withholding tax, and the tax withheld constitute as a FAFS of the tax
liability on the income.
PART 1 Taxation Law

Questions regarding these 3 special NRA-NETB, have yet to be asked in the Bar:
o Sec.25 C,D, E
C-Alien Individual Employed by Regional Area Headquarters and Regional
Operating Headquarters of Multinational Companies
D-Alien Individual Employed by Banking Units
E-Alien Individual Employed by Service Contractor and Subcontrac tor.
o They can only be taxed on their income derived from the sources w/in; they cannot
claim deductions because tax base is Gross Income; and the tax rate has been reduced
to 15%
Q: Mr. Corpuz stayed in the Philippines for more than 180 days. How will his income be taxed if
be was employed by Regional Headquarters of Multinational Company? Would you answer be
the same as in the previous bar exam question?
o You have to change only the tax rate. As to the sources and tax base the rules are still
the same.
SUMMARY:
General Principle of Individual Income Taxation
Kinds of Individual TP
Sources of Income
TAX BASE (SEC 24 and 25)
TAX RATE (SEC24 and

25(
RC
Within and without
Progressive rate 5-32%
NRC
Within (1-1-98)
RA
Within (1-1-93)
NRA-ETB
Within
NRA-NETB
Within
Sec.24A-1(a)-TAXABLE
INCOME. Hence, he can claim
deductions
expenses
paid
within and without.
Sec.24A-1(D)-TAXABLE
deductions
expenses
paid
within.
Sec.24A-1(C)-TAXABLE
deductions
expenses
paid
within.
Sec.25A-1(a)-TAXABLE
deductions
expenses
paid
within.
Sec. Gross Income. Henc e, No
deductions or exemptions can
be claimed.
Sec. 25C, D and E- Gross

Income. Hence, No deductions
or Exemptions can be claimed.
15% Final Tax
Special NRA-N ETB:

1.
Alien
individual
employed by regional or
Area HQ and regional
operating
HQ
of
Multinational Co.-par .C
2.
alien
individual
employed by ohshore
banking units- par D3.
Alien Ind Employed by
petronulnum
service
contractor
and
subcontractor par E.
Within
25% Final Tax
PART 1 Taxation Law

2. General Principles of Corporate Income Taxation:

Domestic Corporation (Sec23E):
Taxable on its income derived from the sources w/in and w/o
As to the tax base, refer to Sec.27 A. It says that the corporate rate is based on the taxable income. This
means that expenses paid or incurred w/in and w/o are deductible.
The taxable income w/in and w/o is subject to 35%(effec tive July.1 2005)
Resident foreign corporation (Sec.23F):
Taxable on its income derived from the sources w/in only
As to the tax base, refer to Sec. 28 A (1). It says that the corporate saleis based on the taxable income.
This means that expenses paid or incurred w/in are deductible.
The taxable income w/in is subject to 35% (effective July 1, 2005)
Nonresident foreign corporation (Sec23F):
Taxable on its income derived from the sources w/in only
As to the tax base, refer to Sec. 28B (1). It says that the corporate rate is based on Gross Income.
The taxable income w/in is subject to 35% FT
Just like NRA-NETB, there are also special kinds of corporate of corporation taxpayers, and this is yet to be
asked in the Bar.
[B] [2]- Nonresident cinematographic film owner lessor or distribution 25% FT
[B][3]-nonresident owner or lessor of vessels chartered by Philippine national -4.5%
[B][4]-nonresident owner or lessor of aircraft machineries and other equipment- 7.5%
1994 Bar. The secretary of finance upon the recommendation of the CIR issued BIR regulation using
gross income as the tax base for corporation doing business in the Philippines. Q: It is BIR Regulation
valid?
o It is not a valid BIR regulation for the simple reason that it runs counter to the provisions of the
tax code. The SC in one case held that the requisites for the BIR regulations to be valid as are
follows (CRUP):
Consistent or in harmony with the provision of the tax code or the law it seeks to
implement.
Reasonable
Useful and necessary and
Pub products listed in the OG or in a newspaper of general circulation
Case: Misamis oriental association of coconut dealers vs. Sec. of Finance
o The SC made a pronouncement in this case that BIR regulations are mere interpretative rules .
Therefore, it cannot go beyond the scope of the provision lay down in the tax code.
Another case: Auto incorporated vs. CIR 240 SCRA 368
o The SC said in this case that HIR regulation is designed or intended to carry out the provisions of
the tax code. It cannot supplant, modify the provisions of the tax code.
You need not cite the name of the case. It is enough to use the following words: It has been held that or
settled is the rule that or it is jurisprudentially settle that BIR regulation is valid if it is in harmony or
consistent with the provision of the tax code. The BIR regulation in question contravenes the provision of
the tax code that the tax base for the corporation doing business in the Philippines is taxable income. It is
PART 1 Taxation Law

a mere interpretative rule intended to carry out the provisions of the tax code. It cannot alter, supplant
or modify the provision of the tax code. The BIR regulation in question therefore, constitutes an
impermissible encroachment on legislative prerogative.
SUMMARY:
General Principles of Corporate Income Taxation
Kinds of corpor ate
Sources of income
(sec.23)
Tax base (Sec. 27&28)
Tax r ate (Sec. 27&28)
DC
Within and without
Sec.27A-TAXABLE INCO ME
Hence, can claim
deductions experiences
paid within and without.
35%
RFC
Within
Sec.28A(1)-TAXABLE
INCOME hence, can claim
deductions experiences
paid within
35%
HRFC-NETB
Within
Sec. 268(1)GROSS
INCOME hence, NO
deductions or exemptions
can be claimed.
35% FINAL TAX
1.Par. B2- nonresident

cinematogr aphic film
owner lessor or
distributor
Within
Sec. 28B(2)- GROSS

INCOME. Hence, NO
can be claimed.
25%FINAL TAX
2. Par. B3- nonresident

owner or lessor of vessels
chartered by Philippine
nationals
Within
Sec. 28B(3)-GROSS
RENTALS, LEASE OR
CHARTER FEES. Henc e, NO
can be claimed.
4.5%FINAL TAX
3. Par. B4-nonresident
owner or lesser of aircr aft
machineries and other
equipment
Within
Sec.28B(4) GROSS
RENTALS, CHARTER FEES
AND OTHER FEES. Hence,
NO deductions or
exemptions can be
claimed.
7.5%FINAL TAX
Special:
NRFC-NETB
(Sec.28B2 ,3 and 4)
SPECIFIC RULES:
NRA-ETB vs. NRA-NETB:
As to the tax base
NRA-ETB
NRA-NETB
Taxed on the basis of the his
Taxed on the basis of his gross
PART 1 Taxation Law

As to the right to claim deduction
taxable net income
income
Can claim deductions
Not allowed
Required
Not required to file since he is

subjected to final tax see Sec. 51A2 in relation to Sec.25B, C, D,
and E
As to the filling of the ITR
Q: When is a corporation considered as doing business
In Mentinolalum vs. Mangiliman, the SC said that it implies continuity of commercial transactions. It was
called in BOAC vs. CIR Doing business engaging in business, conducting business must imply continuity of
commercial transactions. Theres OCT (Original Certificate of Title, hehehehehe)
o
O- the activity is done in connection with its ordinary business in the Philippines
C- ther e is a CONTINUITY of commercial transactions or dealings.
T- trade or business
It must engaged in a business here in the Philippines it must be an ordinary one; and there must be
continuity of the same.
In the case of ______ vs. CA it is intention to engage in a continued business in the Philippines. It is not
the number it is not the frequency, but the intention to engage in a continued business in the Philippines,
that determines whether the corporation is doing or engaging business.
If the corporation is not doing the business the tax effect is that it cannot claim any deductions because
the tax base is Gross income.
In the case of individual it is easy because R is fixed, it says more than 180 days. But in the case of a
corporation, the SC said that it depends upon the peculiar circumstances of the case. But in one case, the
SC said that it is really the intention to engage in a continued business.
RFC vs. NRFC:

RFC
NRFC
As to the tax base
Taxed on the basis of his taxable or

net income
Taxed on the basis of his gross

income
As to the right to claim deductions
Can claim deductions
Not allowed
As to the filling of the ITR
Required to file its ITR
Not required to file since it is

subjected to final tax- see Sec52A in
relation to Sec.28B1, 2, 3, and 4
III. GROSS INCOME:
Sec.32 A must be memorized. Ther e are 13 items here
Keywords: PBC PRP WPD PARI

o
PBC- PROVINCIAL BOARD OF CANVASSERS
PART 1 Taxation Law

PRP- PEOPLES REFORM PARTY
WPD- POLICE
PARI- PRIEST
Sec.32A-Except when otherwise provided GI means all income derived from whatever source including
but not limited to the following items:
-------------------Page 18: MISSING

Requisites for deductibility
a.
It is a payment for services rendered
b.
It must arise from EE-ER r elationship
c.
It must be reasonable, meaning that it represents the fair value of the services rendered.
Example: ER pays 30,000for the services rendered by his secretary. Assume that of the 30000 only 20,000
represents the FV of the services rendered. The 10,000 is a manifestation of the love and affection of the
ER to his EE being his sexytary. Q: how much can be deduc ted on the part of the ER?
o
Apply the rule under Sec.34 A (a)(1). It must be r easonable. It is very clear 20,000 can be claimed
as a deduction as it is the only amount that represents the FV of the service rendered.
Q: how much can be taxed as income on the part of the EE?
To the employee, the entire 30,000 is taxable:
20,000- Taxable as part of the compensation income
10,000- Sec.32 A taxable as it is considered as derived from whatever source.

So it forms part of the gross income.
Life Insurance Premium

o
As to taxability or nontaxability Consider Sec. 32A(1) that is in whatever form paid. This may be
taxed as compensation income because the premium is maintained by the employer under EE-ER
relationship. Also under Sec. 33 B(10) one of the taxable fringe benefit applies to insurance
premiums. Her e, it is subject to final tax.
When you speak of taxability, that is the implication as far as the EE is concerned.
As to deductibility ( it is far as the ER is concerned) Considered Sec.34 A (1) (a,1) this is the basis
for that. It says xxx is reasonable payment salaries, wages and other form of compensation for
personal services rendered. Life insurance premium is one of the other for ms of compensation.
Sec.36A (4) says that this life insurance premium is nondeductible. So, let us summarize 4
provisions in the tax code relative to this Life insurance premium. You will see how technical the
rules are. That is, you really have to group related provisions that apply to this item.
Beneficiaries that may be designated:
The heirs, family, executor or administrator of the estate
Employer
Implications
To the employer it may be treated as an expense and the employee as income
Q: as to assumption that the beneficiary is the heirs, family, executor or administrator of the
estate: Can the employer claim deductions?
PART 1 Taxation Law

Under Sec.34 A(1) (a,1) the provisions say other forms of compensation for personal
services rendered. So this includes life insurance premium paid by the employer under
ER-EE relationship. So, Yes!
Is the amount taxable to the employee?
Quality: bear in mind that there is a now rule- Sec. 33 8 (10) So,
It is taxable FB and therefor e subject to Final tax if the

insured employee is a supervisor or managerial EE.
If the insured EE is a rank and file EE that the time to apply

Sec32A(1) when it says in whatever form paid. So, that may
include life insurance premium. The employee here must be
rank and file.
Simoly but it is taxable to the employed but you should qualify:
It is subject to FT (Sec.33B(10)) if the insured EE is a supervisor or manager a nd
It is subject to compensation income subject to 5-32% progressive rate if the EE

is a rank and file.
As to second the assumption that the employer is the beneficiary: can the employer claim it is a
deductible expense?
No, Why? Because upon the death of the EE the proceeds will go to the ER being the
beneficiary. Shall we allow him to deduct the premiums paid? No because it is just a
mer e return of capital (of the proceeds paid by him) Thats the reason why in Sec.36A(4)
whether the EE is directly or indi rectly designated as beneficiary. Sec36 A(4)says.
NONDEDUCTIBLE.
Is the amount taxable to the employee? This is not taxable to the employee for simple
reason that his family will receive no benefit his estate will receive no benefit. The
proceeds will go to the employer if theres no benefit received theres nothing to tax.
Theres no basis for imposing the same.
Summary of the tax treatment on the life insurance premium:

BENEFICIARY
EMPLOYER
EMPLOYEE
QUALIFY: If this employee is a:
The heirs family, executor of

administrator of the estate.
The ER can deduct the amount of

the premiums paid as a form of
business expense. Sec34A(1)
a. Managerial or supervisor EE- if its

subject to FINAL TAX (fringe benefit)
b.Rank-and-fileEE- it sis considered
a COMPENSATION INCOME and is
therefore subject to progressive
rate. 5-32%
Employer
The ER cannot claim it is deductions

or expenses because the Insurance
proceeds are but a mere return of
capital. (Sec.36A((4))
NOT TAXABLE since there was no

benefit received by the EE or his
family.
TAX IMPLICATION OF CANCELLATION, CONDO NATION OR FORGIVENESS OF INDEBTEDNESS:
PART 1 Taxation Law

This is a favorite bar Q. on forms of Compensation Income. If you try to read Secs. 32 -83, youll
find no specific tax rules on this.
The amount condoned may be considered as compensation income or a donation or a capital

transaction depending on the circumstances of the case.
Sec 32A says compensation in whatever form paid. We have already discussed one that is that
life insurance premiums. The next i s cancellation or forgiveness of indebtedness.
TAX EFFECTS/ IMPLICATIONS/ INCIDENCES:

o
Considered as compensation income of the EE/ Deductible to the ER:
Requisites
The cancellation or forgiveness must be in consideration based on account of

services rendered;
The creditor must be the ER, the debtor must be the EE;
The ER condoned or canceled the debt of the EE in consideration of the

services rendered
Effects if these requisites are present:
To the ER-creditor that may be claimed as a deductible expense because this is

really a form of compensation for services rendered (Sec34A(1)
To the EE-debtor it is a compensation income taxable (sec32A(1) in whatever

form paid.
As a taxable donation:
o
If no consideration was given the obligation was simply condoned renounced by the creditor
employer then that may account to a taxable donation. There is a donation in accordance with
Art 1270 of NCC: it says if its is gratuitious in character, it shall be governed by the rules on
donation. Also, under Rev.Reg.2- R says if the cancellation or forgiveness was made w/o any
consideration that may amount to donation.
Effects:
If theres a donation, the creditor becomes the donor. The debtor become sthe donee
or the recipient of the literally
The creditor-donor is subject to donors tax
The deptor-doner is no longer subject to donees or inheritance tax as the same was
abolished by PD 69 on Nov. 24, 1972
It is not also subject to income tax because Sec32B(3) says that donation/ gifts shall be
excluded from gross income. So the debtor-donee is neither subject to donees or
income tax.
1997 Bar- an insolvent company has an outstanding obligation to its creditor for 100,000. Since
the debtor could not pay its obligation, the creditor agreed to accept through dacion en pago
document property valued at p30,000. Q1: what is the tax effect on the discharge of the unpaid
balance on the debtor-corporation? Explain.
The unpaid balance discharge here is 70,000 and the transaction referred to in the Q is
the condonation of the unpaid balance.
The creditor having resolved no consideration as regards the 70,000 unpaid balance is
liable to pay donors tax as the transaction given rise to a donation. The debtor becomes
PART 1 Taxation Law

the done the recipient of the liberality. He is not subject to donees tax as donees tax
was abolished by PD 69. Neither is he subject to income tax, as a donation under
Sec32B(3) is excluded from gross income.
Q2 in so far as the creditor is concerned tax-wise, how is it affected as a result of that

transaction?
The creditor becomes the donor-The one who canceled or renounced the obligation
without receiving any consideration. As donor, he is subject to donors tax.
The other tax implication is declared by Rev.Reg#2 Sec. 50 that may amount to capital
transactions. This may take the form of INDIRECT DISTRIBUTION of dividends by a corporation.
Hence, the creditor here must a corporation and the debtor must be a stockholder. That must be
the situation.
o
Under Sec43 of the corporation code (provision on declared dividends) dividends that
may be declared may be in the form of cash, property, steel, liquidaled, script and
indirect dividends.
Indirect dividends may arise when a corporation condoned or canceled the obligation of
the stockholder.
This is a form of a indirect dividends in the sense that it is made through the cancellation
or forgiveness of stockholders obligations.
On the part of the stockholder, much amount condoned or canceled is a taxable income
subject to 10%FT
On the part of the corporation, this is considered as i nterest on capital
Is this interest deductible? 1999 Bar 14 Q on wheather or not this interest is

deductibleor not?
De Leon is on the opinion that it depends upon the circumstances. He is of the view that
if the declaration of the dividends is dependent upon surplus profits there is no
obligation to speak of, so it is not a deductible interest. On the other hand,if the
declaration is not dependent upon surplus profits there is an obligation tos peak of, in
case it is deductible interest.
In our suggested answer in the 1999 bar, we did not qualify our answer because interest
on preferred shares of stocks is considered as interest on capital. In your book, i did
mention about this RMC 17-71, june 9, 1971 w/c differentiates the rule that interest on
capital and that may include interest on preferred shares of stock, is a non-deductible
interest. So, we can apply this, that it may be treated as interest on capital. And it is now
an absolute rule that interest on capital is 2 non-deductible interest. So, the corporation
cannot claim this as a deductible interest. Since, it partakes the nature of dividend
through indirect and since dividend under the tax code if received by individual tax
payer is subject to 10% 20% or 25% final tax depending on the kind of taxpayer receiving
the same said indirect dividendsis therefore subject to the same rate if it is a dividend.
SUMMARY:
TAX IMPLICATION OR CO NSEQUENCE OR INCIDENCE OR EFFECT OF CO NDONATION
PART 1 Taxation Law

Rev.Rep2, sec50- must be made in corpor ation for
services rendered on amount of an EE relationship
COMPENSATION INCOME
DER is the creditor and the EE is the debtor
DER can be claim it as a deduction and the same is

considered as a taxable compensation income on the
part of EE.
Article 1270 of the NCC- if the creditor condones the
obligation of the debtor without rec eiving any
consideration. It is considered as a taxable donation
because only the creditors liberality is the
consideration involved.
TAXABLE DONATION
Q: Does it mean that the donor and the donee will be

made to pay donors tax? A: NO. PD69 abolised donees
and inheritance tax which became effective on Nov24,
1972
Q: is the amount donated/ condoned part of the donee

gross income? A: NO Sec32B(3) provides that donations
are excluded from GI.
When the debtor is the corporations and the creditor
becomes a stockholder in exchange of the condonation
of the debtors obligation.
CAPITAL TRANSACTION
The amount condoned is subject to 10% FINAL TAX if

the corporation is DC.
The corporation(creditor) cannot claim the same as a
deducion. When corporation declare dividends. It can
be considered as interest on capital Rev.Memo.Clrc
17-71 effective on July12, 1971 provides that interest
on capital-which includes stocks or dividend- are not
deductible.
Favorite BAR Q convenience of the employer rule

o This is thejustification that may be used in quanting exemptions from income tax on
certain benefits that may be received under an ER-EE relationship.
Housing privelege benefits
o You should consider the employee who may be r ecipient of this.
o In Rev. Reg 3-98 theres a provision on this and this applies to Managerial/Supervisory
Ees
o What are these housing benefits that are tax exempt and granted to the conveniece of
the ER?
If the EE ia a renk and the file EE- the poverning rule is Rev. Administrative
Meino Order(RAMO) 1-87
PART 1 Taxation Law

Before the amendment on some of the parts of Sec.33, it was RAMO 1 -87 that
applies to all employees.
In the light of the new provision code under Sec33 C (a new rule on fridge
benefit) the rule under RAMO 1-87 has been modified. And this has been
implemented by Rev.3-93.
Rev. Reg3-98 says, housing benefits that is exempt one that situated w/in the
business premises of the employer. The new rule included here is including
housing units that are situated w/in the 50 meter perimeter of the business odf
the employer.RAMO 1-87 provides no provision to this effect. This Rev.Reg 398 will only apply to managerial employees.
So if the housing unit is outside the premises of the employer it may or may not
be covered by the exemption. If it is within the 50 meter perimeter then
covered bu the ex emption otherwise it is not exempted.
2001 Bar house constructed w/in the pr emises of the employer and the
employee is a manager. Yet to be asked (in the light of rev.Reg.3 -98) Suppose
the house is constructed outside?
Answer is YES, as long as it is within the 50m perimeter. If not no
longer covered by the ex emption.
The trick of the Q is that, would your answer be the same if the
employee is a rank and file employee? Remember that rev.Reg.3-98)
applies only to managerial/ supervisory employees.
As far as rank and file EE are concerned it is the rule: housing units
covered by the ex emption are those situated within the business
premises of the ER. RAMO 1-87 provides 2 conditions which are not
really found or covered by RR 3-98
o It must be situated w/in the business premises of the
employer.
o This must be given as condition of employment.
If you read rev.Reg.3-98 1 imposes no condition. These requisites are
provided only in RAMO 1-87 and these requisits apply only to rank and
file EE.
MEAL ALLOW ANCE

o Traditional rule is: as long as it is given within the business premises of the employer
and it is justified by the convenience of the employer, it is tax exempt.
o New rule: rev.Reg.10-2000 (Mcal allowance for overtime work) It says it is exempt
provided that the meal allowance for overtime does not exceed 25% of the basic
minumum wage and it applies only to managerial/supervisory employee because this is
not provided under RAMO 1-87.
FRINGE BENEFIT (SEC33B)
o BarQ watch out for this: compensation income (under Sec32A) (1))) vs. Fringe benefit
(Sec33) what are the notable distinctions between the two?
The common features of these 2 is that both must be given under the ER-EE
relationship.
Distinction:
As to the tax rate-compensation income is subject to FT
Whether to be reported as part of the gross income compensation
income is to breported FB being subject to FT need not be repor ted as
part of the gross income.
As to the tax withheld- compensation income is subject to creditable
withholding tax. FB is subject to FT.
PART 1 Taxation Law

o
o
o
Define: Fringe benefit (FB) Sec 33 has 3 parographer: put A(imposition of tax rates) is
the most difficult one (this is onlu proper for CPA board exam) you will not be asked to
compute but you might be asked to enumerate those tax exempt FB.
In Par.A you must note that the tax base is the grossed-up monetary value: the
tax rule is a FT (32,25 or 15%) Multiply the 2 and the result would be the FB tax.
2000Q#3: who is really obliged to pay FB tax?
It is the employer (Rev.Reg3-90) Sec.2.33(2)
Fringe benefit
May be in cash or in kind; it may be goods, services or other benefits.
The giver/source must be yhe employer. So, the benefits are given under an EREE ralationship.
Recipient must be a managerial or supervisory employee
Q: Suppose the recipient a rank and file employee?
Theres an author who is in the view that the benefits received by the rank and
file employee is exempt from the income tax. Do not allow this.
Under Sec.33C it states the following FB are exempt from the tax imposed
therein (1,2,3& 4) and the tax imposed on taxable FB is a FT.
The correct interpretation of this is that FB given to rank and file employee are
not subject to FB Tax which is a final tax. But it does not mean that it is also
exempt from the income tax. That can still be taxed as part of the gross
compensation income. The FB should be reported as part of the GROSS
COMPENSATION INCOME.
Example: A mangerial employees basic salary is 75000/month. He received
housing benefit the monetary value of which is 25000/month. How do we tax
this 75000 representing basic salary?
Do not confused. It does no mean that all benefits/salaries received by
the managerial EE are subject to FT excluded from the imposition of
FBT is the basic salary odf the managerial EE.
If you read Sec33B, it is not clear on this. But rev.Reg3-98 clarifies it says other
than basic salary. This is because basic salary is taxed as compensation income
subject to 5-32%. It is only the housing benefit that is subject to FBT.
Take note of this because the Q may be framed like this: are ali salaries &wages
received by the managerial EE subject to FBT? No, you should exclude the basic
salary because it is subject to 5-32% progressive rate.
Taxable
Fringe Benefit Sec33B

Means any good, servies and other benefit
Lumished or granted by the employer
In cash or in kind, given in addition on the basic salary
Of an individual employer, except rank and file such as but not limited to the
following:
Keywords: HEV HIM HEEL
o Housing
o Expense account
o Vehicle of any kkind
o Household personal-maid, yaya,driver
o Interest on loan at less than market rate 12% benchmark rate
to the extent of the difference between the market rate and
actual rate granted.
o Membership fees, dues and other expenses berne by the
employer for the employee in social and athletic clubs or
other similar organizations.
PART 1 Taxation Law

o
o
o
o
Holiday and vacation expenses

Expenses for foreign travel
Educational assistance to the EE or his dependents
Life or health insurance and other ren-life insurance
premiums or similar amounts in excess of the law allows.
Item #5 : the Actual rate of interest must be less than the market rate, according to rev.Reg.3 -98
market rate refers to 12% benchmark rate.
o If the actual rate of interest is not less than 12% or 12% or more than 12% then theres
no more taxable FB.
o Example: loan amounting to 300000 granted to managerial employee. Situation that
may arise.
If the actual rate is 14%-then it does not result to taxable interest benefit
Employer imposed 12%- sell it does not result to taxable interest benefit
0%-then it is taxable interest benefit
0%-also taxable interest benefit
o Rationale: rate is pag at 12%. So, it is possible that the employer will secure loan from
other sources and he may only be made to pay the legal interest rate. By lowering the
rate to less than 12%theres that benefit that will accrue to the employee.
SUMMARY OF LEGAL PROVISIONS OF TAX EXEMPT FB:
Under rev.Reg.3-98
RAMO 1-87
SEC33C
SEC.33b
3 tax exempt housing benefits

