Taxrev Notes Edited Premid Complete .PDF' PDF

TAXATION REVIEW 2014-2015
GENERAL PRINCIPLES OF
TAXATION
TAXATION DEFINED
Taxation is the inherent power of the sovereign, exercised
through the legislature, to impose burdens+upon subjects and
objectswithin its jurisdictionfor the purpose of raising revenues in
order to carry out the legitimate objects of the government.
1)
2)
The imposition of a valid tax could not be judicially

restrained merely because it would prejudice
taxpayers property
Anillegal tax could be judicially declared invalid and
should not work to prejudice a taxpayers property.
Marshalls view refers to a valid tax while Holmess view refers to

an invalid tax.
Taxation is the power vested in the legislature to impose burdens

or charges upon persons and property for the purpose of raising
revenue for public purposes.
Notes: While the courts may invalidate tax measures that run
counter to the constitution, it bears emphasis that deeply
ingrained in our jurisprudence is the time-honoured principle that
a statute is presumed to be valid.
LIFEBLOOD DOCTRINE
Taxes are the lifeblood of the government; for without taxes, the
government can neither exist nor endure. Without revenue raised
from taxation, the government will not survive, resulting in
detriment to society.
The judiciary can determine if whether the tax is valid or not. It

can look into if a tax law has exceeded the constitutional or
inherent limitation. If it is a void tax, it has no effect. If it is valid
tax, the court cannot struck it down as illegal, hence should be
implemented.
1)
2)
TWO-FOLD NATURE OF TAXATION

Inherent Attribute of Sovereignty - Taxation is inherent in
nature being an attribute of sovereignty. There is no need
for a constitutional grant for the state to exercise this power.
This is so, because without taxes the states very existence
would be imperilled. It is unlimited; the security against its
abuse is to be found only on the responsibility of the
legislature which imposes the tax upon the constituency
who is to pay it.
Legislative in Character - Taxation is a legislative power
because it involves the promulgation of rules. there has to
be a law for the tax to be implemented, it can be exercised
by the immediate representative of the people
1)
2)
3)
4)
5)
1)
2)
3)
4)
5)
6)
7)
SCOPE OF LEGISLATIVE POWER TO TAX

Nature (kind)
Object (purpose)
Extent(rate)
Coverage (subject)
Where the situs (place) of taxation primarily lies
CHARACTERISTICS OF TAXATION
Inherent
Legislative
Generally imprescriptible
Applies prospectively
Subservient to the non-impairment clause
May be exercised jointly with police power or eminent
domain
Power is unlimited
IS THE POWER TO TAX THE POWER TO DESTROY?

First View: The power to tax is the power to destroy. Taxation is a
destructive power which interferes with the personal and
property rights of the people and takes from them a portion of
their property for the support of the government. (Opined by
Chief justice Marshall in McCulloch vs. Maryland)
Second View: The power to tax is not the power to destroy while
this Court sits (Opined by Justice Holmes in Panhandle Oil Co. vs.
Mississippi)
Reconciliation:
POLICE POWER VS. TAXATION VS. EMINENT DOMAIN

Taxation
To raise revenue
Generally unlimited
Police Power
Purpose
To promote public
welfare
Amount
Limited to the cost
of the regulation
Eminent Domain
Taking of private
property for public
use
No amount
imposed but rather
the owner is paid
the market value of
the property taken
Benefits Received
No direct benefit is
A direct benefit
received, but a
results in the form
healthy economic
of just
standard of society
compensation to
is attained
the owner
Non-Impairment of Contracts
Contracts may not
Contracts may be
Contracts may be
be impaired
impaired
impaired
Transfer of Property Rights
Taxes paid become
No Transfer but
Transfer is effected
part of public funds only restraint in use
in favor of State
Scope
All persons,
All persons,
Only upon a
property and
property, rights and
particular property
excises
privileges
Who Exercises
Govt
Govt
May be granted to
Public utilities
No special or direct
benefit is received
by the taxpayer;
general benefit
PURPOSES OF TAXATION
Primary
To raise revenue
Secondary: (Non-revenue or regulatory purpose)
1) For regulation (e.g. sin tax primarily imposed to raise
revenue but incidentally to curtail the consumption of
alcohol and cigarettes.)
2) For the rehabilitation and stabilization of a threatened
industry
3) To reduce social inequality
4) Implemented through eminent domain
Araneta, Arnado, Arriesgado, Atuel, Balahadia, Barcenas, Fiel, Kho, Lim, Menchavez, Novabos, Pasatiempo, Plaza, Plaza, Puracan, Rosales,
Semillano, Uy, Uy, Yu, Jamoner, Susvilla, Santos
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How Can You Justify The Senior Citizens Discount As Taxation

Implemented Through Eminent Domain?
When the seller gives discount to its customers who are senior
citizen, it is in effect taking of private property because the seller
is deprived of the amount corresponding to the discount which
should have been received by it. However, in return, the discount
is allowed to be deducted from the sellers income. So, thats how
taxation is implemented through eminent domain.
1)
2)
3)
reason why you cannot deny payment of taxes from the reason
that you dont get any benefit from it. Coz there is a presuppose
benefit derived from taxation.
NECESSITY THEORY
The power of taxation proceeds upon theory that the existence of
government is a necessity; that is cannot continue without means
to pay its expenses; and that for those means it has the right to
compel all citizens and property within its limits to contribute.
PRINCIPLES OF SOUND TAX SYSTEM