2 tax exempt educational benefit
3 tax exempt life insurance premium
1 tax exempt benefit (expenses for foreign travel)
4 not taxable FB
TAXABLE FB
EXEMPTIONS, if any under ER 398

1. Military Housing
2. Temporary Housing Unit *(3
months or less stay in the
premises)
H-1
HOUSING
3.Business premises of the ER

including housing unit within 50
meters from the perimeter of the
business premise.
KEYWORD: M T B
E-2
EXPENSE ACCOUNT
V-3
VEHICLE OF ANY KIND
H-4
HOUSEHOLD PERSO NNEL
Helicopters or aircrafts are

exempled because they are
considered as business expenses
of the employer.
If the actual interest imposed is

LESS THAN 12% the same is
taxable. If it is exactly more than
12%. It is tax exempt.
Ex: loan of P500000 extended to
PART 1 Taxation Law

managerial employee at the rate
of:
a. 14%- not taxable
b.12%-not taxable
c.6%-taxable
d.0%-taxable
Reason: lowering of interest rate
on loan gives benefit to the
employee (they get to save). So if
the actual rate is less than 12%,
the FB will be taxable to be
extent of the difference between
the market rate and the actual
rate.
A1-6
MEMBERSHIP BENEFIT
H-7
HOLIDAY
EXPENSES
AND
VACATION
EXEMPT IF:
1. required by the nature of the employers trade,
business or exercised professions.
E-6
EXPENSES FOR FOREIGN TRAVEL
2. paid or incurred in connection with the business

conventions, migs or seminars, abroad;
3. All expenses are substantiated by receipts or
documents.
4.Ther e must be an official communication coming
from the business associates abroad:
Tax treatment of the cost of he airline
Economy class: Exempt
Business class: Exempt
1 class tickets-are exempled only up to 70%
5. Allowance exempt only up to 530000
EXEMPT IN 2 CASES
E-8 EDUCATIONAL BENEFIT-for the employee or

his dependent
1. scholarship grant in managerial or supervisory

employees-there must be a written agreement that
the employee shall remain in the employ of the
employer for a certain period of time and such a
scholarship is required by the nature of the
employers business.
2. Scholarship grant to the dependents of an
employee- the dependent must have passed the
competitive exam conducted by the employer.
L-10 LIFE OR NON-LIFE INSURANCE PREMIUMS
3 Tax Exempt life insurance premiums:

a. LIFE INSURANE PREMIUM ON GSIS
PART 1 Taxation Law

B. LIFE INSURANE PREMIUM O N SSS
D. LIFE INSURANE PREMIUM
INSURANCE POLICY
ON
GRO UP
Sec 33 C-Fringe Benifits Not Taxables

1. Fringe Benefits which are authorized are exempted from under special laws;
2. Contributions of the employer for the benifit of the employee to retirement insurance and hospitalization
benefit plans:
3. benifits given to the rack and file EE, whether granted urder a collective bargaining agreement or not and
4.De minimis benefits
The rec ent r egulations is Rev. Reg 10-2009
These refers to facilities or privileges furnished by the employer to his employee that
Are of relatively small value and are offered or furnished by the employer merely as a means of
promoting HEALTH, GOOD WILL, CONTENTMENT OR EFFICIENCY of his employees.
Des
TAX EXEMPT DE MINIMIS BENEFIT
REVENUE REGULATIONS 10-2000
MONETIZED VALUE OF UNUSED BENEFITS
QUALIFY:
PRIVATE EMPLO YEES
Vacation leave- exempt up to 10 days
Sick Leave- always taxable
GOVERNMENT EMPLOYEES
VL and SL are always taxable regardless of the
number of days
MEDICAL CASH BENEFIT OR ALLOW ANCE GIVEN TO THE

DEPENDENTS OF THE EMPLO YEE
P 125.00 per month or P725 per semester
RICE SUBSIDY
P1000.00 per month or 1 sack of 50 kg per month- not

more than P1,000
UNIFORM AND CLO THING ALLOW ANCE
NOT to exceed P3,000 per annum
MEDICAL BENEFIT GRANTED TO EMPLOYEES
NOT to exceed P10,000 per annum
LAUNDRY ALLOW ANCE
NOT to exceed P300.00 per month
EMPLO YEES ACHIEVEMANT AW ARD O N ACCOUNT OF

LENGTH OF SERVICE
Must be in the form of TANGIBLE PERSO NAL

PROPOERTY other than cash or gift certificates, NOT to
exceed P10,000
GIFTS OR DONATIONS DURING XMAS AND MAJOR

ANNIVERSARY CELEBRATION
NOT to exceed P5,000.00 per employee per annum

th
With respect to Christmas Bonus, add 13 month bonus

to the Xmas bonus- the same must not exceed
P30,000.00
PART 1 Taxation Law

FLOWERS, FRUITS, BOOKS AND SIMILAR ITEMS OF
RELATIVELY SMALL VALUE
Reasonable value- depending on the ERs capacity
MEAL ALLOW ANCE FOR OVERTIME WORK
NOT exceeding 25% of the Ees basic minimum wagemanagerial and supervisory employees
Item No. 2- INCOME FROM BUSINESS OR TRADE OR EXERCISE OF PROFESSION

INCOME COVERED
INCOME DERIVED FROM SELF - EMPLOYED FRO M TRADE OR BUSINESS(TRADING, MANUFACTURING,
MERCHANDISING, FARMING AND OTHERS)
SELF- EMPLOYMENT INCO ME (SEC 74) consists of earnings derived by the individual from:
From the practice of profession
Conduct of trade or business carried on by him as a sole proprietor
A partnership of which he is a member
SELF- EMPLOYED- a person engaged in trade or business or performs services for others for a fee and who
derived personal income from such trade or business or from the performance of such services.
INCOME DERIVED FROM PROFESSIONALS FROM THE PRACTICE OF PROFESSIONS
PROFESSIONALS- persons who derive their income from the practice of their profession- lawyers and
other persons registered with the PRO. It may also refer to one who pursues an art and makes a living
there from such as artists, athletes and others who are similarly situated.
NOTE: It is not material whether they have a business license or whether they are registered or if they are
self- declared (so si MangKepweng taxable- joke ni Japs)
BUSINESS INCOME:
FORMULA OF GROSS INCO ME
GROSS SALES
1,000,00.00
LESS: COST OF INVESTMENT

Cost of sale
Cost of goods
Sales allowance
Sales discount
530,000.00
GROSS BUSINEE INCOME
470,000.00
BUSINESS includes: one, which entails time, effort, and activity for purposes for purposes of LIVELIHOOD and
PROFIT
Q: Is income for illegal business taxable?

A: YES. It falls under the phrase income from whatever source- Section 32A
Q: Ar e expenses from illegal business deductible?
A: NO. By express provision of law, only legitimate expenses are deductible
PART 1 Taxation Law

Q: Suppose a Corporation A gave P100,000.00 to a customs official to process their license. Is the P100,000
taxable as income? May the Corporation deduct the same as business expense?
A: The P100,000.00 is taxable and should be included in the gross income of the customs official since it is
income from whatever source. However, the same is not deductible since unlawful or illegitimate expenses are
not deductible items form gross income (Sec. 34A)
Item No. 3- PROPERTY INCOME- GAINS DERIVED FROM DEALINGS IN PROPERTY:

You should know the provisions that amplify this. There are 2 provisions:
Sec 39- there are 4 sets of rules that will apply to Gain from dealing in property
Sec 40- there are also 4 sets of rules that will apply to Gain from dealings in property
So, in all there are 8 rules that apply to Gains from Dealing in Property or property income
Favorite Bar Q: Sec 39A (1)- Ordinary Asset vs. Capital Asset
Q not yet asked: What is ordinary loss; Distinguish ordinary gain from ordinary loss
Classification of Assets (Sec 39A (1)
Ordinary Asset- defined by way of enumeration. There are four categories of Ordinary Asset (SOUR)
Capital Asset- defined by way of exclusion. Meaning, other than ordinary assets. What is not included in
SOUR is considered as capital asset.
S-O-U-R
STOCK IN TRADE SUCH AS INVENTORIABLE ASSET. These are really assets that remain in the inventory of
the taxpayer at the end of the taxable year. This includes raw materials, work- in process and finished
goods.
ORDINARY COURSE OF BUSINESS AND TRADE. So proper ty primarily held for sale to customers may be
ordinary if it is held in the ordinary course of business or trade
Example: A r eal estate dealer sold real properties. Such real properties being held in the ordinary course
of trade or business is an ordinary asset. The gain derived from such sale is treated as Ordinary Income.
Example- sale of land in a real property development business.
USED IN BUSINESS. Property used in business subject to depreciation. These are really depreciable assets.
If these assets are not used in the trade or business, they are capital assets, and therefore the gains from
such sale of assets are treated as Capital Income. Example Furniture and Fixture, Machineries Equipmentthese are really subject to depreciation, but these must be used in trade or business; otherwise, it would
be classified as capital asset.
REAL PROPERTY USED IN TRADE OR BUSINESS SUCH AS PARCELS OF LAND, MACHINERIES AND BUILDINGS.
If these are not used in trade or business, then they are considered as Capital Assets. Real properties not
use in trade or business include residential house and lot.
WHAT IS NOT INCLUDED IN THIS ENUMERATION IS AUTOMATICALLY CONSIDERED AS CAPITAL ASSET
Q: Ar e all properties used in trade or business by the taxpayer considered as ordinary assets?
No. Not all properties used in trade or business are considered as ordinary asset because they are only
limited to SOUR. Assets which may be held in connection with the business but not included in SOUR may
be considered as Capital Asset.
Examples:
Accounts Receivable these are held by the taxpayer in connection with the business. But since it is not
included in the SOUR, the gain derived from sale of A/R is considered as Capital Income.
Investments in Stocks
Sale of Goodwill Goodwill may be sold and the gain from the sale of goodwill is a capital income.
PART 1 Taxation Law

You will note that in the provision, the definition of Capital Asset includes properties whether or not held by the
taxpayer in connection with the trade or business. So, you cannot apply the busin ess test because these are really
properties are held in connection with the business of the taxpayer and yet considered as capital asset. So capital
assets cover not only properties not used in trade or business. It may also include properties used or hel d by the
taxpayer in connection with his business. This is true in the case of A/R Investment in stocks & Goodwill.
But the definition of Ordinary Asset may refer only to properties used in trade or business. So it is safe to say that
Ordinary assets are limited only to those used in connection with his trade or business and capital assets may
include all properties not used in trade or business including those assets which may be used in trade or business.
2003 Bar Distinguish Ordinary Asset from Capital Asset
Answer: In ordinary asset, you cannot use the word includes because that is not only really accurate.
The word includes may be used only in defining capital asset because the enumeration of Ordinary
Assets is exclusive. So, you will sat that Ordi nary asset may refer or is just limited to the following items:
SOUR
On the other hand, Capital Asset (You can now use the word include) includes properties whether or not
connected in trade or business, except or other than SOUR, because capital asset is defined by way of
exclusion. So, you have to exclude SOUR.
Ordinary Asset
Capital Asset
Refers to and is limited to the following

assets: Stocks in trade or business,
properties in Ordinary course of business,
those used in business and Real property
used in trade or business
Includes property whether or not

connected with the trade or business of
the TP other than Stocks in trade or
business, those used in business and real
property used in trade or business.
Q: Distinguish Ordinary Gain from Capital Gain

Answer. Ordinary gain refers to the gain derived from the sale or exchange of ordinary asset whereas
capital gain may include gain derived from the sale or exchange of capital assets. To elaborate on this, you
may define it in this way: Ordinary gain is a gain derived from the sale or exchange of an asset such as
SOUR whereas capital gains refer to the sale or exchange of an asset whether or not used in trade or
business except that of gain derived from the sale or exchange of the following asset: SOUR.
Ordinary Gain
Capital Gain
Gain derived from the sale or
exchange of ordinary assets such as
stocks in trade or business, properties
in ordinary course of business those
used in business and Rizal property
used in trade or business.
Gain derived from the sale or

exchange of capital assets or property
whether or not connected with the
trade or business of the TP other than
stocks in trade or business, properties
in Ordinary course of business, those
used in business and real property
used in trade or busi ness
Q: Define Ordinary Income: Refer to Section 22(2).

The ter m ordinary income includes any gain from the sale or exchange of an ordinary asset. So, it made mention
of Section 39 A (1). Ordinary income is not only limited to that gain derived fro m the sale or exchange of an asset.
Remember that there may be other business that may be the source of this ordinary income. But if the only
source of income is sale or exchange of ordinary asset, that definition may be considered as is really defined i n that
limited sense. Hence, you can use the word includes because there are other sources of this income.
Q: Define Ordinary Loss
PART 1 Taxation Law

This is a loss that may arise or may be sustained from the sale or exchange of an asset that is SOUR.
Q: Distinguish Ordinary Income from Ordinary Loss
Ordinary loss refers to that income that may be derived from the sale of an asset SOUR. On the other hand,
ordinary loss is one that may be incurred from the sale or exchange of an asset considered SOUR.
ORDINARY INCOME
ORDINARY LOSS
Includes the gain derived from the sale or exchange of

ordinary asset
Loss which may be sustained from the sale or exchange

of an ordinary asset
Q: Capital Gain v. Capital Loss

Capital gain may include gain derived from the said or exchange of a n asset whether or not connected in trade or
business except SOUR. On the other hand, Capital Loss is one that may be incurred from the sale or exchange of
an asset whether or not used in the ordinary trade or business except SOUR.
CAPITAL GAIN
CAPITAL LOSS
Includes gain derived from the sale or exchange of an

asset, WON connected with trade or business, except
SOUR
Loss which may be sustained from the sale or exchange

of an asset, WON connec ted with trade or business,
except SO UR
Q: If an asset is considered ordinary, can it be converted to Capital Asset?

Theres really no rule that says Ordinary Asset is always an Ordinary Asset. Ther es no rule to that effect because
there are exceptional case that Ordinary Asset may become capital asset. Conversely, theres no such rule that say
that Capital Asset is always a Capital Asset. Capital asset, also under certain situation may be converted to Ordinary
Asset.
TWO IMPORTANT CASES: SC laid down the criteria/ test on when ordinary asset may become Capital Ass et and
vice- versa
TUASON VS. LINGAT, JR. 58 SCRA 170 In this case, the SC mentioned 7 circumstances that may convert a Capital
Asset to Ordinary Asset
Area of the property
Whether the property or land is divided into lots
The improvements introduced mus t be valuable
Whether the lots are for sale
If for sale, if they are for sale on
If a broker was employed to manage or administer the sale
If the seller is engaged in the real estate business
All of these circumstances were present in this case. It turned out that the seller was really in the real
estate business; the property (78 h) was originally classified as Capital asset; it was subdivided into lots;
improved; sold in installment; and the seller derived substantial income from such sale
Q: What is the really the importance in knowing whether the asset is OA or a CA?
o Bear in mind that capital transaction is accorded preferential tax treatment. Under Sec. 39 B, this
holding period rule which reduces the taxable capital gains by 50% only applies to capital
transactions. This is a form of tax avoidance. If you sell a capital asset, try to recall this provision.
Dont sell it within the 12 month period because if the sale is within that 12 month period, the
gain is 100% taxable. The tax avoidance scheme is that you sell after the lapse of the said holding
period because the gain is taxable only up to 50%. You cannot apply this rule to sale of OA. This is
PART 1 Taxation Law

what the taxpayer is alleging in this case, that the asset is a CA so as to avail of the reduced tax
rate.
OA Conver ted to CA:
Situation: A real estate dealer, business is buying and selling of real property. So this is
considered as OA. When will this OA become CA? What happened?
The real estate dealer died. Upon the death, this property is transmitted to th e heirs
under the law on Succession. The heirs now are in possession of the property.
Answer: It really depends upon the circumstances:
o If the heirs will continue the business, these properties will remain as
OA.
o If the heirs will not continue the business , then these properties will
now converted to CA, so that if the heirs sell these properties, the gain
is considered as Capital Gain.
Calasanzvs CIR 144 SCRA 664: In this case, the SC cited the circumstance substantial or extensive improvements.
How do you improve a parcel of land? You subdivide it; construction of concrete gutters (?) mapping, installation
of lighting systems and drainage facilities. These are substantial improvements according to the SC. The SC in this
case mentioned that it may become an Ordinary asset if the cost of the improvement is twice the cost of the
property. In this case, the cost of property is 4,742.65: the cost of the improvement is 170,028.60, more than twice
the cost of the property.
There is really no fixed rule or formula that will determine whether an OA will be converted to CA or vice
versa. Consider these circumstances. There are really the criteria or tests.
3 Rules that apply only to Capital Transactions: (Sec. 39 B, C, D)
Holding Period Rule (Sec. 39 B)
Capital loss limitation (Sec 39 C)
NELCO Net Capital Loss Carry Over (Sec. 39 D)
2001 Bar-Q on the Distinction between NELCO (Sec. 39 D) and NO LCO (Sec. 34 D(3))
NELCO Net Capital Loss Carry Over
NOLCO Net Operating Loss Carry Over
3 Notable Distinctions
a.
b.
c.
NELCO arises from capital transactions (meaning, involving capital assets): NOLCO arises from
Ordinary transaction (may involve ordinary asset)
Sec. 39 B Categorically says other than corporate, so NELCO can only be availed of by individual
taxpayer. Under NO LCO (Sec 34 D(3)), theres no similar provision Sec 34 D(3) admits of no
distinction, so individual and corporate taxpayer may avail of this NOLCO.
NELCO may be carried over only in the next succeeding taxable year. On the other hand, NO LCO
allows carry over only in the next succeeding taxable years or in the case of mining companies, 5
years.
If you will be asked, define tax avoidance? Distinguish the same from tax evasion 1996 Bar theres a follow up Q.
Give examples of tax avoidance. You can cite these as examples.
Holding period rule this implies that the asset sold has been held by the taxpayer for a period of more
than 12 months; if the sale took place after the lapse of the said 12 -month period then the gain is taxable only up
to 50%
Will this rule apply to Ordinary Assets?
No the gain from the sale of OA is always 100% taxable. The gain derived from the sale of OA is
100% taxable. Immaterial of the holding period. This 50% can only be availed by individual taxpayer.
PART 1 Taxation Law

Q: An individual taxpayer, MR. A, sold his property considered as OA. He derived a gain amounting o 150,000. The
property has been held for 2 year from the date of purchase.
Q#1: what is the tax treatment on the 150,000 capital gain?
Only 50% (70,000) is taxable
Q#2: What if the seller is a corporation?
The whole amount (150,000) is taxable. Sec. 39B says that other than corporate taxpayers, that
means that 100% taxable if capital gains is derived by corporate TP.
Capital Loss is deductible to the extent of Capital Grain
This means that you can only deduct capital loss from capital loss from capital gain. If theres no capital
gain, no deduction is allowed. The deductibility of capital loss is dependent upon the existence of capital gain.
Since you can only deduct capital l oss capital gain, then you cannot deduct capital loss from ordinary gain to allow
such is to violate this rule (Sec 3 C)
2003 Bar the rationale behind the prohibition that capital loss cannot be deducted from Ordinary Gain
Answer: Under Sec. 34, theres a rule on matching cost against revenue. This principle states that Only ordinary
and necessary expenses (business connected expenses) are deductible from Gross income or Ordinary Income.
These non-business connected expenses cannot be considered as deducti ble items. Capital loss is non-business
connected expenses as it arises or can be sustained only from capital transactions. If we allow capital loss as a
deduction from ordinary income, it will violate this rule that only ordinary and necessary expenses ar e deductible
from Gross income as required by the Principle of Matching cost against revenues.
SUMMARY:
CAPITAL TRANSACTIONS 3 Special Rules
Sec. 39 B, C and D
TAXABLE CAPITAL GAINS:
RULE 1:
HOLDING PERIOD RULE Sec. 39B
Applies only to INDIVIDUAL TP
100% subject to tax if capital asset sold after being held by the TP for a period of not more than
12 months.
50% If holding period is more than 12 months
NOTE: Gain from ORDINARY ASSETS is always taxable regardless of the holding period
Ex. Individual TP sold a car which is not used in business for P100,000
Tax treatment
o If the car was NOT held more than 12 months the whole of P100k is taxable.
o If the car was held over 12 months, only P50k is taxable.
RULE 2:
CAPITAL & LOSS LIMITATION Sec. 39C
-
Applies to INDIVIDUAL and CORPORATE taxpayers except, in the latters case. banks and trust
companies
RULES:
Ordinary loss is deductible to the ex tent of ordinary gain

Capital loss is deductible from capital gain
Capital loss IS NOT deductible from ordinary gain
PART 1 Taxation Law

Q: Reason why capital loss is NOT deductible from ordinary gain?
A: Sec. 34 (Allowable Deductions) follow the principle of matching of cost against revenue. Only
ordinary and necessary expenses are deductible from ordinary income. Capital loss is a non business loss; if we deduct it from ordinary income then it would be violative of the principle.
Q: Can you deduct ordinary loss from capital gain?
A: YES, the NIRC provides no prohibition against it.
When capital loss is more than capital gain:
Capital gain
P50,000.00
Capital loss
P100,000.00
Net capital loss P50,000.00 may be carried over to the succeeding taxable year BUT the loss must not be mor e
than the net income for the year it was incurred.
RULE 3 : NET CAPITAL LOSS CARRY O VER Sec. 39 D
Applies only to INDIVIDUAL TP
GR: Expenses which includes losses may not be carried to the succeeding taxable year.
XPN: NET CAPITAL LOSS CARRY O VER such loss (in an amount not on excess of the net income of such year) shall
be treated in the succeeding taxable year as a LOSS from sale or exchange of capital assets held for not more than
12 months
NET CAPITAL LOSS CARRY O VER (Sec. 39D)
NET OPERATING LOSS CARRY O VER (Sec. 34D(3))
- Arises from capital transactions which necessarily

involves capital assets
-Arises from ordinary transactions which necessarily

involves ordinary assets
- other than corporate TP Henc e, available only to

INDIVIDUAL TP
- may be availed of by BOTH individual and corporate TP
May be carried over to the succeeding taxable year

(1year only)
-Allows carryover of operating loss for 3 succeeding

years, 5 years for mining companies
Rules to be remember ed:

1.
2.
3.
4.
It is settled that OL is deductible for OG

It is also allowed to deduct CL form CG (Sec. 39 C)
a. Justice Vitug asked this Q: Can you deduct OL from CG?
i. His opinion is that the tax code provides no prohibition. The prohibition only applies to
the deductibility of CL from OG, as the rule says CL is deductible only from CG. But the
tax code, Justice Vitug emphasized, provides no prohibition in deducting OL from CG,
therefore, it is allowed.
In the case of Capital Loss Limitation it applies to both individual and corporate taxpayer, except trust
companies and banking institutions
NELCO this only applies to individual taxpayers. Sec. 39 B says: other than corporate taxpayer. So
corporate taxpayers are not allowed to carry over Net capital losses.
a. The ter m Net Capital Loss is defined in Sec. 39A (3). It says it is the excess of Capital Losses over
Capital Gains:. It means that Capital Loss is more than Capital Gain
i. Example CG- 150,000
CL 200,000
It says there can only be Net Capital Loss if the CL is more than the CG. In this
case, ther efore, Net Capital Loss is 50,000. This is one that may be carried over as a
deduction in the CG of the succeeding taxable year.
PART 1 Taxation Law

b)
c)
Net Capital Gain- excess of the CG over the CL. Just the opposite of Net Capital Loss
The general Rule is that expenses must be paid and be claimed in the year the same is paid or
incurred. You cannot as a rule, carry over an expense
a. Exception: Sec. 34 Net Operating Losses these can be carried over as a deduction
from the GI in the next succeeding taxable year. Thus when we speak of Capital
Transactions, this is the Exception, Sec. 39 (D) Net capital Loss can be carried over as a
deduction from the CG in the succeeding taxable year.
SALE OF REAL PROPERTY CLASSIFIED AS CAPITAL ASSET:
Sec. 27 D (5): A final tax is hereby imposed on the gain presumed to have been realized on
the sale, exchange or disposition of lands and/or buildings which are not actually used in the
business of a corporation and are treated as capital assets based on the GROSS SELLING
PRICE or FMV, whichever is higher, of such lands and/or buildings.
Sec. 24 D: X X X a final tax is nearby imposed upon capital gains presumed to have been
realized on the sale, exchange or disposition of real property located in the Philippines,
classified as capital assets including pacto de retro sales and other forms of conditional sales
XXX
Favorite Bar Q: Sec. 24 D; compare thi s to 27 D (5)
o Sec. 24 D applies to individual taxpayer while Sec. 27 D (5) applies to Domestic
Corporation
o It is 27 D (5) that is yet to be asked in the Bar. Sec. 24 D was asked 3x already
o These 2 provisions pertain to sale, exchange or other disposition of Real property
classified as Capital Asset. This is the transaction contemplated therein. Try
compare these 2. It will help you establish distinctions between these 2
The tax rate is the some 6%. The tax base is likewise the same it is the
higher amount between the Gross Selling Price and Zonal Value.
These are the distinction:

A.
B.
C.
As to the taxpayer Sec. 24 D applies to individual taxpayers; Sec 27 D (5) applies to Domestic
Corporation:
In 24 D. It says Real Property. However the Real Property in 27 D(5 ) covers only land and building. In 24 D,
it says Real Property while in 27 D (5). It is very specific that it covers only land and building.
1. You must have learned in Civil law that under certain conditions, (Art. 415 (5)),
machinery may be considered as R/P. But since 27 D (5) limits this to land and
building, this machinery which may be considered under 24 D as R/P, may not
be covered.
2. You have to refer to the definition of R/P for purposes of R/p tax. We can adopt
Art 415(5) and this has been cited by the SC. In several cases, since there is
really no clear definition of R/ under the Tax Code. By analogy, we can apply
the definition under the Civil Code; In fact under RA 7160 Sec. 99 (M). It
incorporates Machinery.
Another point of distinction in Sec. 24 D (2), there is a tax avoidance scheme, whereas Sec. 27 D (5)
provides no tax avoidance scheme. In other words, Domestic corporations cannot legally avoid the
payment of Capital Gain Tax on the Sale of Real Property classified as Capital Asset involving land and
building.
1. We have extensively discussed the meaning of Capital Assets [C/A]/ Take note
that this applies to R/P (Expressia Unius Est Exclusio Alterius), so this does not
include those considered as Ordinary Assets Real Property used in trade or
business. So here in Sec. 27 D (5). It must be land and building not used in the
trade or business, thats why t is considered as capital Asset.
PART 1 Taxation Law

2.
Let us emphasize these additional requisites as provided for in RR 17 -2003. This

was mentioned in your book:
a. This is 6% Capital Gains Tax can be legally avoided if the following
requisites are present:
i. The proceeds of the sale of Principal Residence must be
applied either to construct or purchase new principal
residence. It is very clear in Sec. 24 D (2) that the same must
involve Principal Residence. Principal residence may include
also the land which it is built as clarified in Rev. Reg. 30-99)
1. The trick of the problem is that: Suppose what was
sold was not in the nature of Principal residence.
Then this tax avoidance scheme will not apply. It
must be a sale of Principal Residence. We may call it
own principal residence; then
ii. Observe the 30 days day notice to the BIR. That means that
within 30 days from the date of sale, you should notify the
BIR for their recognition of this tax avoidance scheme. The
date of sale as construed under Rev. Reg. 17-2003 refers to
the date when the deed of sale was notarized It is the date
of the Notarization of the Deed or Sale;
iii. Comply with the 18-month period. How do you comply wi th
this?
1. Within 16 months from the date of sale, the
construction or purchase of this residence must be
made. So, the construction of new principal
residence or the purchase of the new principal
residence must be made within 18 months from the
date of the sale was notarized.
iv. Theres another limitation, the 10 year period. This can be
availed of only once every 10 years.
v. Under this Rev. Reg., the 6% capital Gains Tax must be
deposited under an escrow account with the authorized
agent bank.
1. You must be familiar with the ter m escrow because
it is in the Corporation Law-shares held in escrow.
2. Here, the purpose is to ensure compliance with the
requisites. Under this escrow agreement, there are
certain limitations set by the authorized revenue
district officer to the effect that if the seller can
comply with these requisites, then the seller can ask
for the withdrawal of the same.
3. After the ex ecution of escrow agreement, it is
required under Reg. 17-2003 that the seller and the
buyer should file joint tax return wi th respect to this
6% Capital Gains Tax so as to comply with the filing
of the so called ITR of this 6% Capital Gains Tax
vi. There is another rule under RR 17-2003: within 30 days after
th
the lapse of the 18 month period, the seller should submit
documents showing that he has comply with these requisites.
That he used the proceeds to construct or purchase new
principal residence. If ther es: no compliance from the lapse
th
of the 18 month period, RR 17-2003 says that the seller is
considered as a delinquent taxpayer as far as non-compliance
PART 1 Taxation Law

of this provision is concerned. And he can be charged with

appropriate penalty. This is cited in your book, and the 30 day
th
period from the lapse of 10 month period really applies to
the submission of certain documents s howing compliance to
this regulation.
So, if this will be asked again, you should stain these new r equisites and the execution of escrow
agreement among the buyer, seller, and RDO and authorized agent bank.
So far, we have mentioned 3 tax avoidance scheme:
a. mentioned that Sec 39B the holding period rule is really a tax
avoidance scheme because it reduces your taxable gain by 50%, and the
permissible method to reduce the same is to sell the Capital Asset after 12
months from the date of sale;
b.
c.
We also discussed Sec 40 C (2). What is that tax avoidance scheme or

legally permissible means?
i. The exchange of properties, shares of stocks or securities
must be made in accordance with the plan of Merger or
Consolidation (M or C)
And this is the third. If you want to avoid the effect of the 6 % Capital
Gains Tax, comply with the requisites laid down under Sec. 24 D(2)
D. Another distinction between Sec 24 D and Sec 27 D(5) is when the buyer is the Govt political subdivision of the
state, agency, instrumentality or GOCC.
You will not note that under Sec. 24 D, the seller has the option. Theres that option granted by law for
the seller (that is, individual taxpayers only) either to avail of the 6% Capital Gains Tax or the progressive
tax rate of 5-32& under Sec. 24A. It is unfortunate that the BIR has yet to issue a Regulation to this effect
in applying the 6% theres no doubt that the basis is either the SP or Zonal Value, whichever is higher. The
cost is nondeductible. If you apply Sec. 24A, you will note that the tax rates are higher and the very
purpose here is for the seller to avail of the reduced rate. So, is the cost deductible under Sec. 24 A?
If you read Sec. 24A which provides progressive rates, the tax base is taxable income. So an opinion must
be expressed that since the purpose of the law is to make the seller to avail of the reduced tax rate, he
must be entitled to deduct the cost.
On the other hand, under Sec. 2D (5), theres no option given to Domestic Corporation if the buyer I the
Govt political subdivision of the state, agency, instrumentality or GOCC.
SUMMARY:
CAPITAL GAINS TAX 6 % FINAL TAX
Applicability
Tax Base
BIR ruling includes:
Applies to real property classified as capital asset

GSP or the Zonal value of the property, whichever is higher
Exchange of property and other disposition such as:
Assignments of real rights over real property

Pacto de retro sale
Conditional sale subject to a suspensive condition
If the buyer is the GOVERNMENT option of the seller to apply the tax rates under 6% capital gains tax as provided
in Sec. 24D of the NIRC
NOT applicable to corporate TP
Avoidance of 6% CGT
PART 1 Taxation Law

In cases of sale or exchange of principal residential house of the individual TP see the requirements for
the tax avoidance
INDIVIDUAL
CORPORATION
CG tax OF 6% UNDER Sec. 24D
CG Tax of 6% under Sec. 27A (5)
A TAX AVOIDANCE SCHEME for individual TP sec. 24 D

(2)
Corporate TP cannot avail of any tax avoidance scheme
Applicable to individual taxpayers
Applicable only to Domestic Corporations
Applicable to all real property classified as capital asset
Only to land and building
OPTION of the tax rate applicable in case the

government is the buyer 5-32% or CG tax of 6%
No such option available
PRESUMED GAIN:
There is a term you should rememb er under Sec. 24 D & Sec. 27 D (5). The word there is presumed
gains. The CG Tax of 6% shall be imposed on the presumed gains.
2001 Q: A doctor by profession acquired a parcel of land in 1990 for 1 Million. He sold the same in 2000 at
8-00,000. It would appear that he had incurred an actual loss in the amount of 200,000 because he
received the SP amounting to 800,000 (the problem did not state the Zonal Value so, we considered this
as the basis) and he previously acquired it at 1 Million, so he incurred a n actual loss of 100,000. The
doctor argued that he should not be made to pay the tax because he derived no gain, I fact he incurred a
loss is the contention of the doctor/seller tenable?
o The problem may be answered by thee provisions:
o NO. Because the cost is a nondeductible item. If you are an ordinary citizen/taxpayer, you will
surely argue that how can I be made to pay the tax if I derived no gain and more so I incurred a
loss? Not all tax payers are award of this Sec.24 D which fixed the tax base at GSP or Zonal value,
whichever is higher. The cost is nondeductible. The contention of the doctor is not tenable
because the basis of the 6% CG tax is the amount received (the GSP which is presumed in this
problem to be higher than the Zonal Value), so the cos t is disregarded.
Q#1. Can a taxpayer-seller be made to pay tax even if he derived no gain, for instance:
GSP (higher than the Zonal Value) 800,000
Cost
800,000
Gain
-0Answer: Even if he derived no gain, since the basis is the higher between the GSP and Zonal Value, he can
be made to pay the 6 % CG tax
Q#2. Is there a situation where in a seller can be made to pay a tax even if he incurred a loss from such
transaction?
o YES. He r eally incurred an actual loss of 200,000 but he still requir ed to pay the 6% CG tax
because the cost is not allowed to be deduc ted (Actual Bar Question in 2001)
o Note under Sec. 24 D the meaning of other dispositions. Sec. 24 D says sale or exchange
(sale is defined in Art. 1459 NCC, and the exchange or barter in Art. 1638), and then, :other
dispositions. If you read the subsequent provision, this covers also conditional sale such as
pacto de retro sale.
Q#3: Would your answer be the same if the seller is a Domestic Corporation?
o Recall Sec 27 D (5) thats the 6% CH tax. Sec. 28 A applies to RFC while Sec 28 B applies to NFRC
PART 1 Taxation Law

o
So, there is really no provision mentioned about this 6% CG tax in Sec. 28 (A & B ), as this 6% CG
Tax is a rule on corporate income tax that applies solely to Domestic Corporations
o This is a capital transaction which is not covered by the rules which we discussed under Sec 39 (B,
C, D)
Q: What are the capital transactions not covered by the Rules under Sec. 39 B, C & D (Holding period,
Capital loss limitation & NELCO)
o Answer:
Capital involving the sale of Real property (of course, this must be a Capital Asset): this is
subject to 6% CG Tax based on the higher between the GSP and the Zonal Value. So, Sec
39 (B, C, ) does not apply to all capital transactions
Another can be found in 4 Sections (Secs. 24, 25, 27, & 28): this means that this is a rule
that applicable to both individual and corporate taxpayer.
If you asked: Is there a common rule that can be applied to both individual and
corporate taxpayer?
o YES. It is a capital gain (which is really a capital transaction) derived
from the sale of shares of stock NOT listed and traded through local
stock exchange. THE TAX RATES ARE 5 % * 10%
Net CG not exceeding 100,000 5%
In excess of 100,000 10%
Q: Suppose the shares of stocks are listed and traded through the local stock exchange, will your answer
be the same?
o The examiner should not ask this Q because this is excluded from the coverage as this ia really a
percentage tax. You can find in Title V Sec.127: IF the shares of stocks are listed and traded
through LSE, the tax applicable is not an income tax (thats why the examiner should not ask this
Q) but a percentage tax, 1/3 of 1% of the GSP. But you must still answer the same even if the
examiner inadvertently overlooks the coverage as we will recommended that the Q be a bonus
one.
o Thus, these are the 2 capital transactions not covered by the Rules under Sec 39 (B, C &D)
ITEM #4 : INTEREST INCOME:
If a Q will be asked on Internet income, it would be on whether it is taxable or tax exempt

There are only 5 items under the tax code which are exempt from Income tax as far as interest income is
concerned:
o Interest income from bank deposit:
The recipient must be any of the following tax exempt recipients:
Foreign Government
Financial Institutions (FI) controlled or financed by foreign govt
Regional or Intl FI established by foreign govt
o Interest income on loan extended by any of these 3
o Interest income on Bonds, Debentur es and other certificate of Indebtedness received by any of
these of 3.
The first 3 youll find in Sec. 32 B (7.3)
o This has been the subject of amendment by RA 8124. It is an interest income on bond deposit
maintained under the expanded foreign currency deposit system. The rule has been changed
Under the old tax code irrespective of the recipient of this recipient of thei deposit
TAX EXEMPT
Under the present tax code (as amended by RA 5424) it is only tax exempt if the
recipient is a NONRESIDENT taxpayer whether individual or corporate. Thus, if the
depositor (the recipient of this deposit maintained under the expanded foreign currency
deposit system) is a resident taxpayer, it is subject to 7.5% FT.
Under the old tax code, tax exempt; Now, 7 .5%
PART 1 Taxation Law

o
Interest income from long ter m investment or deposit. Youll find the meaning of this und er Sec
22 F. It is regulated by the BSP & the term Is 5 yrs. Or more. If less than 5 yrs this is subject to the
diminishing rates.
If we refer to Sec. 24 & 25, youll find therein a provision exempting interest from income tax. Is this
found in Sec. 27 & 28?
o Note that Secs. 24 & 25 apply to individual taxpayers while Secs. 27 % 28 apply to corporate
taxpayers. There is really no similar provision that youll find in 27 % 28. So, the ex emption
therefore, applies only to individual taxpayers; it does not appl y to corporate taxpayer.
Q: The is the interest Income that is subject Final Tax?
o It must be an interest income on bond deposit. If it is an interest income on loans, assuming it is
not tax exempt, then such interest income is subject to regular income tax , whether the deposit
is Philippine or Foreign Currency Deposit. This is also one of the amendments introduce by RA
8424.
o Before, it only applies to Philippine Currency. Now, the law makes no distinction, bond deposit
whether Phil. Deposit or not, is subject to Final tax
Hypothetical Q: a taxpayer derived income from a loan that he extended to a certain person. He has also
interest income from his bond deposit. Q#1. As regards his interest loan, what ois the treatment?
o Subject to regular income tax since it is not subject to ex emption
Q#2: As regards interest on bond deposit?
o It is subject to Final tax
The tax treatment here is that interest income must be repor ted as part of his gross income but interest
bond deposit, since is subject to FT, it need be reported as part of the Gross income.
Regarding interest income on Govt Securities, dont be misled. Under Sec. 32B, that item was deleted.
There is no item under 32 B regarding interest income on Govt securities. Thats why it is not included in
the exemptions. Interest income on Govt securities, effective Jan. 1, 1998, is already taxable. This is no
longer tax exempt as the item was deleted from the enumeration on the exclusion from Gross Income.
SUMMARY:
Interest
TAX EXEMPT
NTEREST FRO M BANK DEPOSITS Sec. 32 B 7(a)

INTEREST O N LO ANS EXTENDED BY
1. Financial Governments
2. Financial Institutions controlled or financed oy FX
govts, Regional or International FI established by FX
INTEREST INCO ME O N BONDS or OTHER CERTIFFICATES

OF INDEBTEDNESS ISSUED IN FAVOR OF
INTEREST INCO ME O N BANK DEPOSITS MADE UNDER
THE EXPANDED FX CURRENCY DEPOSIT
The recipient must be a by a NRTP NRA or NRFC
INTEREST INCO ME Sec. 22F ter m of 5 years or more

made in pursuance of CB regulations and in
denominations of P10,000 or more
Only INDIVIDUAL TPs are exempted
If by a resident, its subject to 7.5 % FINAL TAX
NOTE: As of January 1, 1998 INTEREST on GOVERNMENT SECURITIES are no longer tax exempt.
ITEM #5 : RENT INCOME:
Fixed sum either in cash or property equivalent to be paid at a definite period for the use or enjoyment of
a thing or a right
PART 1 Taxation Law

SCOPE ALL rentals derived from lease of property, whether used in business in business or not, from real
estate or personal property, earnings from copyrights, trademarks, patents and natural resources under
lease.
Q: What is the difference in terms of tax treatment between Rent Income and Royalties
RENT
ROYALTY
AS TO REPORTING
Must be reported as part of gross

income
Need not be repor ted since

subject to FINAL TAX
AS TO TAX RATE
Regular progressive rate of 5-35%
FINAL TAX
2002Q#3: This is a Q designed by the examiner to test the knowledge of the examinees regarding the
difference between Royalties & Compensation Income
o Q. UVK -UK entered into a licensing agreement with UKV-Pils. UKV-UK authorized UKV-Phils to
distribute computer software in the Philippines. UKV-Phils, thereafter enter ed into a licensing
agreement with a bank in the Phils. In the contract, it was categorically stated that the licensing
agreement with bank in the Phils and the bank did not involved the transfer of proprietary rights
over the assets. Thereafter, Royalty was paid by UKV-Phils to UKV-UK. How do you tr eat these
payments made by the banks to UKV-Phils? Is it in the form of Royalty or compensation for the
services rendered?
The key here is, since it does not involve the transfer of proprietary rights when
UKV-Phils. Enter ed into a licensing agreement, it rendered technical services to
the bank, then that partakers the nature of compensation for services renders.
It is therefore subject to regular or normal tax (if this is in the nature of royalty,
it is subject to FT.)
o Modification: Is the payment be subjected to FT? IF not, then why? (the words if not is a guide
that pag hindi subject to FT, what would be then the appropriate treatment)
So, it should be treated as compensation for services rendered technical services to the
bank although theres a licensing agreement because it is authorized by UKV-UK.
If there was really no transfer of proprietary rights, that may be tr eated as
compensation for services rendered, otherwise (that is, there was transfer of
proprietary rights), that may be tr eated as Royalty
o ADVANCE RENTALS:
Rev. Reg. #2 Sec. 49 provides Rules not found in Title II which states that: Rent Income is
not only limited to the ordinary rent but also to additional rent income.
There is no rule under Title II regarding Additional income. What would you find in Sec.
32S (5) is only ordinary income. Additional rent Income may be grouped into 2 accor ding
to Rev. Reg. #2 Sec. 49:
rd
Obligations of lessons to 3 parties assumed by the lessee:
o Real estate taxes on the leased premises
o Insurance premiums paid by the lessee
o Dividends paid by lessee to SH of lessee - corporation
Jana
ITEM # 5 : RENT INCOME:
Fixed sum either in cash or property equivalent to be paid at a definite period for the use or enjoyment of
a thing of a right.
SCOPE ALL rentals derived from lease of property, whether used in business or not, from real estate or
personal property, earni ngs from copyrights, trademarks, patents and natural resources under lease.
PART 1 Taxation Law

Q: What is the difference in terms of tax treatment between Rent Income and Royaltics.
RENT
ROYALTY
AS TO REPORTING
- must be repor ted as part of gross

Income
Need not be repor ted since subject to FINAL

TAX
AS TO TAX RATE
- regular progressive rate of 5-35%
FINAL TAX
2002Q#3: This is a Q designed by the examiner to test the knowledge of the examinees regarding the
difference between Royalties & Compensation Income.
Q: UKV-UK entered into a licensing agreement with UKV-Phils. UKV-UK authorized UKV-Phils. To
distribute computer software in the Philippines. UKV-Phils. Thereafter entered into a licensing
agreement with a bank in the Phils. In the contract, It was categorically stated that the licensing
agreement entered into by UKV-Phils and the bank did not involved the transfer of proprietary
rights over the assets. Thereafter, Royalty was part by UKV-Phils. to UKV-UK. How do you treat
these payments made by the banks to UKV-Phils? Is it in the form of Royalty or compensation for
the services rendered?
-
The key here is, since it does not involve the transfer of proprietary rights when UKV-Phils.
Entered into a licensing agreement, and it rendered technical services to the bank then that
partakes the nature of compensation for services rendered. It is therefore subject to regular
or normal tax. (If this is in the nature of royalty it is subject to FY.)
Modification: Is the payment be subjected to FT? If not, then why? (the words if not is a guide
that pag hindi subject to FT, what would then be the appropriate treatment?)
-
So, it should be treated as compensation for services rendered because it rendered technical
services to the bank although theres a licensing agreement because i t is authorized by UKVUK.
If there was really no transfer of proprietary rights, that may be tr eated as compensation for
services rendered, otherwise (that is, there was transfer of proprietary rights). That may be
treated as Royalty.
ADVANCE RENTALS:
Rev. Reg #2 Sec. 49 provide Rules not found in Title II which states that: Rent Income is not only
limited to the ordinary rent but also to additional rent income.
There is no rule under Title II regarding Additional Income. What you can find in Sec. 32A(5) is
only ordinary income. Additional Rent Income may be grouped into 2 according to Rev. Reg. #2
Sec. 49:
rd
1. Obligations of lessons to 3 parties assumed by the lessee:
Real estate taxes on the leased premises
Insurance premiums paid by lassee
Dividends paid by lessee to SH of lessor corporation
Interest paid by lessee to holder of bonds issued by lessor -corporation:
PART 1 Taxation Law

2. Value of permanent improvements made by the lessee on leased property that will
become the property of the lessor upon the expiration of the lease.
VALUE OF PERMANENT IMPROVEMENT: A permanent improvement may arise

in long term contract of lease. Under the long ter m contract of lease, which is
usually 20-30 yrs. The lessee can introduce improvements, such as building on
the proper ty. As far as taxation is concern, the value of the proper ty may be
taxed as additional rent income Under Rev. Reg #2 Sec. 49 it may be reported
under either of the 2 recognized methods:
a. Spread-out method; and
b. Outsight method
There will be no computation. You will only be asked to state the methods
which this value of permanent improvement may be r eported as additional
rent income.
In legal ethics. If you will be asked to draft Long term contract of lease, you
should not forget, say it is for the period of 30 years to Incorporate the usual
stipulation that the lessee can introduce improvements on the premises and
upon the expiration of the LT contract of lease the ownership of such
improvements on the pr emises shall be transferred to the lessor.
In Outright method it is the FV of the per manent improvement upon the

completion of the contract that should be reported as additional rent income.
In Spread-out method (the technical term to be remembered as to what

should be spread-out is depreciated Value. It is the depreciated value of the
permanent upon the expiration of the contract of lease. You have to consider
the deprecated value of the per manent improvement upon the expiration of
the contract and divide it by the remaining contract of lease. Every year, an
aliquot part of the depr eciated value should be reported as additional rent
Income in addition to the regular rent Income.
th
Ex. Term of the Contract of lease is 30 years. In the 5 year, a building is

constructed with a value of 25M: the remaining term of the lease therefore is
25 years. Every year, 1M is to be reported as additional rent Income (25M/25
yrs.) This 1M is the aliquot part of the 25M. You need not state the amount in
your answer. As long as you can explain that an aliquot part of the depreciated
value of the improvement should be reported.
ITEM #7 : DIVIDEND INCOME:
> There are 8 provisions under Title II that deal with Dividend income:
PART 1 Taxation Law

1) Sec. 24 B (2) RC,NRC & RA are subject to 10% FT on dividends received from Domestic
Corporation effective year 2000;
2) Sec. 25 A (2) covers NRA-NETB. Tax is 20% FT on the dividends received from Domestic
Corporation;
3) Sec. 25 B NRA-NETB. Tax is 25% FT on the dividends received from Domestic Corporation.
4) Sec. 27 D(4) Dividend received by a Domestic Corporation from another Domestic
Corporation. It is tax exempt.
5) Sec. 28 A (7. D) 2005 Bar Recipient is RFC. Is that taxable? No. it is tax exempt:
6) Sec 23 B (5. B) r eceived by NRFC. This is subject to 15% FT and this is subject to tax credit
system:
7) Sec. 42 A (2) the source is a FC. In the first 6 provisions. The source is DC.
Q: the giver is a FC. What is the tax treatment?
Answer: It is an Income derived from sources win if:
a) the Philippine Income of this FC In the last 3 preceding taxable years is at least 50% of its
foreign income (income w/o). If it is less than 50%, that's not an income derived fr om sources with, so not taxable:
8) Sec. 73 B It provides that stock dividend is not subject to tax. It is not subject to tax because it
TAX RULES O N DIVIDEND INCOME
is just a
transfer from the surplus to the capital account.
SUMMARY:
PART 1 Taxation Law

GIVER OF DIVIDEND
RECIPIENT
DC
RC
BASIS
TAX TREA TMENT
Sec. 24B 2
10% FINAL TAX
NRC
RA
DC
NRA ETD
Sec. 25A 2
20% FINAL TAX
DC
NRA- NETB
Sec. 25B
25% FINAL TAX
DC
Sec. 27D 4
Tax exempt
DC
RFC
Sec. 20A 7(d)
Tax exempt
DC
NRFC
Sec. 28B 5(b)
15% FINAL TAX subject

to the tax credit system for
corporate income tax
DC
FC
Individual or corporate TP
Sec. 42A 2
INCOME FROM WITHIN IS

TAXABLE IF:
If the income from

within is AT LEAST 50% of
its income from without.
Otherwise It's not taxable.
STOCK DIVIDENDS
Sec. 73B
GENERALLY TAX EXEMPT
> TAXABLE GAIN AND DEDUCTIBLE LOSS :

* Sec. 40 has 3 paragraphs:
Par.
A) provides the basic rules on taxable gain and deductible loss:

B) provides the rules on the detennination of the cost or adjusted basis thereof; and
C) States 2 Rules:
1. NO GAIN, NO LOSS which means that if the gain is not taxable the loss is
not deductible
2. GAIN RECOGNIZED, LOSS NOT RECOGNIZED
> Q. When you sell property how do you know whether you derive gain from such sale of exchange or you incur
losses from such sale or exchange of an asses or capital?
*
The rules are basic theres taxable gain if the amount received or realized is more than the cost or
adjustable basis.
* Example: You sold your property: the selling price (thats the amount you received) is 500,000. This for
example, you acquired it at 330,000. It is really the differenc e between the Selling Price and the cost. So, the
taxable gain is 200,000.
* Is there an exception to this rule, that as a rule the cost is deductible from the amount rec eived or
realized?
PART 1 Taxation Law

- Yes. It is clear in Sec. 24 B (1) that the basis of the tax rate of 6% Capital Gains tax is the
higher amount between the Gross Selling Price and the Zonal Value
* Thus if you will be asked: It is the general rule that cost or adjusted basis is deductible from the Selling
Price, is there an exception to this Rule? YES. What is that Sale? It is a sale of capital asset, and that must be r eal
property. It is a sale of capital asset classified as real property.
* The general rule is, If there is a loss, that is the amount rec eived or realized is less than the cost or
adjusted basis, such loss is deductible. That means that, for example. The Selling Price (the amount received or
realized) is 300,000. This property was previously acquired for 400,000, theres a loss of 100,000. As a rule this is
deductible. Exception to this is Sec. 24B(1).
> BASIS FOR DETERMINING GAIN or LOSS FROM SALE O R DISPOSITION OF PROPERTY:
* It is really Important to know the cost or adjusted basis because this will help you determine whether or
not you incur gain or loss. What are the Rules on this? It depends upon the Mode of acquisition or purchase of
such property.
*
Sec. 40 B enumerated all the possible modes of acquiring property.
Modes:
1. Purchases (Sales tax)

2. Succession or Inheritance (Estate tax)
3. Donation (Donees)
4. Acquired through Insufficient or Ina dequate consideration ( montage?)
5. Property or shares of stocks acquired through the so called tax exempt
transactions
If the property is acquired under the above modes, we call that NO GAIN, NO LOSS
transaction
The last 2 modes are the technical ones.
You sold property for 500,000; property was previously acquired through
purchase.
-
The basis therefore is the purchase price. Thus, if the Purchase price
is 300,000. Deduct is from 500,000. The gain therefore is 200,000
#2: the law says, it is the FMV of the property at the time of acquisition. What
does that mean?
-
In the law of succession, when the proper ty was acquired through

inheritance, the right accrues upon the death of the
decedent/testator. For purposes of deter mining the amount refer
to Sec. 88. How would you know the FMV of the property
transmitted through succession? Sec. 88 says it depends upon the
nature of property, whether real or personal.
Correlate. The exam will not ask you to compute. Just remember :
the basis is the FMV at the time of death of the decedent that is the
date of acquisition. If you sold property acquired through
PART 1 Taxation Law

inheritance, selling price is 500,000. Shat must be the cost or
adjusted basis?
To answer this, determine how you acquire this property

which you sold for 500,000 you acquired it through
inheritance. And since Sec. 40 B (2) says the cost or the
adjusted basis is the FMV of the property. Then it is a
matter of referring to the date of property to deter mine
the FMV. The schedule of FMV of the property is usuall y
supplied by the executor or administrator. So, If according
to the Schedule of FMV of property, the FMV at the time
of death is 400,000 (date of death is very material). The
gain derived would be 100,000.
#3: The tax Code provides all the possible mode of acquiring properties. It is
possible that the property was acquired through Donation. Say, the property
was donated to you by your friend. You are in dire of money so you
subsequently sold the same for 500,000. How do you know whether you
derived a gain or incurred a loss?
-
The provision is quite long. It may be simplified as follows: a) It is

the same basis in the hands of the donor. In the case of
inheritance above, it is the FMV of the property at the time of death
of the testator. Here, it is the same basis in the hands of the donor.
What you have to do is to inquire from the donor this basis in
acquiring the property. It is possible that the donor acquired it
through purchase, so he can tell you the purchase price.
The rule under his situation may change if it is acquired through

inheritance of insufficient consideration
Example: B acquired property through Insufficient consideration

from A, B sold said property to C. SP =500,000. So the property was
not acquired through purchase or inheritance. It was acquired by
the seller for inadequate or insufficient consideration Imaginable. It
is below or way below the FMV of the proper ty.
1936 Bar many examinees complained to the SC that taxation was

a killer subject because several Questions Involved computations.
The example above was one of the Q. If this will be asked again, I
think you will only be asked about the legal provisions: What may
be the basis for the sale of the property acquired through
Insufficient or Inadequate consideration?
Answer it is the amount paid by the transferee who now

becomes, as far as the present sale is concerned, as the
transferor:
Example: A had this property with a FMV of 500,000. He

sold it to B for 200,000. It was acquired by A for
Inadequate or insufficient considerati on in moneys worth.
Under ordinary transaction, A can sell that at a price not
below the FMV but he sold it a price way below the FMV,
so it was sold for Inadequate or insufficient consideration.
B to A in acquiring the property). Subsequently, B dispos ed
PART 1 Taxation Law

the same to C. What then is the basis for the sale of the
property?
o
1994 Q#4 Suppose the property was acquired through these exempt as
provided for in Sec. 40 C(2). What are the situations covered ther ein?
These are tax exempt exchanges of properties, shares of stocks or

securities when these are paid in accordance with the plan of merger of
consolidation. According to Sec. 40 C92). All these exchanges made in
accordance with the plan of M or C are tax exempt. This is not a subject
of subsequent sale. So if these properties, shares of stocks or securities
were acquired pursuant to the plan of M or C, the gain der ived from this
exchange is tax exempt.
However, subsequently, these were sold.

o
It is the amount or consideration paid by the

transferee (as far as the first transaction is concerned
A to B), now the transferor (as far as the present
transaction is concerned which is the sale from 2 to
C). Since B paid 200,000 that is the amount or
consideration as far as A is concerned. B is the
transferee, now the pr esent transferor. So, deduct
200,000 the gain derived is 300,000.
As regards the subsequent sale, that is the one that is subject to

tax.
Example: ABC Corp. entered into a contract of M or C with LMN corp. All
those exchanges of properties , shares of stocks and securities are tax
exempt. But the subsequent disposition is already subject to tax. For instance
those properties were subsequently sold by the Corp for 500,000. Remember
that this was acquired through an exempt transaction. What would be the tax
treatment?
o
Answer: Just take note of the legal provision under Sec. 40 C (5). It
says in the same basis in the hands of the transferor. In UP law
Center suggested answer the basis is the original cost of the
property or shares of stocks or s ecurities, as the case may be. The
basis shall be the original or historical cost of the property, shares of
stock or securities.
SUMMARY OF THE RULES :
MODE OF ACQUISITION
COST or ADJUSTED BASIS (tax base)
PART 1 Taxation Law

Purchase price
PURCHASE
Ex. Selling price

Cost of acquisition
Property Inco me
P500,000
P300,000
P200,000
FMV at the time of death of the decedent or testator

correlate with Sec. 88B.
Ex. Selling price
INHERITANCE or SUCCESSION
FMV
Property inco me
P600,000
P500,000
P100,000
FMV is the same basis in the hands of the donor
DONATION
The amount paid by the transferee who is the transferor

at the present sale
TRANSFER FOR INSUFFICIENT CO NSIDERATIO N
Ex. As house and lots FMV was P500,000 but A

sold his house and lot to B for P200,000, thereafter B
sold the same to C for P500,000.
1. deduct P200,000 (SP of A to B) from

P600,000 (SP of B to C) P400,000 property income
PROPERTY OR SHARES OF STOCKS ACQUIRED
THROUGH THE SO CALLED TAX EXEMPT
TRANSACTIONS
- The original or historical cost of the property or share

of stocks as the case may be.
Sec. 40C TAX EXEMPT EXCHANGES :
NO GAIN NO LOSS RECOGNEZED :
The Rule is No Gain, No Loss recognized. This means that the gain if the gain is taxable
or the transaction is tax exempt, the loss is not deductible. Ther e are four transactions
covered by this Rule:
1.
Properties for Stocks
2.
Stocks for Stocks
PART 1 Taxation Law

3.
Securities for Stocks
These 3 transactions are exchanges purely in kind. Each of the transactions

must be made in accordance with the plan of M or C
4. Exchange of property for corporate control this is also a purely in kind exchanges.
This is another form of Tax Avoidance
Sec. 40 C(6,b) Supposed the exchange is not made in accordance with the
plan of M or C as it is a transaction wherein say, ABC Corp. transferred all its
property to LMN Corp. in exchange for shares of stock. No M or C was made is
this transaction covered by the exemption?
o
If you have not read Soc. 40C (6,b), you may answer that
since it is not a M or C, then it is not exempt. This is not
correct. The meaning of M or C a requisite under Sec. 40 C (2)
has been relaxed. According to Sec. 40 C (6 (2)). It is not only
limited to the ordinary meaning of M or C. Under the
Corporation Code (Secs. 76-87) this is not definitely covered.
But the Tax Code says It also covers the acquisition and
substantial transfer of all properties to another Corp. in
exchange solely for shares or stocks. So, it is considered as M
or C in so far as the Tax Code, in concerned. So this
transaction is also covered by the exemptions. Ther efore, If
there is any gain the gain is tax exempt.
The trick in the Q Is: Would your answer be the same if the exchange is made
not in accordance with the plan of M or C. It is a transaction that involved the
transfer of all assets of the corp. to another corp. in exchange solely for shares
of stock.
o
The answer would still be the same. It is still tax exempt.
Another Tax Avoidance is, that transaction is also tax exempt

not in accordance with the plan M or C, is the exchange for
Corporate Control. That means that as a result of the
exchange of property for shares of stocks, the transferor/s
has/have acquired corporate control.
What do you mean by Corporate Control?
Sec. 40 C (6,C), It means that at least 51% ownership

of the Outstanding Capital. The provision says one
person alone, including others not exceeding 4.
How do you construe this?
This means that the transferor or may be 1

that is alone: or including others not
exceeding 4 (that is 1 tranferor plus 1 other,
1+2 up to 1+4, or up to the maximum of 5).
To be exempted, the transferor must
acquire at least 51% ownership of the
outstanding capital stock.
PART 1 Taxation Law

SUMMARY:
PURELY IN KIND EXCHANGES
REQUIREMENT FOR EXEMPTION

Must be in accordance with a plan for merger or consolidation
PROPERTY FOR STOCK

Ex. ABC Corp. pursuant to a plan of M or C, gave all its pr operties to
LMV Corp. in exchange of stocks such transaction is tax exempt BUT
should LMN Corp. sell the sold properties to another person such sale
would be subjected to tax.
STOCK FOR STOCK
SECURITY FOR STOCK

Must result to corporation control of the transferee corporation
corporate control should be 51% or more, there may be mor e than 1
transferor but the same must not exceed 5 whether the transferor
is an individual or a corporate TP.
Ex. ABC Co. transferred all its property to XYZ Corp in exchange
of shares of stock but there was no plan for M or C. Is the transfer
exempt from tax?
PROPERTY FOR STOCK
The concept of merger or consolidation under Sec.

4QC(2) has been relaxed. The concept is not limited to
the ordinary concept of M or C it likewise covers if
theres no plan for M or C PROVIDED that the
transferors would acquire control over the corpora tion
shares of stock is 51% or more.
So, In the case at bar, If the shares of stock would be at

least 51% the transaction is tax exempt, otherwise its
taxable.
TAXABLE GAIN DOES NO T ONLY ARISE FRO M ORDINARY SA LE. It is also derived from exchange of property for
stocks:
FMV of shares of stocks

Less: Cost of the Prop
Gain or Loss
PART 1 Taxation Law

GAIN RECOGNIZED, LOSS NOT RECOGNIZED :
Q: When does this occur?

o
A: In the following circumstances:

1. When the transaction is NOT solely in kind that if aside from the property, cash
is also given in the transfer
-
Thus, suppose cash is given as additional consideration? This means

that cash + property, securities or shares of stock. A different rule will
apply. The Rule that will apply now is GAIN RECOGNIZED, LOSS NOT
RECOGNIZED. How do you describe this transaction?
This is a transaction not solely in kind because it involves cash

or money as an additional consideration. The gain will now be
subject to tax. So, don't give additional cash or money
because it will now be governed by this Rule GAIN
RECOGNIZED, LOSS NOT RECOGNIZED.
2. Illegal transactions
-
2001 Bar illegal transaction Is governed by this rule because the illegal
gain is taxable but the illegal loss or expense is not deductible. We can
tax the illegal gain because of Sec. 32 B(l) derived from any other
source, but the loss that may be sustained from illegal transaction is a
non-deductible loss because only those losses that are legitimate ones
actually sustained from legal transaction are deductible
3. Transactions between related TP

-
Transactions between related taxpayers shall be governed by this rule.

If theres a gain the gain is definitely taxable, but the expense or the
loss is a non-deductible expense
Group of Related Taxpayers (Sec. 36 B)

a.
Members of the same fa mily
b.
A Stockholder and a Corporation 1man Corporation, that is

the corporation is own or controlled by a single individuals
c.
Between 2 corporations they are related in the sense that

they are own and controlled by the same stockholders
d.
Parties to a trust
1.
Trustor
2.
Trustee
3.
Beneficiary
4.
Fiduciary
PART 1 Taxation Law

4. Wash sale one of the illegal trading devices

-
The reason why it is an illegal trading device is because theres really

no substantial change of beneficial ownership
Q: 1. What may be the subject of wash sale?
Q: 2. Who must be the seller of such shares of stocks, securities, or

stock options?
YES. a) 30 days before the sale; and 2) 30 days after the sale.
These 2 periods are really determinative of whether it is a
wash sale or not
What must be that event that must transpire or occur 30 days before
the sale or 30 days after the sale (this is the reason why this is called
61- day sale)?
The event that must transpire is the purchase or acquisition

of identical or substantially the same stock or securities
It is important to know whether it was a wash sale or not because if it

was a wash sale transaction, the gain is taxable and the loss is nondeductible (Sec. 38)
Q: What must be the r eason for this?
It must not be a dealer in securities
Are these periods that must be observed?
It may be shares of stocks, securities, including stock options
The rationale behind this is that , this is mer e artificial loss

and it is not actually sustained. In actual transaction, the
seller can recover his loss by adding the amount of loss to the
Selling Price Involving the sale of stocks or securities. The
seller can recover this loss through the subsequent sale of the
same. In effect the loss can be recover. So there is really no
loss actually Incurred of sustained as it is a mere artificial loss
STOCK DIVIDENDS:
Those are the 3 important cases that provide exceptions to the rule that stock dividend is tax
exempt:
1.
CIR vs. ANSCOR this pertains to the redemption of shares of stock
2.
CIR vs. MANNING this was 1994 Bar Q this pertains to dividends declared in the guise
of stock dividends
3.
BACHARACH vs. SCHIFERT (87 Phil 403) this pertains stock dividends received by the
usufructuary
PART 1 Taxation Law

CIR vs. ANSCOR: The requisites of redemption of stock divi dends that may result to taxable
income according to this cases are:
a.
There must be a redemption or cancellation
b.
It must be of shares of stock involving stock dividends
c.
The cancellation must result in distribution of taxable dividend or income
Sec. 73 B second sentence thereof made mentioned of these 3 requisites at such time and
in such manner that may result in the distribution or cancellation of taxable dividend. These
are really the criteria or tests.
According to the tax courts of US, consider the following:
a.
the real or business purpose (?);
b.
the redemption must be bonafide;
c.
the lapse of time between the issuance and redemption
d.
the net effect of the redemption of the shares of stockholders
ANSCOR CASE: The 2 purposes raised by the taxpayer. a) legitimate business purpose; and b)
justification for the cancellation or redemption, wer e not considered by the SC. The case
made mention about the Filipinization(?) of the Corp. and citizenship(?); and the reduction
of foreign exchange transactions These 2 were not a justification. The period of 2-3 years
was not also considered. However, the net effect, the SC said, resulted in taxable income.
Here 108,000 shares _______(?) the original 25,247.50 shares _______(?). It turned out the
corporation redeorned the original investment on the original 25,247.50 shares of stocks.
The SC modified the decision of the CA on the amount representing the taxable income.
In Corporation law, shares of stock may be classified as redeemable upon

incorporation but it must be expressly provided for in the Articles of Incorporation as
redeemable. If this will be redeemed by the Corporation, this is not the one referred in the
exception. So, if the source is the original subscription or the Initial Investment, Sec. 73 B will
not apply because is still capital. But if the source is additional shares of stock, that is, stock
dividends were declared and this are in the nature of redeemable shares, then this is the one
contemplated by this Sec. 73 B.
The SG said, if these redeemable shares of stock are in the nature or form part of
the original investment the redemption is not covered by Sec. 73 B the exception is not
applicable. It must be the shares of stock declared as stock dividends and were classified as
redeemable shares. The situation in this case is that the corporation declared stock
dividends classified as redeemable shares.
The rule regarding stock dividend is that it is tax exempt because there is just a
transfer from surplus to capital account. There is No realized gain or profit. In this case, a
device could really be availed of by the corporation. If this stock dividend declared would be
categorized as redeemable shares of stock, this would be the situation: under the Corp. Code
this may be redeemed in cash. Once this will be redeemed the stockholder will receive cash.
PART 1 Taxation Law

There is now a flow of wealth according to SC. This is the reason why stock dividends
declared in the nature of redeemable shares of stock is taxable.
In the language of the SC, it is really a constructive ploy or device to evade the
effec t of taxation having in mind that the stock dividend is stock exempt but if it is classified
as redeemable shares of stock once redeemed from the corp. the stockholders cannot allege
that stock dividend is tax exempt. You ca nnot apply the principle here because there is a
flow of wealth. Her e, there may arise a flow of wealth because the stockholder will now
receive cash.
The reason of the exceptions that youll find in Sec. 77 B is that it is an Income
constructively devised to avoid the effects of taxation. So, stock dividends , as a rule is tax
exempt. But onc e it is in the nature of redeemable shares of stock, there being a flow of
wealth as the stockholder may receive cash, then thats the time we can tax such stock
dividends. _______(?)
CIR vs. MANNING: Disguised Dividends
In the case of, it is in this case that youll find the language in the guise of stock
dividends . What does that mean? The board may declared dividends and treat the same as
stock dividends, name it as stock dividends in the books. But the BIR may examine the books.
In this case, It was discovered that the stocks were declared not in accordance with the
Corporation Code. It was not declared out of the unrestricted retained earnings of the corp . It
was declared out of the Outstanding capital stock. So there was a violation on the basic
requirement under the Corp. Code that dividends, Including stock dividends can only be declared
out of unrestricted retained earnings.
So as to evade the affects of taxation, stock dividend being tax exempt the Corporation,
in connivance with the stockholders treated such stock dividends. So it is a dividend in the guise
of stock dividends as to avoid the payment of tax. This is taxable of course. This is taxable as
there is no tax dividends legally declared under the Corporation Code.
BACHARACH vs. SCHIFERT: The Q here: Is the stock dividends received by the usufructuary tax
exempt or taxable?
This is taxable according to the SC, rejecting the opposite view tha t it is tax exempt. The
SC adopted the Pennsylvania Rule. The SC cited Art. 565 of the Civil Code. Under this Article the
usufructuary is entitled to the natural, industrial, and civil fruits of the thing in usufruct. The
PART 1 Taxation Law

thing in usufruct here is shares of stock. As this is a thing is usufruct, the SC considered this an
exception to the rule and held that the stock dividends received by the usufructuary are subject
to tax.
WHEN THERE IS A CHANGE IN THE STOCKHOLDERS INTEREST IN THE CORPORATION:
This is another exception to the rule.
Illustration: A, before the declaration of stock dividends had a 20% ownership of the
Outstanding capital stock of the Corporation. If theres no change pertaining to the
percentage of ownership after the declaration of the stock dividends, then such stock
dividends is tax exempt. But if theres a change, and it must be an increase in the interest. If
this increase to 22%, it is considered as an exception to the rule.
OTHER SOURCES OF INCOME
CAPITAL GAIN FRO M SALE OF SHARES OF STOCK
ACQUISITION & DISPOSITION OF CAPITAL STOCK WHICH INCLUDE SALES AND RETIREMENT OF
BONDS
ILLEGAL GAINS
o
RECOVERY OF DAMAGES
o
Taxable only when it represents lost profit or income.
BAD DEBTS RECOVERY

o
Taxable if it results in reduction of the TPs tax liability in the previous year. TAX BENEFIT
RULE or DOCTRINE OF EQUITABLE BENEFIT applies in this case.
It must be claimed as a deduction from the gross Income in the preceding year the
reduction results in a tax benefit.
TAX REFUND
o
Gambling betting, extortion or fraud
Taxable if it results in reduction of the TPs liability in the preceding year. This means
that the tax refunded must be pr eviously claimed as deduction from gross income. The
tax benefit rule also applies.
In the items mentioned under Sec. 32 A ( we said that there are 13), the following are subject to FT
1.
Royalties:
2.
Prizes take note of the clarification.

Prices subject to 5-32%. It must be included in the Gross Income of the taxpayer;
3.
Winnings except lotto and sweepstakes;
4.
Interest
This is subject to FT if this is an interest income on bank deposit. If it is an interest
on loan, then it is subject to regular tax;
5.
Dividends are subject to FT under 2 cases:
PART 1 Taxation Law

a)
When it is received by Individual taxpayers. We can simply say that when a dividend
is received by an individual taxpayer from a Domestic Corporation, it is subject to
FT;
b)
If the recipient is a NRFC. So, if it is received by a Domestic Corporation or a RFC, it

is not a FT:
6. Share of a partner from the net Income after tax of a business or taxable partnership.
Try to compare this to item 11 of Sec. 32 A. under Sec. 32A (11), the source is general
professional partnership.
Q: A is a partner in ABC Partnership, a business partnership. A received an income
amounting to 150,000 representing his share in the income of the partnership.
1.
How do you tax the 150,000 income received by A from ABC partnership?
Answer: Since the source is a taxable partnership, this is subject to FT and
therefore the partner is not required to report this Income as part of his
gross Income
2. Would your answer be the same if ABC is a general professional partnership?

Answer: No. If it is received from a tax exempt partnership. Sec. 26last
paragraph states that the professional partner shall report such share fr om
the professional partnership a part of his Gross Income. So Sec. 32 A (11).
As the tax treatment In Sec. 26 will tell you should be reported as part of
the Gross income of the professional partner. But in the case of a taxable
partnership, Sec. 24 states that the share of a partner if it is received from
a taxable partnership (that is not a general professional partnership)
shall be subject to FT. And the rule provides that the recipient of the same
is not required to report that as part of his GI.
2001 Bar: If a cash dividend ( or property) is received by a RC or RA, this is subject to FT (Sec.
24. 10% FT). Q: What do you think is the reason why these dividends received by RC or RA
are subject to 10% FT and not by 5-32% progressive rate?
Answer: The reason is to ensure the collection of tax on these dividends. If we
subject these to 5-32%, which can only be done through the tilling of ITR, there is
no assurance that the taxpayer will report those as part of his GI because he has
also other sources of Income. It is extremely difficult for the BIR to monitor
compliance w/ this considering the number of stockholders.
By shirting the responsibility to remit the tax to the corporation, it is easy for
the BIR to check compliance because there are fewer withholding agents compared
to the # of stockholders. By subjecting this to FT the Govt. is assured of revenues in
the earliest possible time because these taxes are needed by the Govt. to carry out
its legitimate objectives LIFEBLOOD na naman hehehehehe.. this is really
favoured by the LIFEBLOOD DOCTRINE.
By the way, In the case of interest on deposits, it is the bank that is legally
obliged to withhold the tax.
PART 1 Taxation Law

SUMMARY:
ITEMS SUBJECT TO FINAL TAX

R
ROYALTIES
PRIZES
Always subject to final tax
DEPENDS:
P10,000 or less If forms part of gross income subject to S.
32% progressive rate
More than P10,000 20% FINAL TAX

W
WINNINGS
INTEREST FROM BANK

DEPOSITS
GR:
Always subject to final tax
XPM:
Sweeptakes and lotto winnings (exempted)
Subject to FT whether in Philippine or FX currency
Subject to FT BUT If the r ecipient is a DC or a RFC. Its exempt
NOTE: Cash Dividends given by DC to RC. NRC and RA is subject to 10%

FINAL TAX due to the following reasons:
DIVIDENDS GIVEN TO AN
INDIVIDUA L TP
1. To ensure collection on the cash dividends otherwise there

would be no assurance that the TP will report it in his ITR
2. The BIR will have a hard time monitoring compliance since there
are numerous SHs
3. Shifting the responsibility to the corporation as the withholding
agent easier collection since there are fewer Corps then SHs
4. Taxes are made available to the govt in the earliest time
possible.
S
SHARE OF A PARTNER FROM
THE NET INCOME OF A
TAXABLE PARTNERSHIP
If the source is a TAXABLE PAT the share is subjected to a FT if

the source is a TAX EXEMPT PAT, according to the last
paragraph of Sec. 26, it must be reported and included in the
gross income of the TP.
Sec. 24B (2) and Sec. 25A (2) JOINT PAT etc. are tax ex empt
PART 1 Taxation Law

IV.
EXCLUSIONS FROM GROSS INCO ME: Sec. 32B
In a recent case, the SC held that exclusions are in the nature of Exemptions and therefore these should
be strictly construed against the taxpayer a nd liberally in favour of the Govt. So, this give us this probable bar Q
because in the Recent case of PLDT vs. Laguna. The SC distinguished Exclusions from Exemptions.
There are 2 Probable Bar Q here:

a)
Exclusions vs. Exemptions; or
b)
Exclusions vs. Allowable deductions (Sec. 34)
In this case of PLDT vs. Laguna (2005 case), for the first time the SC made distinctions between these 2,
thats why this is a probable bar Q.
1.
Exclusions refers to the removal of otherwise taxable items from the reach of taxation (this is
the language of the US tax court as cited in the PLDT vs Laguna case):
Exemptions refers to an immunity or privilege, fr eedom from change or burden to which other
persons are subject to tax.
The court said, they are the same as to their effect or nature. Thats why the old rule that would
apply to them is the principle of STRICTISSIMI JURIS : Exclusions and Exemptions must be strictly
constructed against the taxpayer and liberally in favour of the Govt.
If that would not be asked, this would be the Q on this section What are the
distinctions between Exclusions from Gross Income (32 B) and allowable deductions
from GI (Sec. 32)?
o
According to Sec. 61 of Rev. Reg. #2:
Exclusions from Gross income refer to a flow of wealth to th e

taxpayer which does not from part of the GI because of the
following reasons:
1)
It is excluded by applicable law:
2)
Excluded by the tax code: or
3)
Excluded by the Constitution
On the other hand, allowable deductions refer to amounts, which

the law allows to be deducted from GI in order to arrive at taxable
or net Income
EM
IV. EXCLUSIONS FRO M GROSS INCOME: Sec. 32B
PART 1 Taxation Law

In a recent case, the SC held that exclusions are in the nature of Exemptions and there strictly construed
against the taxpayer and liberally in favor of the Govt. So, this gives us because in the Recent case of PLDT vs.
Laguna, the SC distinguished Exclusions from Exemptions.
There are 2 Probable Bar Q here:
a)
b)
Exclusions vs. Exemptions; or

Exclusions vs. Allowable deductions (Sec. 34)
In this case of PLDT vs. Laguna (2005 case), for the first time the SC made distinctions between thats
why this is a probable bar Q.
1.
Exclusions refers to the removal of otherwise taxable items from reach of taxation (thislanguage of the
US tax court as cited in the PLDT vs Laguna case)
Exemptions refers to an immunity or privilege, fr eedom from charge or burden to which other are
subject to tax.
The court said, they are the same as to their effect or nature. Thats why the old rule that would the m is
the principle of STRICTISSIMI JURIS. Exclusions and Exemptions must be strictly construed against the
taxpayer and liberally in favor of the Govt.
If that would not be asked, this would be the Q on this section What are the distinctions Exclusions
from Gross Income (32B) and allowable deductions from GI (Sec 34)
According to Sec. 61 of Rev. Reg. #2 (?)
2.
3.
Exclusions from Gross Income refer to a flow of wealth to the taxpayer which does part of the GI
because of the following reasons:
1) It is excluded by applicable laws;
2) Excluded by the tax code; or
3) Excluded by the Constitution.
On the other hand, allowable deductions refer to amounts, which the law deducted from GI in order
to arrive at taxable or net income
Another point of distinction is that Exclusions may pertain to the computation (this is material) for
purposes of determining GI, whereas allowable deductions is important for purposes of determining net
or taxable income and this must be deducted from GI to arrive at taxable income. I repeat, exclusions may
be material for purposes of determining GI because you have to exclude it to arrive at GI.
Exclusions are something earned or received which do not form part of GI, while deductions are
something paid or incurred in earning GI.
Try to analyze the enumeration under Sec. 32 B. If you count, there may be 19 Exclusions from GI. The
Enumeration is not exclusive because there are other items not mentioned in 32 B but should be excluded. For
instance, in Sec. 24 & 25, there is that tax exempt inter est income which we have already cited and is not
PART 1 Taxation Law

included in Sec. 32 B. This is interest income on Long term deposit. This is not included in the exclusion under
Sec. 32 B. You will find that in Secs. 24 & 25 if the term is 5 years or more, the interest income is tax exempt.
Keyword: LAGCIRM
1.
2.
3.
4.
5.
6.
7.
Life insurance proceeds

Amount received as return of premium
Gifts, bequests, devises & legacies
Compensation for injuries or sickness
Interest ex empt under tax treaty
Retirement benefits, pensions, gratuities, etc. (favorite Bar Q)
Miscellaneous items
Under item 6, there are 6 exclusions (a -f) and under item7, there are 8 items there. So, 19 items all in
all
Favorite Bar Q: Life insurance proceeds, Compensation for injuries or sickness, Retirement benefits, pen sions,
gratuities, etc., and on item 7, just focus on 2 items (prizes and awards)
Item #1. Life Insurance Proceeds:
Correlate this with Sec. 85E because there are 2 Q on this in the previous bar exams.
Sec. 85E r efers to the Rule regarding Exclusions or inclusions from Gross Estate of Life Insurance
Proceeds
o When a beneficiary is designated, you ought to know whether it is revocable or irrevocable,
in which case you must really consider the rule under Sec. 11 of the Insurance Code.
In 1983 Bar: There are 3Q on this:

a) Whether the proceeds received by the beneficiary may be excluded from GI. So its a Q on the
Exclusion from GI;
b) Whether this should form part of the Gross Estate.
We have already discussed the tax Implications of Life Insurance Premium. When the life insurance policy
is obtained by the employer for his employee, premiums may be paid by the ER. And we have already extensively
discussed the rule/tax implications of life insurance premium. Just incorporate the rules that we have simplified .
Tax implications:
a)
b)
Life insurance premium, may be taxable or not taxable to the employee; or

As regards the employer, it may be a deductible or non-deductible expense
For these tax implications, you must know the beneficiary designated in the life insurance policy, and we
have 2 assumptions:
1.
Beneficiary is the heir, estate, ex ecutor, or administrator
PART 1 Taxation Law

2.
rd
Beneficiary designated is a 3 person, which may include the employer
Under assumption #1. This should always be excluded from the GI of the recipien t whether irrevocably or
revocably designated.
rd
Under assumption #2 some examinees answered that, since its a 3 person, that should be subject to
tax. That is not correct. The provision says any beneficiary. There is really no profit or gain here. This just
represents indemnification and the insured has the right to designate the beneficiary. So it is always excluded from
the GI of the recipient irrespective of the beneficiary designated in the life insurance policy.
Section 32. Gross Income. (B) Exclusions fro m Gross Income. - The following items shall not be included in gross income and shall be exempt
from taxation under this title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to
pay interest thereon, the interest payments shall be included in gross income.
Section 85. Gross Estate.

(E) Pro ceeds of Life Insuran ce. - To the extent of the amount receivable by the estate of the deceased, his executor,
or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether
or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary
designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary
is irrevocable.
RULES under Sec. 85 E:
A)
1.
2.
B)
1.
Included and therefore subject to estate tax under 2 cases:

If the beneficiary designated in the life insurance policy is the heirs, estate, ex ecutor or administrator of
the estate. Whether the designation is revocable or irrevocable, always included if the beneficiary is the
estate, executor or administrator of the estate.
rd
If a third person (including the employer) is revocably designated as beneficiary. If a 3 person is
designated as beneficiary, the rule says excluded from gross estate.
Excluded and therefore Not subject to Estate tax under 2 cases:

rd
If 3 person is irrevocably designated as beneficiary
You see now the possible confusion. The designation of the beneficiary is IMMATERIAL if the one
designated as beneficiary is the heirs, estate, executor or administrator of the estate. This is ALWAYS
INCLUDED.
rd
But if the one designated is a 3 person, you ought to know or check whether the designation is
rd
revocable or irrevocable. If the designation or this 3 person as beneficiary is REVOCABLE, you have to
rd
INCLUDE that, th erefore subject to estate tax. If this 3 person is IRREVOCABLY designated, EXCLUDED
from the Gross Estate and therefore not subject to estate tax.
PART 1 Taxation Law

2.
If it partakes of a nature of Group Insurance policy
I mentioned about Sec. 11 of the Insurance Code. Under the Old Insurance Code, the rule was that
designation is irrevocable. However, the rule now is REVOCABLE, unless that right is waived. Under Sec. 11 of the
Insurance Code ther e is only irrevocable designation of the beneficiary if the life insurance policy expressly so
provides. If it is silent, then it is presumed that the designation is revocable. So in A#2, it shall be included in the
rd
Gross Estate subject to Estate tax. But if a 3 person is designated as beneficiary and the policy is silent, you may
consider the designation revocable.
RULES ON PREMIUMS
In Life insurance, premiums are paid. We say the the following tax implications: To the employee, it may
be a taxable income, and to the employer, that may be an expense.
1. Under the assumption that is the heirs, estate, executor or administrator of the estate who received
the premium as beneficiary, it is taxable to the employee. It is taxable to the employee and the rules
are:
a. Under 32 A, taxable as compensation income if the employee is a rank and file employee.
b. Under 32 B (m) taxable as Fringe Benefit if the insured employee is a managerial or supervisory
employee
Q. Can it be claimed as an expense by the employer?
Yes. It is a deductible expense (32 A (1, a(I)) as other forms of compensation for personal services
rendered.
2. Under the assumption a 3rd person was the one designated (and this may include the employer) It is
NOT PAYABLE on the part of the employee there being no benefit accruing to the family of heirs.
To the employer designated as beneficiary, the proceeds he received upon the death of the EE just yo
represent a mere return of capital. This being the case, the employer should not be allowed to claim the
life insurance premium paid as a deductible expense.
SUMMARY RULES ON LIFE INSURANCE POLICY:
Example: A life insurance was obtained by an employer for his EE. The estate of the EE was designated as the
beneficiary. During the lifetime of the EE, pr emiums wer e paid by the ER.
Q#1 : Upon the death of the EE, the proceeds shall go to the beneficiary designated in the Policy. Will that form
part of the GI of the beneficiary?
Answer: NO. For purposes of exclusion, since Sec. 32 B (I) make no distinction as regards beneficiary, the
proceeds of life insurance policy are always excluded from the Gross Income of any recipient or beneficiary of the
PART 1 Taxation Law

same. It is excluded whether the beneficiary is the employer or the heirs, estate, ex ecutor, or administrator of the
estate.
Q#2 : Will that be included in the Gross Estate of the dec edent EE? Is that subject to Estate Tax?
Answer: Qualify: Under Sec. 85 E: if the beneficiary is the heirs, estate, ex ecutor or administrator of the estate,
it should always be INCLUDED in the Gross Estate whether the designation is revocabl e or irrevocable. This will
form part of the Gross Estate.
rd
rd
If the beneficiary is a 3 person, Sec. 85 E makes a qualification. If a 3 person is the designated

beneficiary, it is INCLUDED if the designation is revocable. It is EXCLUDED from the Gross Estate and therefor tax
rd
exempt if the designation of the 3 person is irrevocable.
Q#3 : Ar e premiums paid by the ER on the policy:

a. Deductible expense to the ER?
Answer: YES. [NB: there is a written note, Depends.] It is a deductible expense on the part of the ER if the
designated beneficiary is the heirs, estate, ex ecutor or administrator of the estate. If the one designated as a
rd
beneficiary is the employer (considered as 3 person) that is not a deductible expense.
b. Taxable compensation income to the EE?

Answer: YES. It is taxable compensation income to the employee if the designated beneficiary is the heirs, estate,
executor or administrator of the estate. Since the beneficiary designated is the estate of the EE, then it is taxable. If
rd
the beneficiary designated is a 3 person (that includes the employer), it is not taxable since it is just a mere return
of capital.
SUMMARY
TAX TREATMENT OF LIFE INSURANCE PROCEEDS

BENEFICIARY DESIGNATED
EFFECTS
EXCLUSION FROM THE GROSS

INCOME
WON INCLUDED or EXCLUDED IN

THE GROSS ESTATE
HEIRS, EXECUTOR OR
ADMINISTRATOR
EMPLO YER
EXCLUDED from the gross

income of the beneficiary
(revocable or irrevocable) it
represents a compensation for
the loss of life, hence a mere
return of capital
EXCLUDED from the gross

income of the employer no
realization of profit and express
exclusion by law
INCLUDED whether the

designation is revocable or
irrevocable (Sec 85 E)
Considered a 3 person
rd
QUALIFY
IRREVOCABLE EXCLUDED
PART 1 Taxation Law

REVOCAVLE INCLUDED
TAXABLE to the EMPLO YEE
during his lifetime Sec 33B-10:
MANAGERIAL or SUPERVISORY
employee (32 B (m)) taxable as
fringe benefits
PREMIUMS PAID
NOT TAXABLE on the part of the

employee there being no
benefit accruing to the heirs
NONDEDUCTIBLE EXPENSE to the

employer as the same just
represent a mere return on
capital
RANK & FILE (32 A) taxable as

compensation income
DEDUCTIBLE EXPENSE to the

employer
Item #2. Amounts received as Return of Premium:
This is self-explanatory in the sense that, the same as that of Life Insurance Proceeds, these are not
included or mentioned under Sec 32 on Exclusions, but still it is excluded because this really does not qualify as an
income. It is just a return of capital. Return of premium means a repayment of a part of the whole of the pr emiums
paid.
Item #3. Donations:
There are 2 kinds of Donations: Donation Inter Vivos and Donation Mortis Causa.
Distinctions:
1.
Donations Inter Vivos the giver is the donor

Donation Mortis Causa the giver is the testator or decedent
2.
Donation Inter Vivos the recipient is the done

Donation Mortis Causa recepients are the heirs or beneficiary
Q: If a donation inter vivos is given, what are the tax implications?

Sec 32 B (3) laid down just one of the tax implications.
As far as the donor is concerned subject to donors tax
As far as the donee is concerned
PART 1 Taxation Law

1.
2.
Not subject to donees tax as donees tax was abolished by PD 69 (favorite # of my

good friend Prof. Sandoval. Prof. Portfolio)
This is not also subject to income tax because the same, according to Sec 32 B (3) is
excluded from Gross Income
Q: Tax implications of Donation Mortis Causa

As far as the testator is concerned subject to estate tax
As far as the done (heirs of the decedent or beneficiary)
1.
2.
Not subject to donees tax as donees tax was abolished by PD 69

This is not also subject to income tax because the same, according to Sec 32 B (3) excluded
from Gross Income
1994 Q#2b: Are donations inter vivos and mortis causa subject to Estate Tax?
Answer: It is donation mortis causa that is subject to Estate Tax. Donations inter vivos are subject to
donors tax.
Q: What about the implication in so far as the done is concerned?

Answer: At present, the right to r eceive donations is not subj ect to any tax.
SUMMARY:
TAX TREATMENT or IMPLICATION

MODE OF DO NATION
GIVER
Donor is subject to donors tax
INTER VIVOS
RECIPIENT
Donee is NOT subject to donees
tax since Donees Tax has been
abolished by PD 69
The same is not subject to

income tax since donations are
expressly excluded from the
gross income by the NIRC (Sec 32
B)
The estate of the testator is
subject to Estate Tax
Heir/s NOT subject to inheritance

tax since inheritance tax has
been abolished by PD 69
MORTIS CA USA
NOT subject to income since the
same are expressly excluded
from the gross income by the
NIRC (Sec 32 B 3)
Item #4. Compensation for Injuries or Sickness:

PART 1 Taxation Law

In 2003 Q#5: Examinees were asked whether the following is subject to income tax:
a. Hospitalization expenses
b. Cost of repair of damaged vehicle; and
c. Moral and Exemplary damages
Q: X, while driving home from his office, was seriously injured when his automobile was bumped from
behind by a bus driven by a reckless driver. As a result, he had to pay P200,000 to his docto r and P10,000
to the hospital where he was confined for treatment. He filed a suit against the bus driver and the bus
company and was awarded and paid actual damages of 300,000 (for his doctor and hospitalization bill),
P100,000 by way of moral damages for what he had to pay for his attorney for bringing the case to court.
Which, if any of the awards are taxable as income to X and which are not? Explain
Answer:
a.
Hospitalization expenses this is tax exempt because this represents compensation for
injuries sustained (this is the one covered by Sec 32 B 94)
b.
Cost of repair of damaged vehicle not taxable. Ther e is really no income here. So,
compensation for the amount spent for the repair of the car is not subject to tax.
c.
Moral and Exemplary damages Prof. Domondon advanced the view that moral damages
and exemplary damages are taxable (he may have changed his view because when we
answered this in the UPLC, we unanimously suggested that moral and exemplary damages
are tax exempt). He made mention about the definition of Gross Income under Sec 32 A
derived from whatever source. He pointed out that there are really no clear exemptions
from Gross Income and there are really no clear exemptions from Income under Title II.
The Committee in taxation in UPLC always answer this Q as not subject to tax. Under the NCC Art 2197 (you must
master this) & 2229 (Exemplary damages) you should know the grounds for recovery of damages. Ther e are 9
grounds under 2217 (you should memorize this article):
1.
2.
3.
4.
5.
6.
7.
8.
9.
mental anguish
serious anxiety
wounded feeling
besmirched reputation
physical suffering
social humiliation
moral shock
fright
similar injury
The enumeration is not really exclusive because there are other grounds in the subsequent sections
If we tax moral damages, you can just imagine the effect, taxing any of the 9 grounds for which moral damages are
awarded. There is really no gain or profit realized, how can we tax that? We shall not tax that, otherwise, we are in
effec t taxing the grounds for which moral damages may be awarded. The is the same as in the case of exemplary
damages under 2229. Under 2229, there are 2 grounds mentioned ther e: 1) by way of example; and 2) as
PART 1 Taxation Law

deterrent for the commission of similar offense. If we tax that, we are in effect taxing the grounds laid down under
Art 2229.
The correct answer is, and it is a unanimous decision of the members of the Committee in Taxation of UPLC it
should not be subject to tax.
Q: What about the award representing loss income or earnings or profit? He was hospitalized & wasnt
able to earn his 2 months salary amounting to, let us say P30,000. This P30,000 is included in the
judgment r ender ed by the court. Is this subject to tax or excluded from Gross Income?
Answer: What is clear here is that it is compensation for injuries or sickness that is not taxable. There is
an opinion expressed by 1 author that it should not be taxed because it is the result of that injury or
hospitalization. I mentioned this in my book (as revised, p. 17) citing that opinion of tax experts of US. It is there in
1961 that the opinion is that this award representing loss income or profit is the one taxable. So, all damages that
may be included in the judgment of the court are tax exempt EXCEPT that amount representing loss of income.
That is the one that is taxable.
Item #6. Retirement Benefits, Pensions, Gratuities, etc.:
You should try to distinguish Paragraph (a) from paragraph (b). Par (a) refers to tax exempt retirement
benefits, pensions, gratuities, etc. Par (b) is popularly known as separation pay.
Item (a) refers to that retirement benefits received from private firm, whether corporate or individual.
The Tax Code is strict on this, in that it provides 4 requisites for exemption or exclusion. But if you try to
refer to item (b), there is only 1 requisite for exemption, that is, if it is received beyond the control of the
employee or official.
In Par (a) there are 4 requisites for exemption:

1. There must be BIR approved retirement plan (RA 4917);
2. The retiring employee or offi cial must be at least 50 years of age;
3. The retiring employee or official must have rendered at least 10 years of service
4. This can be availed of only once. Subsequent r etirement that may be r eceived from a private
employer is no longer tax exempt.
Compare the provisions:
In Par (b) the source of payment in the case of separation pay is immaterial. So, even if it is paid under
the approved BIR retirement plan or not, exempted. Also, Par (b) does not require a certain age to avail of the
exemption, even if the employed is below 50 years of age. Ther es also no requirement on the length of service.
Even if he rendered only 1 or 2 yrs, if this benefits or pay is received on account or by reason beyond the control of
the EE or official, it is tax exempt.
Examples of causes beyond the control of the EE or official:

a.
death;
PART 1 Taxation Law

b.
c.
physical disability;
sickness or illness
1996 Bar. An employee died and his surviving spouse received P100,000 separation pay benefits from the
ER. Is this amount subject to tax?
Others answered this Q in this way: taxable because under Sec 32 A Gross income means all income
from whatever source.
This Q is covered by item #6 (Sec 32 B 6 (b)). This is a tax exempt separation pay and should be excluded
from the Gross Income of the surviving spouse.
So dont always refer to Sec 32 A derived from whatever source. Consider also Sec 32 B. Sec 32 A is
modified by Sec 32 B. Yes, it is derived from whatever source but ther e are items that are excluded from Gross
Income under 32 B and a retirement benefit is one of them.
Availed of only once

st
Illustration: Assume that A, received from his 1 employer 500,000. The employee is 50 yrs old, at least 10 yrs of
service. Payment was made under a BIR approved retirement plan. He got employed in another ER and after
rendering 10 yrs of service he retired from employer #2 and received P300,000.
Can only be availed of once means that the subsequent retirement benefit rec eived from private firm is no
longer tax exempt. It is the first retirement benefit that is covered by the provision. So the P300,000 received from
the subsequent ER is already subject to tax.
Karen
Suppose the subsequent ER is a Govt. Say, the employee was employed by a Government
owned and controlled corporation (GOCC). Would your answer be the same?
No. All benefit he received, according to RA 3231 (Revised GSIS Law), are tax exempt, including
retirement gratuity.
So, this limitation applies only to retirement benefit received from a subsequent private
employer. It does not apply to subsequent public employee as the benefits are still exempt; not
subject to tax under RA 8291
1999 Q#10: A Co., a Philippine Corporation has two divisions manufacturing and construction.
Due to the economic situation, it had to close its construction division and lay-off the employee
in that division. A Co. has a retirement plan approved by the BIR, which requires a minimum of
50 years of age and 10 years of service in the same employer at the time of retirement. There
are two groups of employees to be laid off:
PART 1 Taxation Law

a) Employees who are at least 50 years of age and has at least 10 years of service at the time of
termination of employment
b) Employees who do not meet either the age or length of service A Co. plans to give the
following
For category (A) employees the benefits under the BIR approved plan plus an ex gratia
payment of one month for every year of service.
For category (B) employees one month for every year of service
For both categories, the cash equivalent of unused vacation and sick leave benefits.
A Co. seeks your advice as to whether or not it will subject any of these payments to
Withholding Tax. Explain your advice.
SUGGESTED ANSWER:
For category A employees, all the benefits received on account of their separation are no t
subject to income tax, hence no withholding tax shall be imposed. The benefits received under
the BIR approved plan upon meeting the service requirement and age requirement are explicitly
excluded from gross income. The ex gratia payment also qualifies as an exclusion from Gross
Income being in the nature of benefit received on account of separation due to causes beyond
the employees control. (Sec. 32B) The cash equivalent of unused vacation and sick leave credits
qualifies as part of separation benefits excluded from gross income.
For category B employees, all the benefits received by them will also be exempt from income
tax, hence not subject to withholding tax. These are benefits received on account of separation
due to causes beyond the employees control, which are specifically excluded from gross income
(Sec. 32N).
JAPs ANSWER:
Majority of the examinees qualifies their answer based on age & length of service; others also
answering regarding the monetized unused sick leave credits. They mentioned about the 10 day
rule and answered that sick leave credits are taxable. That is not correct.
Answer: All of these benefits are NOT taxable. Why? They overlooked the second sentence due
to economic situation. This is considered as a cause beyond the control of the employee or
official. So, when the benefit or separation pay received from the employer is brought about by
causes beyond the control of the employee, that is tax exempt. Disregard the source.
So, dont just take note of the benefits stated in the problem. Remember also the rule on
separation pay. It must be one received on account of cause beyond the control of the
employee or official. Separation pay as a result of voluntary resignation this is subject to tax as
the cause is not beyond the control of the employee or official.
In 1 Bar exam: A govt employee received benefits from GSIS. He deposited the amount received
& it earned interests. Q: Is the benefit representing GSIS benefit taxable?
No. It is tax exempt. But as regards interest on this benefit, that is the one that is subject to tax.
This is the same also with SSS benefits. If the amount received is deposited in a bank & it earned
interest, such interest is subject to 20% FT. So, do not apply in this case the rule that accessory
follows the principal because of the rule that exemptions must be strictly construed against the
taxpayer and liberally in favour of the government.
PART 1 Taxation Law

SUMMARY:
ITEMS INCLUDED
RETIREMENT BENEFIT FROM
PRIVATE RETIREMENT PLAN
CONDITIONS OR PARTICULARS
A REQUISITES: keyword FORT
a) Retiring official must be AT LEAST 50 years of age
b) Approved or availed on ONCE
c) REASONABLE private benefit plan approved by the BIR
d) 10 years in service
Note: if the employee is still on active employment with the
company, any and all the funds distributed from the fund to the
private member over and above his personal contributions shall
be taxable.
SEPARATION PAY
If he has a 2nd employer and he has received benefits from the

GSIS, the shall be tax exempt.
The benefit shall be tax exempt, whether his employer is a
private firm or the government provided the pay is given on
account of:
a) Death
b) Sickness
c) Other physical disability
d) For any cause beyond the control of the official or
employee
Cessation of business operation due to continued losses

Dissolution of the corporation
Other authorized causes under the Labor Code
Compulsory retirement
Terminal leave pay
SOCIAL
SECURITY
BENEFITS, Received by RC, NRC and RA from foreign government agencies
RETIREMENT
GRATUITIES
AND and other private or public institutions
OTHER SIMILAR BENEFITS
BENEFITS FROM
US Veterans Administration by veterans residing in the
Philippines
SSS RA 8282
Tax exempt
GSIS RA 8291
Tax exempt
COMMUTATION OR MONETIZED VALUE OF LEAVE PAY
VL
If it forms part of TERMINAL LEAVE PAY
Not taxable
If given during the taxable year but NOT RR 10 2000
retirement to
Government employees
Tax exempt
Rank-and-file
Exempt up to 10 days
SL
Not taxable
Tax exempt
Unused - taxable
PART 1 Taxation Law

Item #7 Miscellaneous Items:

I am confident that 1 or 2 on this item will be asked in the coming bar!
4 most important items: Paragraph a, b, c & d
Par. (a) refers to investments in the Phils. By any of these:
1. Foreign government
2. Financing institutions controlled or financed by the foreign government
3. Regional or international financing institutions established by the foreign government
****SOME PAGES MISSING HERE***
(B) 7b. Income derived by the Government or its Political Subdivisions income derived from any
public utility or from the exercise of any essential governmental functions accruing to the
Government of the Phils. Or to any political subdivision thereof.
Sec. 27. Rates of Income Tax on Domestic Corporations
(C)Government owned and controlled corporations, agencies or instrumentalities the
provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned or controlled by the Government EXCEPT
the GSIS, SSS, PHIC, PCSO and the PAGCOR, shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations or associations engaged in a
similar business, industry or activity.
There are 2 requisites for the exemption:
a) Source it is an income derived from the exercise of essential governmental functions. If it is
derived from the exercise of proprietary function, that is subject to tax, and apply the principle
Strictissimi Juris
b) Recipient must be any of the following:
a. Government of the Phils. Or Republic of the Phils.
b. Political Subdivision of the State (LGU)
It does not say national Government. It says Govt of the Phils. Thus, in Mactan Cebu International
Airport Authority vs Marcos (261 SCRA 667) the SC extensively discussed the distinction between Govt
of the Phils. And National Govt. The SC said these are different. Govt of the Phils is synonymous with
Republic of the Phils but it is different from national govt. Govt of the Phils refers to instrumentality to
which the political authority is exercised throughout the Phils. This may include autonomous regions and
LGU. LGU is within the contemplation of the govt of the Phils or RP.
1999 Bar, there was a Q regarding GOCC. Do government-owned-and-controlled corporations form
part of the Govt of the Phils (RP) or national govt?
It is believed that GOCC are within the contemplation of national govt, so that if the income is
received by the GOCC, since it is not covered by this (2nd requirement), even if it is an income
derived from the exercise of essential Governmental functions, that may be subject to tax.
But this is qualified by Sec27C, as amended by RA 9337. Under Sec27C, as amended, it grants
exemptions to 4 GOCCs:
1. GSIS
2. SSS
PART 1 Taxation Law

3. PHIC
4. PCSO
PAGCOR is no longer a tax exempt GOCC. This is an amendment introduced by RA 9337 which
took effect July 1, 2005. So, even if the recipient is not an LGU, as it is a GOCC, exemption is
granted to the 4 GOCCs under Sec27C. PAGCOR was deleted from the list.
Take note of Paragraph C & D (favourite bar Q).
Par (C) Prizes and Awards:
Sec. 32. Exclusions from Gross Income
(B) 7c. Prizes and Awards Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary or civic achievements, but only if:
a) The recipient was selected without any action on his part to enter the contest or
reseeding, and
b) The recipient is not required to render substantial future services as a condition to
receiving the prize or award
The Tax Code is strict with regard to Paragraph C. There are 3 requisites in Par.C, while in Par.D, there is
only 1, sanctioned by their respective sports association, Phil Olympic Committee (RA 7549)
3 requisites for exemption under Par. C:
1. Prize must be received in recognition with SCRALEC (scientific, charitable, religious, artistic,
literary, educational or civic achievement);
2. No action on his part to enter the contest or proceedings;
3. Unconditional receipt of such prize meaning that the recipient is not required to render
substantial future services as a condition to receiving the prize or award
2000 Q#10: Jose Miranda, a young artist and a designer, received a prize of 100,000 for winning
in the on-the-spot peace contest sponsored by a local Lions Club. Shall the reward be included in
the gross income of the recipient for tax purposes? Explain.
a) Answer: Yes. It is in recognition of his artistic achievement but since he performed an
act he qualified as a contestant we pointed out that in the absence of the 3
requisites, the 100,000 received must be subject to tax. Exemptions must be strictly
construed against the taxpayer.
Par. (d) Prizes and Awards in Sports Competition

Sec. 32. Exclusions from Gross Income
(B) 7d. Prizes and Awards in sports competition All prizes and awards granted to
athletes in local and international sports competitions and tournaments whether held in
the Phils or abroad and sanctioned by their national sports association.
Sec. 32 B 7d provides only 1 of the Rules under RA 7549. RA 7549 (which is the one you will find
in 32 B 7d) provides that the recipient is exempt from income tax; it is excluded from Gross
Income.
PART 1 Taxation Law

There are other Rules which are not incorporated in the Tax Code; the other Rule is the donor or
contributor of the award is not subject from donors tax. If your read Sec. 101 A (3) (Note this as
this is a favourite Q under donors tax), this particular contribution or donation is not covered,
but it is still exempt. The donor or contributor is exempt from donors tax, not under the tax
code but by virtue of RA 7549.
Q: Is the contribution a deductible contribution?

a) According to RA 7549, it is a deductible contribution. But if you read Sec. 34H
(exemptions), it enumerates all those deductible contributions, and this is not one of
them.
b) To reiterate, it is deductible not under the provisions of the Tax Code but because of RA
7549. It is RA 7549 that is the source of the Rule that the donor of the award is exempt
from donors tax. It is also the law that allows the contribution as deductible from the
Gross income of the donor or contributor.
1990 Q# 10: Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup
Boxing Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc
received the amount of P500,000 as his prize which was donated by Ayala Land Corporation.
The BIR tried to collect, income tax on the amount received by Onyoc and donors tax from
Ayala Land Corporation, which taxes, Onyoc and Ayala Land refuse to pay. Decide.
a) Answer: The prize will not constitute a taxable income to Onyoc, hence the BIR is not
correct in imposing the income tax. RA 7549 explicitly provides that All prizes and
awards granted to athletes in local and international sports tournaments and
competitions held in the Philippines or abroad and sanctioned by thei r respective
national sports associations shall be exempt from income tax.
b) Neither is the BIR correct in collecting the donors tax from Ayala Corporation. The law is
clear when it categorically stated that the donors tax of said prizes and awards shall be
exempt from the payment of the donors tax.
But this Q may be asked also: How about the amount of the contributions? Can that be claimed
as deductible contributions?
a) Under RA 7549, YES. (You must state the # of the law to impress the examiner 75
grade you must obtain; 49 avoid this, mortal sin!)
So to summarize, in paragraph d, the following are exempted:

1. The recipient of the award exempt from income tax
2. Contributor/donor of the award exempt from donors tax
3. Contributor/donor is allowed to claim the same as deductible contribution. This is based
on RA 7549 and not on the Tax Code.
Under the Old Tax Code, the following items were EXCLUDED from Gross income
a) Informers reward
Under the Present Tax Code (as amended by RA 8424 Sec. 282), this informers reward is
now subject to 10% FT (effective January 1, 1998)
b) Interest in income on Govt securities
PART 1 Taxation Law

This has been deleted from the enumeration under the Present Tax Code. This means
that it is now taxable.
c) Interest income from bank deposit maintained under the Expanded Foreign Currency
Deposit System
Under the Old Tax Code, it made no distinction, irrespective of the recipient or
depositor, tax exempt. Under the Present Tax Code, if it is received by Resident
Taxpayer t is now subject to 7.5% FT. It is exempt only if the recipient is a non-resident
taxpayer (individual or corporate).
SUMMARY ON MISCELLANEOUS ITEMS:
INCOME DERIVED BY FOREIGN INCLUDES:
GOVERNMENT FROM THEIR
a) Foreign government
INVESTMENTS IN THE PHILS
b) Financing institutions controlled by FX government
c) Intl or regional FI established by FX govt
Reason: To lessen the burden of foreign loans in as much as the
interest of these loans are, by contractual arrangement, borne by
domestic borrowers
COVERS THE FF INCOME GIVEN BY (a-c): INTEREST INCOME
1. From bank
2. On loan granted
3. On certificate of indebtedness on banks issued in ___
4. Dividend income received from DC stock investment income
INCOME DERIVED BY THE To be exempted it must be derived from GOVERNMENTAL
GOVT OR ITS POLITICAL FUNCTIONS
SUBDIVISIONS
XPN: Proprietary Income of the ff are tax exempt:
1. GSIS
2. SSS
3. PHIC
4. PCSO
Note: PAGCOR is no longer tax exempt RA 9337 Expanded VAT
PRIZES AND AWARDS
REQUISITES:
1. received in recognition with SCRALEC (scientific, charitable,
religious, artistic, literary, educational or civic achievement);
2. Recipient was selected without any action on his part to enter
the contest or proceeding;
3. Recipient is not required to render substantial future services
as a condition of receiving the prize
PRIZES AND AWARDS IN Under RA 7549, the venue is immaterial BUT the sports competition
SPORTS CCOMPETITIONS
must be sanctioned by the Philippine Sports Competition.
TAX TREATMENT:
Exempt from income tax
PART 1 Taxation Law

Donor or contributor is exempt from donors tax under RA

7549
He may claim the same as a deduction in addition to those
available under Sec. 34H
OTHER Total exclusion shall not exceed P50,000
13th MONTH AND

BENEFITS
GAINS FROM SALE OF BOND, Maturity of more than 5 years
DEBENTURES
OR
OTHER
CERTIFICATE OF INDEBTEDNESS
GAINS FROM REDEMPTION OF
SHARES IN MUTUAL FUND
Hanz
V. CORPORATE INCOME TAX
These are the provisions that apply to corporate taxpayers:
1.
2.
3.
4.
5.
Under Sec 22B youll find therein the definition of Corporate taxpayers, the meaning of corporation for
purposes of income tax;
Sec 27, 28 and 29 these provisions lay down different corporation rules
Sec 30 enumerates 11 tax exempt corporations
Sec 34, allowable deductions from GI of Corporate Taxpayers
Tax Exempt corporations: Sec 22B enumerates 3 tax exempt ass ociations or entities. Add those tax exemptions
GOCC under Section 27 C, as amended by RA 9337. As amended, there are 4 tax ex empt GOCC. Also add Sec 30 (11
items). So, all in all, there are 18 tax exempt corporations.
Sec 22B Definition of Corporation for purposes of Income Tax Corporation includes partnership[ no matter how
created or organized. There are 6 cases cited by the SC on this and there is also a BIR Ruling on this.
No matter how created or organized
EVANGELISTA v. COLLECTOR (104 Phil 42): According to the SC, the phrase simply means that coporations
may be formed or organized in writing, orally or in a public instrument. It requires no particular form under which
a partnership may be formed and organized.
RALOS v. RALLOS: 2 persons made a contribution to a common fund for the purpose of engaging in a
profit oriented business. So, there was a contribution to a common fund. Remember that under the law on
Partnership, a partnership is formed or created or organized if these 2 requisites concur:
1.
2.
Contribution to a common fund, and

Intention to divide the profit among themselves
In this case, they have the intention to divide the profits among themselves. These persons, according to its SC
formed a taxable unregistered business.
PART 1 Taxation Law

GATCHALIAN v. COLLECTOR: 15 persons made a contribution to a common fund to buy a sweepstakes
ticket and agreed to divide the winnings among themselves. The SC held that there was a partnership formed.
REYES v. COLLECTOR (1960 case) Father & son purchased a building and put up a business. They agreed to divide
the profit. Then an administrator was appointed. The SC said that there was a partnership created. These father
and son formed a taxable unregistered partnership.
ONA v. CIR (45 SCRA 74 Favorite Bar Q; 1972 c ase asked 1997 bar): As a rule, co-ownership is tax-exempt because
the co-owners formed the co-ownership not for profit but for common enjoyment. One of the causes that give rise
to co-ownership is inheritance. The heirs are considered co-owners and in trial stage, they cannot be considered as
unregistered taxable partnership. Here in Ona, after partition, the co-owners made a contribution to a common
fund out of their inherited properties. The allow one of them to administer the properties and the survivin g spouse
made use of these funds and made investments in business that produced income. The SC said, the co -ownership
was converted into a taxable unregistered partnership because:
a)
b)
The heirs made a contribution to a common fund; and

There was an intention to divide the profits among themselves.
Co-ownership may be converted into unregistered taxable partnership once the heirs made a contribution to a
common fund with the intention to divide the profit among them. The SC held that the circumstance of the c ase
would reveal that there was an intention to divide the profits among themselves because they authorize the
surviving spouse to administer the property and make use of these to invest in a profitable business.
Cases which are yet to be asked in the BAR:
OBILLOS, Sr. v. CIR (139 SCRA 436) OBILLOS DOCTRINE: Obillos, Sr. entered into a contract with Ortigas Corpo.
The agreement stipulates that the parcels of land be dividend into residential houses. But the children found the
construction as expensive so they decided to sell the parcels of land. The BIR claimed that they formed a
Partnership, No matter how it created.
The SC said there was no partnership created because it was just an isolated transaction. From the very
beginning, the children never intended to for m a partnership. There was really no intention to divide the profits
among themselves.
PASCUAL v. CIR (166 SCRA 306, 1988 case): The SC ruled that there was no taxable unregistered partnership
formed or organized. Pascual acquired 5 parcels of land. They said these parcels of land for a profit. The BIR
claimed that there was a partnership formed. The SC ruled that ther e was no partnership formed or organized. The
SC cited Art. 1769 B of the NCC, these are the tests to deter mine the existenc e on a partnership it says mere
sharing of gross returns does not of itself establish partnership. Here, they shared in the gross returns, not in the
net profit. There was that absence of intention to divide the profits among themselves.
These to my mind, are the probable bar Qs. Ona case was already asked but it may be asked again. Obillos and
Pascual are the most probable Q.
PART 1 Taxation Law

BIR Ruling 87-102 (April 8, 1987)

If the heirs who inherited a property, an appointment in this case, whereby income is deri ved on such
property, continue to engage in the business (rental) and with intent to divide the rentals among themselves, then
they shall be taxed as a taxable unregistered partnership.
TAX EXEMPT:
Sec 22B 3 tax exempt entities or associations:

1.
2.
3.
General Professional Partnership

Joint venture for the purposes of undertaking construction projects
Joint consortium for the purpose of engaging in petroleum and other energy operations
Sec 27 C 4 tax exempt GOCCs

4.
5.
6.
7.
GSIS
SSS
PHIC
PCSO
Sec 30 11 tax exempt corporations:

8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
Labor horticultural organization not principally formed or organized for profit;

Mutual savings bank not for profit but organized for mutual purposes;
Beneficiary society or fraternal society/ it is organized for the benefit of the members;
Non-profit cemetery formed or organized for the benefit of the members;
Non-stock corporations which must be organized or organized or formed for gain or profit;
Business League, Board of Trade or Chamber of Commerce, formed or organized for the promotion of
collective business interest (Manila Stock Exchange is not qualified under this particular exemption);
Civic league formed or organized for the promotion of the general welfare of the people;
Non-stock, non-profit educational institution;
Government education institution;
Farmers cooperatives;
Fruit Growers Association
You need not memorize these. What is important is that you are familiar with the characteristics or features of
these tax ex empt corporations.
Q: Why are these corporations tax exempt? Tax reasons are: 1) They are not r eally organized for profits. They may
be organized for charitable, educational, religious, philanthropic and other purposes. These are really non -stock
corporations; 2) No part of the income of these corporations inures to the benefit of a particular member or
individual.
But memorize the last paragraph of Sec 33. This may be asked again:
PART 1 Taxation Law

Sec 30 last paragraph: Notwithstanding the provisions in th e preceding paragraphs, the inco me of
whatever kind and character of the fo regoing organizations fro m any of their properties, real or personal, o r from
any of their activities conducted for profit rega rdless of th e disposition made of such in come, shall b e subject to tax
imposed under this Code.
2002 Q #6: XYZ Foundation is a non-stock non-profit association duly organized for religious, charitable and social
welfare purposes. Last January 3, 2000, it sold a portion of its lots used for religious purposes and utilized the
entire proceeds for the construction of a building to house its free Day and Night Care Center and to support its
religious, charitable and social welfare projects, the Foundation leased the 300 square meter area of the second
and third floors of the building for use as a boarding house. The foundation also o perates a canteen and a gift shop
within the premises, all the income from which is used actually, directly and exclusively for the purposes for which
the Foundation was organized.
A.
Considering the constitutional provision granting tax exemption to Non-stock corporations such as those
formed exclusively for religious, charitable and social welfare purposes, explain the meaning of the last
paragraph of said Sec 30 of the Tax Code which states that income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal or form any of their activities
conducted for profit regardless of the disposition made of such income shall be subject to tax imposed
under this Code.
B.
Is the income derived a by XYZ Foundation from the sale of a portion of its lot, rentals from its boarding
house and the operation of its canteen and gift shop subject to tax? Explain.
SUGGESTED ANSWER:
A.
The exemption contemplated in the Constitution covers real estate tax on real properties actually , directly
and exclusively used for religious, charitable and social welfare purposes. It does not cover exemption
from the imposition of the income tax which is within the context of Sec 30 of the Tax Code. As a rule,
non-stock, non-profit corporations organized for religious, charitable and social welfare purposes are
exempt from income tax on their income derived by them as such. However, if these religious, charitable
and social welfare corporations derived income from their properties or any of their a ctivities conducted
for profit, the income tax shall be imposed on said items of income irrespective of their disposition. 9Sec
30 YMCA v. CIR)
COMMENT: Since this was asked already, the possible problem may be based on that case of CIR v. YMCA, which is
a case wherein the SC construed the meaning of the last paragraph of Sec 30.
When it says NOTWITHSTANDING, it implies that these 11 tax exempt corporations are not totally
exempt from corporate income tax because their income derived from their properties, real or personal,
regardless of the use of the same is subject to tax because their income derived from activities conducted for profit
irrespective of the use of the same is subject to tax. They are not totally exempt from their corporate income tax
because they can be taxed on their income derived from the sale of their properties, real or personal. They can be
taxed on their income derived from the lease of their properties, real or personal. They can be taxed on the
interest income from bank deposi t. With more reason, income derived from businesses. YMCA falls under
paragraph E, non-stock corporations, non-stock associations charitable, religious and educational organizations.
PART 1 Taxation Law

CIR v. YMCA (298 SCRA 83)
4 arguments of YMCA in claiming that it is a tax-exempt corporation or association:

1.
2.
3.
4.
It invoked the constitutional exemption under Art VI Sec 28, par 3, it says that religious, educational
and charitable institutions are exempt from taxation;
YMCA, under Art 14 Sec 4 (3), claimed that it is a NSNP educational institution, therefore exempt
from tax;
YMCA argued that it could not be taxed because it did not engage in a business
Such an amount shall never be used for business or for gain. It shall be used to carry out its non -profit
purposes which are religious, educational and charitable purposes
RULING:
1.
2.
3.
Art VI Sec. 28 (3) applies only to property. The tax subject matter of the case is an income tax and not
property tax.
YMCA is not qualified as a NSNP educational institution. The SC scrutinized the pr ovisions of the Ar ticles of
Incorporation and By Laws of YMCA and ruled that it did not possess the features of NSNP educational
institution.
Yes it did not engaged in a business. The leasing of such property cannot be considered as business. It is
an isolated transaction. But this is where the provision in Sec 30 last paragraph saying from any of their
activities conducted for profit, came into play.
`
The SC construed that whether for profit or act, that income derived from the sole of real
propertt, lease of real property including personal property is subject to tax. So this is now
settled that such phrase for Profit does not equally this provision. But the basis of this, the SC
said: yes, that may be considered as isolated transaction, yes, we bel ieve that YMCA is not
engaged in a business, but the law says from any of their properties, real or personal. It is
immaterial whether such transaction is for business or not, as even isolated transaction is
covered by this.
TRANSACTIONS COVERED
a) Income derived from the sale of real or personal properties received by any of Corp. under
Section 30;
b) Income derived from the exchange of real or personal property even for isolated
transaction;
c) Income derived from the lease of personal or real property or in other words, income
derived from dealings in property. Recall Sec. 32 A(3) one of the items that will form part
of the GI is gain derived from dealings in property. Hence, it made mention of Real or
Personal property as the source whatever the transaction be it in the nature of sale,
exchange or lease of property.
So, 1) the income derived from the sale of real and personal property of any of these corporations under Section
30 is subject to tax; 2)the income derived from the exchange of real or person al property of any of these
corporations under Section 30 is subject to tax; 3) the rent income from real or personal property of any of these
corporation under Sec 30, is subject to tax; 4) as well as interest income from bank deposits is subject to 20 FT.
PART 1 Taxation Law

The SC said in this case that if YMCA derived income from deposits in the bank, that interest income is subject to
20%FT. Can it argue that the interest income shall be used to carry out its educational, religious, and charitable
purposes? No. it brings us to the argument.
4.
That it being a religious educational charitable institution, the income (rent income) shall be used in
furtherance of its purpose. It is clear in the last paragraph of Section 30, regardless of the disposition
made on such income. Disposition also means use. So, even if this income (rent income or income
derived from sale or exchange or exchange of real or personal property or interest in bank deposits) shall
be used in furtherance of non-profit purposes, that is not an argument b ecause the tax code categorically
says regardless of the disposition; irrespective of use, that income is subject to tax.
Q: What about NSNP educational institutions, is this covered by the last paragraph of Sec. 30 (par H)?
There is constitutional infirmity. Dont apply the last paragraph of Sec 30. What should be applied
in so far as NSNP educational institution is concerned is Art 14 Sec 4(3) of the Constitution. It says
as long as the revenue income shall be ACTUALLY, DIRECTLY AND EXCLUSIVELY used for
educational purpose, EXEMPT. But here in Sec 30, even if such income is actually, directly, and
exclusively used for educational purpose, it is still subject to tax.
This constitutional exemption must pr evail over Sec 30. Sec 30 last par.must be amend ed to
apply to NSNP educational institution.
Q: A government educational institution received interest from its bank deposits
a. Is this subject to 20% FT?
YES, the last paragraph of Sec 30 squarely applies to a govt educational institutions.
Govt educational institutions cannot argue that it shall be used for educational purpose.
b.
Would your answer be the same if the educational institution is an NSNP education institution?
The answer would not be the same because as long as there is proof that the inter est
income shall be actually, directly, and exclusively used for educational purpose that is
exempt from the 20% FT.
In par E it covers non-stock corporations. It includes charitable and religious institutions. YMCA falls under this. It is
a charitable and religious corporation based on it By-laws. So, the last paragraph of Section 30 squarely applies to
it.
Q. Is the inter est income rec eived by YMCA subject to 20% FT? YES. It is a charitable and religious institution but it
is not considered a NSNP educational institution.
Educational institutions are favourite Bar Q. You should know the Rules on these (Rules under Title II Exemptions
from property taxation; tax treatment on donations that may be given to these educational institution inter vivos
or mortis causa)
Classifications of educational institutions:

1.
2.
3.
Private educational institution

Government educational institution
Non-stock, non-profit (NSNP) educational institution
PART 1 Taxation Law

There may be 4 Q on these educational institutions:
Q1. Are these educational institutions subject to income tax? (be guided by Section 30)
Answer: As regards private educational section 27 B imposes 10% preferential corporate rate of 35% as amended
July 1, 2005. The 10% preferential corporate rate applies if the income from unrelated trade, business or activity is
NOT MORE THAN 50% of its total income. It means that if it is more than 50% of its total income, apply the 35%
corporate rate.
As regards NSNP educational institution Under Art 14. Section 4 (3) of the Constitution, it is exempt from income
tax, property tax and customs duties. The constitutional exemption from income tax is reiterated under Section 30
(H).
Q2. What is the importance of knowing whether it is a constitutional exemption or a statutory exemption? If a l aw
is pass by Congress withdrawing this exemption (Section 30 I), is that a valid law? YES. The power to grant an
exemption carries with it the power to withdraw the same.
Would that be the same if the withdrawal pertains in NSNP institution?

That is UNCONSTITUTIONAL. The ex emption is by virtue of a constitutional provision. Tes, the power to grant an
exemption carries with it the power to withdraw the same but it cannot withdraw Section 30(H) because it is just a
reiteration of a Constitutional provision. It is the Constitution that grants the exemption.
Q3. Are donations inter vivos given to these educational institutions subject to donors tax? (Sec 101 A (b))?
Answer: Private educational institutions are not one of those mentioned under Section 101 A(3) . What it
mentioned ther e is Non-Stock corporation, that may include NSNP educational institution and government
educational institution formed or organized as non-profit educational institution.
When this was asked in the bar exams, we suggested that the examinee should state these r equisites for the
exemption from donors tax:
a.
b.
c.
d.
e.
The done must be a NSNP educational institution

The institution must be governed by the Board of Trustees
The Trustees received no compensation;
The donation shall be used or devoted to the accomplishment of purposes stated in the Articles of
Incorporation
Not more than 30% of the amount shall be used for administrative purposes
If the Government educational institution and NSNP educational institution possess these
requisites/characteristics, the donor is not subject to donors tax with respect to donation inter vivos; given to
these Government educational institution and NSNP educational institution
Q4. Is donation mortis causa made in favour of these educational institutions subject to Estate ta? (Section 87
(d)?
PART 1 Taxation Law

ANSW ER: Yes. Under Section 87, the institutions covered are:
a)
b)
c)
Transfers made in favour of social welfare organizations

Given to charitable institutions
Cultural institutions
So, educational institution is not one of them. Since it does not cover educational institution, by the principle of
strictissimi juris, any donation mortis causa given to private educational institution, government educational
institution and NSNP educational institution subject to tax.
SUMMARY
EDUCATIONAL
SUBJECT TO:
INSTITUTION
INCOME TAX
PRIVATE
10% preferential
corporate rate if the
income from unrealised
business is more than
50% of the total
income; if not more
than 50% than normal
corporate rate of 35%
Exempt
GOVERNMENT
PROPERTY TAX
DONORS TAX
ESTATE TAX
Exempt provided
actually, directly and
exclusively used for
educational purpose
Donor is subejt to tax

Sec 101 A (3) does not
include private
educational institution
Donation is subject
to Esate tax as Sec
87 does not include
educational
institutions
Exempt provided
educational purpose
Donor exempt
provided that:
Donation is subject
to Estate tax as Sec
87 does not include
educational
institutions
a. The
donee/government
educational
institution is
organized as nonprofit educational
institution;
b. The institution must
be governed by the
Board of Trustees;
c. The Trustees
received no
compensation
d. The donation shall be
used or devoted to
the accomplishment
of purposes stated in
the Articles of
Incorporation
Not more than 30% of
the amount shall be
used for administration
PART 1 Taxation Law

purposes
NSNP
Exempt
Exempt provided
educational purpose
Donor exempt
provided that:
e. The donee is
organized as nonstock non-profit
educational
institution;
f. The institution must
be governed by the
Board of Trustees;
g. The Trustees
received no
compensation
h. The donation shall be
used or devoted to
the accomplishment
of purposes stated in
the Articles of
Incorporation
i. Not more than 30%
of the amount shall
be used for
administration
purposes
Donation is subject
to Estate tax as
Section 87 does not
include educational
institutions
TAX TREATMENT ON CORPORATIONS

TAX RATE
GOVERNING PROVISIONS
MCIT
2% on Gross Income
Sec 27B and 28A (2)
BPRT
15 of profits applied or earmarked

for remittance
Sec 28A (5)
TAX SPARING CREDIT
15%
Sec 28B 5B
IAS
10%
Sec 29
BPRT Marubeni v. CIR (177 SCA 500)

TAX SPARING CREDIT (Sec 285) (???)
Cases are: Protector and Gamble Phils. V. CIR (160 SCRA 560)
Wander Phils. V. CIR (160 SCRA 573)
Protector and Gamble Phils. V. CIR (204 SCRA 377)
You should also be aware of the modification on the BOAC Doctrine
PART 1 Taxation Law

Illustration:
Normal Income Tax

MCIT
Tax payable (higher between
MCIT & normal tax)
LESS: excess MCIT over normal
Distribute the 150,000 (200,00050,000) excess MCIT for the next
3 succeeding TAXABLE year.
NET AMOUNT of TAX PAYABLE
2000
60,000
200,000
200,000
200,000
2001
100,000
50,000
100,000
2002
100,000
60,000
100,000
100,000
50,000
-0-
50,000
2. Another equitable provision is that MCIT applies only after 4 years from the commencement of the
corporate business and not in the first year of operation. If you apply this in the 1sy year of corporate
existence- the year of adjustment of corporation-that would be unjust. (Sec. 27 E) The law assumes that
corporations are already financially stable on its 4th year of operation.
3. This may be suspended under equitable exceptional circumstances (Sec. 27 E (3)):
a. Suspended in the sense that upon the cessation of this cause. MCIT shall automatically be applied.
b. Prolonged labor dispute experienced by the corporation.
Equity dictates MCIT must be suspended. This is clarified by RR 9-98. What is meant by prolonged labor
dispute that will justify the suspension of this MCIT? The must be brought about by a labor strike and
have lasted for than 6months and it must result in the shutdown of the business operations.
c. Force Majeure
(This is construed under RR9-98 to include FILES (Flood, Insurgency, Lightning, Earthquake, and Strom)
d. Financial business reverse/lossess brought about by FERT (Fire, Embezzlement, Robbery, Theft)
2 Corporations covered by MCIT
a. Domestic Corporations (Sec.27 E); and
b. Resident Foreign Corporations (Sec. 25 A2)
4 Tax Exempt Domestic Corporations from MCIT under RR 9-98
a. Private or proprietary educational institutions;
b. Non-profit hospital;
c. Depositary bank that operates under the Expanded Foreign Currency Deposit System
d. Enterprises or firms registered with:
1. PEZA pursuant to RA 7960
2. registered with Basic Conversion Development Authority
Resident Foreign Corporations not subject to MCIT
a. regional headquarters of multinational corporations doing business in the Phils.
PART 1 Taxation Law

b. those engaged in offshore banking activities

c. international carriers which may include international airlines and international shopping or vessel
d. enterprises or firms registered with
2. Registered with Basic Conversion Development Authority
2001 Q# 9b: I a corporation which is exempted from MCIT automatically exempted from the regular
corporate income tax? Explain your answer.
Answer: No. Corporations may be exempted from MCIT but are still subject to corporate income tax.
The MCIT is a proxy for the normal corporate income tax, not the regular corporate income tax paid by a
corporation. For instance:
a. Private or proprietary educational institution-exempt from MCIT automatically exempted from the
regular corporate income tax of 10% under Sec. 27 B depending on its dominant income
b. Non-profit hospital exempt from MCIT but subject to 10% or 35% as the case may be exempt from
MCIT but subject to 10% FT
d. Enterprises or firms registered with:
2. Registered with Basic Conversion Development Authority

Exempt from MCIT but subject to 6% special corporate rate
Improperly Accumulated Earnings Tax of 10% (new provision-has yet to be asked in the Bar)
Q: Explain the rationale of this new corporate rule imposing what is known as IAET
Sec. 2 RR 2-2001- Dont just try to memorize this. Understand the implication so that you can easily
recall the provision.
Answer: In a domestic corp., if dividends are declared and distributed to stockholders, the stockholders
are subject to the 10% tax on these dividends. The source of these dividends is earnings (Sec. 43 says
unrestricted R/E). Let us say, the corporation improperly accumulates the corporate earnings. It
withheld the declaration of dividends. The effect of this is that the Govt. was deprived of the right to
impose tax on the dividends. Improperly accumulated earnings means that the corporation is not
justified under the circumstances.
As clarified by RR 2-2001 Prima facie Instances of IAE includes the following:
1. Based on 2nd par. Of Sec. 43 of the Corporation Code- stock corporations are prohibited from retaining
surplus profits in excess of 100% of its paid in capital. If theres a violation of this, RR 2-2002 says that
this may give rise to IAE. This is a classic case wherein the 10% may be imposed;
2. When substantial earnings and profits of the corporation were invested in unrelated trade business or
activity of the corporation;
PART 1 Taxation Law

3. When such corporation made an investment in bonds and other long-term securities.
This is a good Q in the Bar- What are the 3 instances that may give rise to prima facie evidence of IAE.
On the other hand, when is it proper to accumulate earnings in excess of 100% of paid in capital?
Sec.43 Corporation Code & RR 2-2001:
1. When justified by definite corporate expansion projects or programs approved by the BOD; or
2. When the corporation is prohibited under any loan agreement with any FI or creditor, whether local
or foreign from declaring dividends without its/his consent and such consent has not yet been secured;
or
3. When it can be clearly shown that such retention is necessary under special circumstances obtaining
in the corporation, such as when there is a need for special reserve for probable contingencies.
4. To purchase land or building approved by the BOC.
Note: There are 6 cases under RR 2-2001 but these 4 are notable ones.
Sec. 29. Imposition of Improperly Accumulated Earnings Tax
B (2) Exceptions The IAET as provided for under this Section shall not apply to
a. Publicly-held corporations;
b. Banks and other non-bank financial intermediaries; and
c. Insurance companies.
Since corporation covered are closely held corporations not covered are the following:
Under Sec. 29- 3 (BPI):
1. Publicly held corporations;
2. Banks and other non-bank financial intermediaries; and
3. Insurance companies.
In RR 2-2002, there are additional exempt corporations in addition to the the 3 mentioned in Sec. 29:
4. Taxable partnership
5. General Professional Partnership
6. Non-taxable joint ventures
7. Enterprises duly registered pursuant to the Bases Conversion and Development Act of 1992 under RA
7227.
These are the 8 corporations or entities which are not covered by the 10% tax on Improperly
Accumulated Earnings.
What was asked in the 2001 Bar is tax exempt corporations from MCIT. If this will be the trend the Q
may be corporations which are not subject to the 10% IAE (Sec. 29)
Branch Profit Remittance Tax of 15% (Sec. 28 A (5))
PART 1 Taxation Law

2 amendments were introduced by RA 8424. These amendments refer to the basis and the enterprise
not subject to 15% FT.
Sec. 28 A- Tax on Resident Foreign Corporations
Tax on Branch Profit Remittance- Any profit remitted by branch to its head office shall be
subject to a tax of 15% which shall be based on this total profits applied or earmarked for remittance
without any deduction for the tax component thereof EXCEPT those activities which are registered with
the Philippine Economic Zone Authority. Xxx Provided, that interests, dividends, xxx receiv ed by a
foreign corporation during each taxable year from all sources wihin the Philippines shall not be treated
as branch profits unless the same are effectively connected with the conduct of its trade or business in
the Philippines.
Questions that must be answered:
1. What constitutes branch profits subject to 15% Ft?
2. What is the tax base of the 15 FT?
3. What are the tax exempt branch profits?
Q#1 MARUBENI CORP vs. CIR (177 SCRA 500) 1999 Q #9:
HK Co. is Hongkong company, which has a duly licensed Phil. Branch, engaged in tradition activities in
the Phils. HK Co. also invested directly in 40% of the shares of stock of A Co., a Phil. Corporation. These
shares are booked in the Head office of HK Co. and are not reflected as assets of the Phil. Branch. In
1998, A Co. declared dividends to its stockholders. Before remitting the dividends to HK Co. A Co. seeks
your advice as to whether it will subject the remittance to WT. No need to discuss WT rates, if
applicable. Focus your discussion on what is the issue.
SUGGESTED ANSWER:
I will advise A Co. to withhold and remit the withholding tax on dividends. While the general rule is that
a foreign corporation is the same juridical entity as its branch office in the Phils. when, however, the
corporation transacts business in the Philippines directly and independently of its branch, the taxpayer
would be the foreign corporation itself and subject to the dividend tax similarly imposed on nonresident foreign corporation. The dividends attributable to the Home Office would not qualify as
dividends earned by a resident foreign corporation which is exempt from tax.
JAPS ANSWER:
Branch Profits are gains or profits which are effectively connected with the trade or business in the Phils.
That is exactly the last provision of Sec. 28 A. The case of Marubeni Corp. involves a direct investment by
the mother corporation (Marubeni Japan) in the Philippines corporation. It received income for such
direct investment. Marubeni Japan claimed that that should form part of the branch profit subject to
this 15% FT.
PART 1 Taxation Law

RULING: It should not form part of the branch profits because such investment has no connection with
the trade or business conducted in the Philippines.
With this ruling of the SC, we can now say that to be considered as effectively connected with the trade
or business in the Philippines. It must be one that is made by the branch office. If the investment is
directly made by the mother corporation, the income or profit derived therefrom cannot be considered
as branch profit subject to this 15% FT. Dont be misled if in the problem the mother corporation
invoked that under the principal-agent relationship theory, that may be considered as branch profit or
profit of the branch office. Principal-agent relationship was rejected by the SC. You cannot apply that
theory which dictates that the profit of the mother corporation is considered as profit of the agent and
vice versa. It is not applicable because there is a clear provision under the Tax Code. This has not been
amended. That is. It must be effectively connected with the conduct of trade or business in the
Philippines. It may be considered as branch profit if that investment is made through the branch office.
Q: What is the basis of this 15% FT?
There are 2 decisions of the SC: City Bank case and Chartered Bank case. The Sc based its rulings on the
old provisions because these 2 cases were promulgated before the effectivity of RA 8424. The SC said
that the 15% branch profit remittance tax should be based on profits actually remitted. This is no longer
the rule. With the effectivity of RA 8424 amending that particular provision, the basis now is it is no
longer the amount actually remitted it is the amount applied or earmarked for remittance. So, in the
problem, it is possible that the amount applied or earmarked for remittance is %M. Amount actually
remitted is 4M. This is the old rule which is deemed repealed by Sec. 28 A5.
Q#3. Tax exempt branch profits- profits earned or derived by firms or enterprises registered under
Philippine Economic Zone Authority. Under the old Tax Code, it was Export Processing Zone Authority.
But now, it under PEZA.
Carlos
TAPSI PART I
Tax Sparing Credit: (Sec. 28B5b):
What is the situation contemplated therein?
* Q#1: NRFC rec eived a dividend from a Domestic Corporation. So, the income subject matter of that provision is
dividend income. Is that taxable? YES, that is taxable.
If it is taxable, is it subject to corporate FT or regular corporate rate?

- The tax rate is in the nature of a FT (I t is mentioned in Sec. 28B5b, and it made mention of Sec.
57A this is the rule on Final Withholding tax there are 26 items in Sec. 57A and this is one of them). This means
that this 15% corporate income tax is a FT. Since it is a FT, the source (w/c is the domestic corporation) is
considered as the withholding agent of the government. And applying the Rule under RR 2 -98, as withholding
agent, it is one legally obliged to pay the tax.
PART 1 Taxation Law

* Q#2: Why is it that the corporate rate has been reduced to 15%? The SC in the case of Proctor & Gamble Phils.
said that the purpose of the tax code is to attract/encourage foreign investment. If we reduce the tax rate from
35% to 15%, is there a tax saved or spared?
Yes. As described by the SC, this is known as the Tax Sparing Credit. So this implies that there is a tax
saved.
Try to analyze, 35% would have been the applicable corporate income tax but Sec.28B5b reduced it to
15%. So the tax saved percentage wise, is 20%.
* Q#3 : What is the condition for the imposition of this 15% reduced corporate rate?
A condition sine qua non to the imposition of reduced corporate rate is that the foreign government, in
the language of Sec. 285b shall allow tax credit on taxes deemed paid in the Philippines by this foreign
corporation.
* Q#4 : When it says shall allow tax credit on taxes deemed paid in the Philippines what does that mean? Will
these corporations be obliged to present clear and convincing proof of the amount actually granted as tax Credit?
This now brings us to the 2 cases decided by the SC on the same date (April 15, 1980):
1.
Procter & Gamble Phils. vs. CIR (160 SCRA 560)
2.
Wander Phils. vs. CIR (160 SCRA 573)
These 2 cases were decided on the same date but wer e in conflict with each other (the jurisprudence has yet to be
asked in the bar).
nd
In the Procter case, according to Justice Paras of the 2 Division, ther e should be proof of the amount actually
rd
granted as tax credit. However, in the Wander case decided by the 3 Division of the SC, did not make any ruling to
that effect. It can be inferred from the W ANDER case that proof as to the actual amount granted as a tax credit
need not be necessary.
Prevailing Doctrine laid down in the MR of the Procter case (204SCRA 377)
On Dec. 02, 1991, acting on the MR filed by Procter & Gamble, SC En Bank ruled that the Tax Code does
not acquire actual grant. It says Shall allow, it did not say Actual grant. The SC is absolutely correct in its
ruling that since the Tax Code does not require actual grant, proof of the amount granted as tax credit by the
foreign Govt. is enough. According to the SC, this is an old provision, except for the tax base. This provision is the
same as the old tax code. And there is really no BIR Ruling requiring actual grant.
So, the prevailing view is No proof of the actual amount granted as tax credit What is only required is
to prove that the for eign Govt allows such tax credit.
Q.
How do you prove if the foreign Govt allows tax credit?
PART 1 Taxation Law

Refer to the Revenue Code of the for eign Govt. In fact, in the Procter case, there is a provision in the U.S.
Revenue Code allowing tax credit to these American corporations.
Twice asked in the BAR Whether or not the withholding agent (subsidiary corp., in this case Procter Phils.) has the
legal personality to file written claim for refund.
nd
In the Procter case, the 2 division of the SC said It is the mother corporation that has
a legal personality to file the written claim for refund because the mother corporation is the one
considered as the taxpayer. Since withholding agent is not considered as taxpayer, it has no legal
personality to file a claim for refund.
rd
But in the Wander case, the 3 division said Withholding agent has the legal personality to file a
written claim for refund.
This issue was also resolved by the SC en banc in the MR of the Procter case on Dec. 2, 1991. The
SC en banc ruled that the withholding agent is not only an agent of the Govt; it also an agent of
the taxpayer. Since it is an agent of the taxpayer, it is technically considered as a taxpayer. As
such, it has legal personality to file a written claim for refund. (The SC cited the case of Phil. Life
Insurance vs. CIR: SCRA 15). It is an agent of the Govt for the collection of taxes and it is an
agent of the taxpayer for the filing and payment of income tax
SUMMARY:
PROCTOR & GAMBLE vs. CIR

April 15, 1988
WANDER PHILIPPINES vs. CIR

April 15, 1988
PROCTOR & GAMBLE vs. CIR

MR Dec 2 1991
WHETHER THE WITHHOLDING AGENT OF THE MOTHER CORPORATION MAY

FILE FOR A WRITTEN CALIM FOR REFUND
NO personality to file an action for

refund because only the mother
corporation can file the same since it
is the TP.
YES, since the agent is an agent of

the TP and likewise an agent of the
government. It is an agent of the
mother corporation since it is the
one responsible for the reporting of
such, an income CO NTROLLING
DOCTRINE
YES Under sec. 222, in case of

failure to remit the tax withheld the
agent shall be liable for the same.
PROOF NEEDED TO AVAIL OF THE TAX CREDIT
There must be proof of the actual

amount of the tax credit by the FY
Actual proof is not required
Sustained Wander ruling the law

didnt: mention actual the
amount actually allowed need not
PART 1 Taxation Law

government .
be proved, it would suffice that

under the Tax Code of the FX /Govt,
it allows its corporation to claim tax
credit for the taxes paid in FY
governments.
BOAC DOCTRINE (take note of the modification as to tax situs)
Doctrine #1. Sources of income it reiterates the settled rule that the sources of income are P.A.S
(Property, Ac tivity and Service). Recall the technical definition? Income is a gain derived from CAPITAL,
LABOR or BOTH labor and capital (Fischer vs. Trinidad(?). In BOAC case, it just changed the terms: from
nd
capital to property, labor to services; but activity is added. This is now brings us to the 2 doctrine.
Doctrine #2, When can you say that an income is derived from sources within? It is also in this case that
the SC enunciated the rule that An income is considered as income WITHIN when the source of such
income is undertaken within the Philippines. In the BOAC case, what is the determinative test of that
income considered within? It is an Income derived from sources within when the source of the same is
made or conducted or undertaken in the Philippines. So, it is considered income WITHIN if: the property
from which the income is derived is situated in the Philippines; or the activity from which such income is
derived is undertaken in the Philippines; or if the service is performed within the Philippines. Thats the
meaning of that.
Doctrine #3. Stale-Partnership Theory The Philippines has the right to tax the same because it enjoys the
protection of the Philippine Govt. It can be taxed if the particular subject of taxation enjoys the
protection of the Philippine Govt. If that subject of taxation does not enjoy the protec tion of the Phil.
Govt. (Theory of Protection reiterated in the BO AC case), we cannot tax that. So , in the BO AC case, the SC
said that an income derived from the sale of transport documents (airline tickets) can be taxed because
such activity enjoys the protection of the Phil. Govt. This now brings us to the tax situs of sale transport
document.
In BOAC case, the tax situs is the place of sale or place of payment. This has been changed or
modified by SEC. 28 A (3). The composition of Gross Phi. Billings or the deter minative test of those
revenues that would constitute Gross Philippine Billings has been changed by RA 8424.
Under the BO AC case, it is the place of sale or payment
Now, it is the origin of passengers, baggage, cargoes and the like.
This in effect changed the tax situs under Sec. 42A (6) it speaks of sale of personal property and
this may include sale of transport document or intangible personal property. In Sc. 42a (6), the tax situs is
the place of sale. This is modified by SEC 23 A (3), that is, if the subject of sale is a transport document
then consider the origin of the passengers, baggage or cargoes. As amended by RA 8424. Gross
Philippine Billings may now consist of revenue that may be derived from the transport of passengers,
cargoes and the like, irrespective of the place of sale or payment.
PART 1 Taxation Law

RR 15-2000 now declares that off-line international airlines cannot be taxed on the income
derive from the sale of transport documents where the passengers and cargos do not originate from the
Phils.
1994Q#15: An off line international airline sold transport documents (airline ti ckets) ir, the Phils.
to his clients and officers. Can this off line international airline be taxed from income derived from the
sale of transport documents?
Under the BO AC case, YES because while it is true that it rendered no service, no property in th e
Philippine from which income may be derived; there was that ACTIVITY. There was such activity
undertaken in the Philippines. The SC said that the activity refers to the sale of transport
document. Since these transport documents are sold in the Phili ppines, payment is made in the
Philippines, the flow of wealth therefore, occurred within the Philippines.
The rule now has been changed. W e can no longer tax this. The origin of the passengers,
baggage or cargoes must be here in the Philippines.
VI.
ALLOWABLE DEDUCTIONS & PERSONAL AND ADDITIONAL EXEMPTIONS:
The TP must point to some specific provisions of the statute authorizing the deduction and he must be
able to prove that he is entitled to the deduction authorized or allowed.
If a TP fails to deduct certain expenses for the taxable year, he cannot deduct them from the income of
the next year or any succeeding year.
The following are not allowable to claim deductions their tax base is GROSS INCOME
a.
NRA NETB
b.
NRFC
EXCLUSION FROM GROSS INCOME
ALLOWABLE DEDUCTIONS
Section 326
Section 34
Refers to a flow of wealth which doesnt form part of

the gross income because they are excluded by the TC
or by special laws or the Constitution material to arrive
at gross income exclude such items to arrive at gross
income
Refers to amounts which the law allows as deductions

from gross income in order to arrive at net income or
taxable income.
necessary to arrive at net or taxable income

something earned or received which do not form part
of gross income.
something paid or incurred in earning gross income
PART 1 Taxation Law

ALLOWABLE DEDUCTIONS
As to nature
In the nature of business expenses
As to purpose
Is to recover or recoup the cost of doing business
PERSONAL EXEMPTIONS
In the nature of personal, living or

family expenses
To recover the personal living and

family expenses paid or incurred
during the taxable year
may be claimed by individual and corporate TPs
Except: 1) NRA-NETB (Sec. 25B, basis us GI)

As to claimant
As to amount
Are granted only to individual TP

except NRA-NETB
2) NRFC (Sec. 28 B1, basis of 35% is GI)
The actual expenses paid or incurred in the conduct

of trade, business or profession
Arbitrary amounts granted to

approximate the personal expenses
that may be incurred by individual TP
Exemption may be classified info:

Under /sec. 34 are classified into:
As to kinds of
deductions or
exemptions
1)
Itemized deductions
2)
Optional Standard Deductions of 10% of GI
1)
Basic personal exemption
2)
Addtl personal exemption PEX

for every qualified dependent,
legitimate, recognized
illegitimate child or children not
more than 4.
Sec. 35D Rule on r eciprocity regarding NRA-ETB

It only applies to basic personal exemptions and should not exceed our maximum basic personal
exemption:
For married individual
32,000
Head of the family
25,000
Single
20,000
Q: A. A non-resident foreigner was doing business here in the Philippines. He is married and has 2 minor
children
Check if the country of the foreigner allows basic personal exemption to the citizens of the Phils.
If no personal exemptions is granted by his govt. we cannot grant him any personal exemption.
PART 1 Taxation Law

But if his govt allows basic personal exemption to Filipino citizens, we can grant him basic
personal exemption but th e amount must not exceed our maxim basis personal exemption.
Example: his country allows 25k basic personal exemption to married Filipinos. Then he is also
entitled to 25k basic personal exemption here in the Phils. If his country allows 40k as basic
personal exemption to married Filipinos in his country, he is only entitled to a basic personal
exemption of 32k as the amount is the maximum basic personal exemption granted by our
country to a married person.
The for eigner cannot claim additional exemption as regards his 2 minor children as the rule on
reciprocity applies only to basic personal exemptions.
OSD of 10% GI vs. Itemized deductions :

CLASSIFICATIONS OF DEDUCTIONS
ITEMIZED
As to proof
substantiated by receipts or documents
As to claimant
claimed by individual and corporate TP
OPTIONAL STANDARD
requires no proof of expenses or
incurred because allowable
deductions is 10% of GI or Gross
receipts
claimed only by 3 individual TP:
a. RC
b. NRC
c. RA
Q: Suppose your friend asks you about these 2 deductions, would you advise him to avail of itemized
deductions or OSD of 10%?
Answer: It depends upon the circumstances of the case. If your friend has receipts or documents
which may substantiate all the expenses, its better to ava il of the itemized deduction because he
can claim more deductions. On the other hand, if he has no receipts to substantiate the expenses
incurred, he should avail of the 10% OSD. No proof or receipts are required to avail of the 10%
OSD.
ALLOWABLE DEDUCTIONS FROM GROSS INCO ME: Section 34
Business expense
Interest expense
Taxes
Losses
Bad debts
Depreciation
PART 1 Taxation Law

Depletion of oil and gases wells and mines
Charitable and other contribution
Research and development
Pension trust
Additional requirements for deducti bility of certain payments
Optional standard deduction
Premium payments on health and/or hospitalization insurance of an individual TP
COMMON REQUISITE OF DEDUCTIONS:
Must be incurred in the exercise of the TPs the trade or business
Incurred during the taxable year EXCEPT losses which may be turned over
Must be substantiated by receipts
Must be reasonable
Must not be contrary to law, public, morals or public policy
Favorite Bar Questions:

A)
Sec. 34 A (1) Ordinary and Necessary expense
B)
Sec. 34 B Interest expense
C)
Sec. 34 C Taxes (re: Tax Benefit rule; asked 2003 Bar; Q was modified in 2005 Bar)
D) Sec. 34 D Losses
E)
Sec. 34 E Bad Debt Expense
Tax Benefit Rule: (Se c. 34 C (taxes) and 34 E (bad debts):
What is the provision under the Tax Code which enunciates the Tax Benefit Rule? This applies to two
provisions under Sec.34, paragraphs C and E. there is that common provision on income tax benefit.
Paragraph C provides; shall be included in the gross income in the year of receipt to the extent of the
income tax benefit of said deduction. So, this is refers to tax refund.
Paragraph E deals with recovery of bad debts. The provision says: shall be included in the gross income in
the year of recovery to the extent of the tax benefit of said deduction
These are the provisions on Tax Benefit Rule. it applies to 2 cases:

1.
Tax refund
PART 1 Taxation Law

2.
Recovery of bad debts written off
Tax refund:
shall be included in the C in the year of receipt to the ex tent of the income tax benefit of said deduction
--- it talks about deduction, so it means that what is involved is a deductible tax. This must be a deductible
tax and must be actually claimed as deductions. That is precisely the tax benefit --- it is one that may
reduce the taxable income. Stated otherwise, that ma y only reduce the taxable income if it is a deductible
tax.
Example: 2003 taxable year:

Net income before tax
150,000
Less: Local business tax (50,000)
Taxable Income
100,000
In 2004, the Local business tax of 50,000 was recovered through a r efund because it turned out that the
taxpayer is tax exempt. This 50,000 tax refund is subject to tax because applying the tax benefit rule, it
was claimed as deduction and therefore it reduces taxable income by 50,000. It reduced your taxable
income by 50,000.
However, if the taxpayer receives no tax benefit, the r ecovery of such tax refund may not result to taxable
income. Example is when the tax refunded is a non-deductible tax. If a tax refunded is a non-deductible
tax, it is not subject to income tax in the year of recovery because it did not result in a tax benefit as it did
not reduce the taxable income of the taxpayer for the simple reason that it is not a deductible item.
So you ought to know what are non-deductible taxes because if the tax refunded is a non-deductible tax,
common sense will tell you it never reduced the taxable income in the preceding year. Ther e is no tax
benefit, so there is nothing to tax. In short. It is not taxable.
TAXES:
Sec. 34 C-Non-deductible taxes (S-I-D-E):

1.
Special assessment;
2.
Income tax;
3.
Donors Tax;
4.
Estate Tax
These taxes if refunded, will not result in a taxable gain because the taxpayer received no tax
benefit
Deductible Taxes:
PART 1 Taxation Law

1.
VAT;
2.
Percentage Taxes;
3.
Excise Taxes;
4.
Documentary stamp taxes;
5.
Local business taxes
Take Note: Only Local taxes are included in the coverage of the exam!!!
NON-DEDUCTIBLE TAXES
DEDUCTIBLE TAXES
S Special assessment tax
E Excise tax
I Income tax
V Value added tax
D Donors tax
P Percentage tax
E Estate tax
D Documentary Stamp tax
L Local business tax
NOT taxable and does not form of the gross income
Taxable if tax refunded was a deductible tax, hence

forms part of the gross income in the year of receipt
Recovery of Bad Debts Written Off:
Same principle as that of refund applies to the ex tent of the income tax of said deduction. It
presupposes that the bad debt was claimed as a deduction; that it was actually claimed as a deduction.
Example: 2003 taxable year:
Net income before write off o f worthless accounts
150,000
PART 1 Taxation Law

Less: Bad Debts Written off
Taxable income after BDWO
In 2004, this 50,000 was recovered by the creditor. Will this result in taxable gain?
(50,000)
100,000
Suppose:
Applying the Tax benefit rule, yes, because such taxpayer received tax benefit. By claiming
the 50,000 as deduction from the net income, it reduced the taxable income by 50,000. It
follows that if such amount was not claimed as a deduction, it will never result in a taxable
income.
Net loss
(150,000)
BDWO
( 50,000)
Total net loss (200,000)
The 50,000 was subsequently recovered in 2004. Is that subject to tax?
That is not taxable because the taxpayer received no tax benefit since it was never
claimed as a deduction. According to RR 5-99, the recovery of bad debts written off
is a mere return of capital. The reason is simple: it was never claimed as deduction
because the taxpayer has no net income in the preceding taxable year. There is
nothing to reduce.
2000 Q#8: a) What is meant by the tax benefit rule? b) Give an illustration of the application of the tax
benefit rule.
SUGGESTED ANSWER:
a)
TAX BENEFIT RULE states that the taxpayer is obliged to declare as taxable income subsequently
recovery of bad debts in the year they were collected to the ex tent of the tax benefit enjoyed by
the taxpayer when the bad debts were written off and claimed as a deduction from income. It
also applies to taxes previously deducted from gross income but which were subsequently
refunded or credited. The taxpayer is also required to report as taxable income the subsequent
tax refund or tax credit granted to the extent of the tax benefit the taxpayer enjoyed when such
taxes were previously claimed as deduction from income.
b)
X Company has a business connected receivable amounting to 100,000 from Y who was declared
bankrupt by a competent court. Despite earnest efforts to collect the same, Y was not able to
pay, prompting X company to write-off the entire liability. During the year of write-off, the entire
amount was claimed as a deduction for income tax purposes reducing the taxable net income of
X Company to only P1M. Three years later, Y voluntarily paid his obligation previously written -off
to X Company. In the year of recovery, the entire amount constitutes part of the gross income of
X Company because it was able to get full tax benefit three years earlier.
JAPS ANSW ER:
PART 1 Taxation Law

Citing 2 cases, tax benefit rule applies to:
1.
Tax Refund. It is subject to tax if the tax refunded is a deductible tax;
2.
Recovery of bad debts written off. It is subject to tax if the amount recover ed was claimed as
a deduction from gross income in the preceding year
2005Q#2: Are the following taxable:
a)
Tax refund
b)
Recovery of bad debts
Answer: You really have to qualify your answer.
In letter (a) it may be taxable depending on the nature of the tax refunded, whether it is a
deductible or non-deductible tax. If it is non-deductible, then it is not taxable as there is no
benefit on the part of the one claiming the refund.
In letter (b) you must qualify and cite RR 5-99 if the problem states that there was a net loss in
the prec eding taxable year. It was just a return of capital, so not taxable.
BUSINESS EXPENSE:
Considered as ordinary or necessary expenses. They are directly attributable to the development
management operation and/or conduct of the trade or business of the TP or in the ex ercise of his profession.
The enumeration of ordinary and necessary expenses under Sec. 34 A is not complete. O ther reasonable
business expenses are:
Compensation for personal services rendered-ex. Life insurance premium paid by the
employer
Traveling expenses meal and lodging
Representation
Entertainment
Adver tising or promotional expenses
Rent
Repairs and maintenance must be ordinary or incidental
Q: How do you know whether or not an expense is ordinary or necessary?
PART 1 Taxation Law

ANSW ER: D-O-M: An expense is ordinary and necessary if it is paid or incurred in connection with
the DEVELOPMENT, OPERATION, or MANAGEMENT of the business or exercise of profession.
This is a new provision. Under the old tax code, there was no determinative test because as
explained by the Sc in several cases, ordinary and necessary cannot be defined with
completeness
Promotional Expenses:
CIR vs. ALGUE (158 SCRA 9):
Q: Is the P125,000 promotional expenses considered reasonable?

o The word reasonable is a question of fact. It is a relative term and will depend upon
the circumstances of the case and the nature of the business of the taxpayer. According to
the SC, the 125,000 promotional expense is reasonable under the circumstances. It is
reasonable because the experimental project involves millions of pesos. P125,000 is
unreasonable if your business is a mere sari -sari store.
ESSO STANDARD DOCTRINE:
The doctrine enunciated her e is that an expense is deductible if it is paid or incurred in the
production of income. It is not deductible if it is paid or incurred after the production of income
or disposition of income.
The case is about whether the margin fee paid to the Central Bank is a deductible expense. The
SC said that it is not deductible because this was paid or incurred not in the production of
income. It was paid or incurred after the disposition of income.
INTEREST EXPENSE:
Amount of compensation paid for the use of money or forbearance from such use. They are
deductible under the following conditions:
o
There must be a valid and subsisting indebtedness
It must be an interest bearing obligation see art. 1956
Obligation incurred or paid in connection with the business or trade or the exercise of ones
profession
Must be proven or substantiated by receipts or documents
Just focus on non-deductible interest!!!
PICOP vs. CIR (yet to be asked in the Bar) a case regarding non-deductible interest
Q: Is theoretical interest deductible?
PART 1 Taxation Law

There are 2 reasons why theoretical interest is non-deductible (citing RR 2 Sec. 79):
1.
It is not paid or incurred. Here, the interest is merely computed or calculated (iniisip
pa lang);
2.
It lacks the essential requisite for the deduc tibili ty of interest expense it must
arise from interest bearing obligation. The SC said, this does not arise from interest
bearing obligation.
MANO A MANO : PACQUIAO vs. LARIOS unanimous decision
Interest on Capital: (non-deductible interest):
1994Q#14: a Co., a Philippine corporation, issued preferred shares of stock with the
following features:
1.
Non voting;
2.
Preferred and cumulative dividends at the rate of 10% per annum, whether or
not in any period the amount is covered by earnings or projects;
3.
In the event of dissolution of the issuer, holders of preferred stock shall be paid
in full or ratably as the assets of the issuer may permit before any distribution
shall be made to common stockholders; and
4.
The issuer has the option to redeem the pr eferred stock.
A Co. declared dividends on the preferred stock and claimed the dividends as interests deductible
from its gross income for income tax purposes. The BIR disallowed the deduction. A Co. maintains
that the pr eferred shares with their features are really debt and therefor e the dividends are really
interests. Decide
SUGGESTED ANSWER:
The dividends are not deductible from gross income. Preferred shares shall be considered capital
regardless of the conditions under which such shares are issued and therefore, dividends paid
thereon are not considered interest which are allowed to be deducted from the gross income of
the corporation (RMC #17-71, July 12, 1971)
JAPS ANSW ER:
The Q here is: Is the interest on preferred shares of stocks deductible? De L eon qualifies his answer.
PART 1 Taxation Law

Yes if the payment of dividends is not dependent upon surplus profits.
No if the payment of dividends is dependent upon surplus profits.
We do not qualify. Under RMC 17-71, it is clear here that interest on capital, which may include interest on
preferred shares of stocks, is a non-deductible interest. It makes no qualification.
BAD DEBT EXPEN SE:
Under Sec. 34 E: RR1 5-99 (as amended by RR 25-2002) and PRC vs. CIR (256 SCRA 57), these are the
requisites for the valid deduction of bad debts written off:
there must be an existing, valid and enforceable obligation;
this must be connected with the business, trade or exercise of profession by the taxpayer;
this must not arise from transactions between related taxpayers under Sec . 36 B:
between FAMILY MEMBERS
between an INDIVIDUAL and a CORPORATION, more than 50% of the OCS is owned by
such individual
3)
between two (2) corporations

c.
same exception as the foregoing
between GRANTO R and FIDUCIARY of any trust
between FIDUCIARY OF A TRUST and A FIDUCIARY OF ANO THER 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
it must be charged or written off from the books of the taxpayer;
Under RR 5-99, there must be an actual charged off or written off of such amount, mere
recording will not suffice. The implication is that: only those taxpayers who have books of
accounts can claim these particular expenses as deductions;
it must be ascertained to be wor thless and uncollectible as of the end of the taxable year;
EXCEPT IN LIQUIDATION
PRC vs. CIR it must be uncollectible in the near future (not just at the end of the taxable year;
there must be no slim chance on collecting the same)
Test or factors that are determinative of worthlessness of a debt or obligation (p. 119-120 of the book)
based on American Jurisprudence:
3)
Consider whether the obligation has already prescribed (Application of Statute of Limitation
once it is already prescribed, it is already an exercise of futility);
4)
The amount should also be considered, it may be collected but if the cost of collecting the same
is more than the amount to be collected, it is impractical to be collect such amount;
5)
Injury that may sustained by the debtor. For example, nahospital ang debtor, walang panggastos,
wag mo na lang singilin, maawa ka naman);
6)
Death of the debtor leaving no property (galang natin ang patay)
PART 1 Taxation Law

7)
Bankruptcy/solvency of the debtor;
8)
Insufficiency of collateral;
9)
Destruction of documentary evidence or receipts which will prove the payment if theres no
evidence to prove that the debtor incurred obligation;
10) Under RR as amended by 25-3002:
The CIR is authorized to waive that required evidence regarding the deter mination of
worthlessness of an account. It made mentioned of the financial incapacity or condition
of the debtor ;
It also mentioned the insufficiency of collateral;
Referral of debtor/defendant lawyer (?) (the lawyer must ex ecute and affidavit to the
effec t of that filing of the case on court would be unsuccessful (di ko maintindihan
sinasabi ni japs dito)
World Cup muna ako --- Germany vs. Italy eh. Talo team ko .. last two minutes na lang before mag penalty, naka
score pa ItalyFrance na nga lang ako
EXEMPTIONS:
In Sec. 35 there are important provisions there:
Master the definition of head of the family; the Q on senior citizen has never been asked in the
Bar (marami tayo dito niyan, Dimayuga, Aligada, Alcantara)
Sec. 35 C
Head of the family An unmarried or legally separated man or woman; with one or both
parents, or with one or more brothers or sisters; or with one or more legitimate, recognized
natural or legally adopted children living with and dependent upon him or her for their chief
support; and where such brothers or sisters or children are 1) not more than 21 years of age, 2)
unmarried, and 3) not gainfully employed, or 4) where such children, brothers, or sisters,
regardless of age are incapable of support because of mental or physical defect (last paragraph
Sec 35 A)
RA 7432, as amended by RA 9257: Senior citizens shall be treated as dependents provided for
in the NIRC and as such, individual taxpayers caring for them, be they r elatives or not, shall be
accorded the privileges granted by the Code insofar as having dependents are concerned.
Example, 60 years old resident citizen of the Philippines. Even if he is receiving income,
if the gross income is not more than 60,000, this senior citizen can be considered as a
dependent.
Take note that relationship is not requisi te.
Sec. 35 C there are 2 new rules hero. Master this. This was asked in 2004. I told them dont
forget this Sec. 35 C (yung natutulog, di nasagot to). This refers to change of status.
Q in 2004 Bar: Ram married Liza in January 2003. Liza died in November 2003. For purposes of
filing his income tax return, what would Ram declare as status?
Single
Married
Head of the family
None of the above
PART 1 Taxation Law

This may be answered by Sec . 35 C has 3 paragraphs:

st
1 Paragraph: * If the taxpayer marries or should have additi onal dependent(s) during
the taxable year, the taxpayer may claim the corresponding additional exemptions, as
the case may be, in full for such year.
Par. 1 covers 2 situations:
Marriage of the taxpayer during taxable year
> Example. You have developed an unexplained feeling with your

seatmate. So you agreed to get married after the Bar (December
31, 2006). You made it sure that the marriage will be solemnized
before the midnight of December 31. Even if you will be
considered married for only 1 hour, you can claim 32,000 basic
personal exemptions as married individual. as long as the
marriage is within the taxable year.
Additional dependent
> Example. Masipag si Mister. Punong puno si Mrs. May anak ng
isa, nanganak pa si Mrs. Twice in the same year. Can you claim
this 2 children as dependents?Yes.
nd
2 Paragraph: *if the taxpayer dies during the taxable year, his estate may still claim
the personal and additional exemptions for himself and his dependent(s) as if he died at
the close of such year.
rd
3 Paragraph: *If the spouse or any of the dependents dies or if any of such dependents
marries, becomes 21 years old or becomes gainfully employed during the taxable year,
the taxpayer may still claim the same exemptions as if the spouse or any of the
dependents died or as if such dependents married, became 21 years old or became
gainfully employed at the close of such year.
2 new rules under this paragraph:
5.
marriage of an dependent during the taxable year
6.
> Old Tax Code he could no longer be claimed as dependent

>New Tax Code taxpayer can still claim this as dependent (P8K)
gainfully employment of the dependent during the taxable year
>Old Tax Code he could no longer be claimed as dependent

>New Tax Code the taxpayer is entitled to claim that dependent. As such he can
claim the P8K as additional personal exemption
NRA-NETB is not entitled to claim personal exemption
NRA-ETB Sec. 35 D requires the reciprocity rule. The for eign Government of the NRA-ETB must also
grant exemption to Filipino citizen doing business therein. If no exemption is granted, we cannot grant
exemption to this NRA-ETB. That rule in reciprocity applies only to basic personal exemption. So even if
the foreign government grants additional personal exemption to citizens doing business ther ein, we
cannot grant additional personal exemption because it is clear. In Section 35 C, basic personal exemption,
that means additional basic exemptions are excluded.
Q: Who can claim the additional personal exemption of P8K in the case of married individuals?
The additional exemption for dependents shall be claimed by only one of the spouses in the case of
nd
married individuals. (2 par. Section 35 B). The husband shall be the proper claimant for qualified
st
dependent children (last par. Section 2.79 (l) (1) (b), and the 1 sentence Section 2.79.1 A 5 of 2-98)
Instances when the wife shall claim full additional exemptions for qualified dependent children:
PART 1 Taxation Law

6.
Husband is unemployed
7.
The husband waives his right to claim the exemptions of children (waiver should be for all children)
8.
Husband is a member of RAMBO Report Again kay Misis Bawal Oras (Alcantara is
member of this)
or a member of BBB Bantay Bata Brigade
Husband is a non-resident citizen deriving income from foreign sources.

TAX PART 1 Compiled PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

TAX PART 1 Compiled PDF

Uploaded by

Copyright:

Available Formats

PART 1 Taxation Law

Notes by: Justice Dimaampao

nick g. tracy bryan louie levie

Justice JaparDim aampao

j. Substituted Fuling of Income Tax Return

PART 1 Taxation Law

Gross income derived from the conduct of trade or business, or the

It provides for different tax rules or treatment

The income of the taxpayer is categorized or classified;

Where income is derived from the performance of services, Sec 35

Where income of individual TP partakes of the nature of business

Where income is derived solely from income subject to final tax, as in

PART 1 Taxation Law

It imposes different tax rates

b. GLOBAL SYSTEM OF TAXATION

PART 1 Taxation Law

PART 1 Taxation Law

This case was decided during the OLD Tax Code

PART 1 Taxation Law

CRITERIA or INCOME TAX SITUS

Residence and Nationality

SOURCES of TAXABL E INCOME

They can claim personal and

In certain cases, they are not

Within and Without

They are not allowed to claim

DETERMINATIVE TEST OF WHETHER THE INCOME IS TAXABLE Doctrine

PART 1 Taxation Law

BASIS FOR THE COMPUTATION OF TAXABLE INCOME:

PART 1 Taxation Law

PART 1 Taxation Law

NET INCOME TAXATION and GROSS INCOME TAXATION:

NET INCOME TAXATION (NIT) vs. GROSS INCOME TAXATION(GIT):

GIT can be applied or adopted under exceptional cases.

It is really correct to say that we have not adopted GIT

Sec. 25 B, C, D, and E, speak of gross income

As regards Corporate taxpayers:

Individual NRA NETB; and

Corporate Nonresident foreign corporation

PART 1 Taxation Law

Explain the meaning of GIT

1995 Q. #1: Define Gross income

PART 1 Taxation Law

Try to recall these, as these are the characteristics or features of NIT.

Take note of the 2 salient features of GIT:

PART 1 Taxation Law

NIT vs GIT (As regards the objective of generating more revenues ):

PART 1 Taxation Law

the effec t of this graft and corruption is tax evasion

G. FILING OF INCOME TAX RETURN AND PAYMEN T OF TAX:

PART 1 Taxation Law

. This is modified by these 3 systems:

H & I. CREDITABLE WITHHOLDING TAX SYSTEM:

PART 1 Taxation Law

1) As to Income subject of the system

2) As to whether o r not the Inco me should be reported as part of gross in come:

PART 1 Taxation Law

4) As to the Filing of Tax Return.

PART 1 Taxation Law

> So they are NRA-NETB

> So as to the 2 Questions:

> How about Corporate taxpayer?