Fiscal Adequacy the tax system should be able to provide
sufficient revenues in order to meet the legitimate purpose
of the government. There is no fiscal adequacy if theres an
excess of revenues because that would mean that the
government is not working well in terms of spending the
revenues that are collected. That means that they are over
taxing. So the revenues must be capable of expanding and
contracting in order to respond to the variation of the public
expenditures.
DOCTRINES IN TAXATION
PROSPECTIVITY OF TAX LAWS
General rule: Tax laws are prospective in operation.
Reason: Nature and amount of the tax could not be
foreseen and understood by the taxpayer at the time
the transaction.
Administrative Feasibility there must be convenient in

paying and collecting the tax. It should be convenient to the
taxpayer to pay, and convenient on the part of the
government to collect. The collection and the manner of
payment shall be one that will allow the people to comply
with the tax imposed.
Exception to the Exception:when retroactive application would

be so harsh and oppressive
Theoretical Justice it must be collected on the basis on the

ability to pay. This is your equity in taxation.
Non-compliance with the sound tax system does not make the
taxes imposed invalid since these are only principles or ideal in a
tax system.
THEORIES OF TAXATION
LIFEBLOOD DOCTRINE it holds that taxes collected by the
government are what made it alive. Taxes are considered as blood
of the government for it to continue working.
Manifestation of Lifeblood doctrine:
GR: You cannot enjoin the payment of taxes (Non injunction
rule)
EXC:You can file an injunction with the CTA or SC on the
ground that the collection of taxes will jeopardize the
interest of the government and/or the taxpayer.
GR: As a rule, there can be no set off or compensation of
taxes (no set off rule)
EXC: When the obligation of the government to pay the
taxpayer, and the tax obligation of the taxpayer are both
liquidated and demandable.
Amago: If its already a tax credit. So it can be set off if its
already a tax credit. If youre taxes and the refund, youre
suppose to get, actually its the payment from the
government or the obligation of the government to you and
youre tax obligations are all liquidated and demandable. So
thats the exception to the no set-off rule in taxation. Take
note, its the underlying theory of taxation.
BENEFITS-PROTECTION THEORY/SYMBIOTIC RELATIONSHIP
There is a reciprocal duty of protection and support between the
state and its citizens. So the symbiotic relationship is the rationale
of taxation and should dispel the erroneous that it is an arbitrary
method of exaction by those in the seat of power. And that is the
Exception:Tax laws may be applied retroactivelyprovided it is

expressly declared or clearlythelegislative intent.(e.g. increase
taxes on income already earned)
Sir: It would violate the due process if you give retroactive effect
to taxation. How would he know that he will be subject to tax on
the act that he did before. So, you should be informed first of the
activities that will be subject to tax so that you will be given an
opportunity to evade. (Laughs) Not evade taxes, but manage your
activities. You will avoid (okay thats the term) doing those
activities and not incur the taxes. So the public need must exist at
the time of the enactment of the tax measures.
Q: Previously assessed and demanded tax, can it still be
collected? For example, in 2010, you have been subject to tax
based on beauty. Youre very beautiful. You are subject to 10% tax.
Will you pay? (Laughs) Later on, the government said, oh there
are a lot of protests from the ugly ones arguing why are they the
only ones taxed, why are they not being taxed. So they decided to
repeal the law. So now, you were assessed for the tax for the tax
you were previously assessed way back in 2010. Can you object to
the assessment?
A: You cannot. And the reason is because tax laws are applied
prospectively. That has been previously taxed, di ba? So you dont
go back there also because at the time it is actually imposable on
you, you will have to pay. So the repeal is considered an
exemption and because it is an exemption it is construed strictly
against the taxpayer. So at the time it was imposed and so for the
reason you were assessed that is because at the time you incur
the activity being taxed, it was really due for payment. So thats
one example of this doctrine the prospectivity of tax laws. That
even previously assessed and demanded tax may still be collected
from you.
DOCTRINE OF IMPRESCRIPTIBILITY
Unless otherwise provided by the tax itself, taxes are
imprescriptible.
Reason:
1)
2)
It is inherent
You need taxes for the expenses of government
Sir: As a rule, theres no prescription for the power of the

government to tax as you said it is inherent. Second, the
collection of tax is imprescriptible because you need taxes for the
government. This is supported by the Lifeblood Theory. If theres
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any doubt as to how you would support your answer in tax,
always refer to the Lifeblood doctrine. Thats the standard answer.
DOUBLE TAXATION
Means taxing twice for the same tax period the same thing or
activity, when it should be taxed but once, for the same purpose
and with the same kind of character of tax.
Sir: So there are two tax laws imposing dual burden on the same
subject.
Strict Sense (Direct Double Taxation)
1) the same property must be taxed twice when it should be
taxed once;
2) both taxes must be imposed on the same property or
subject matter;
3) for the same purpose;
4) by the same State, Government, or taxing authority;
5) within the same territory, jurisdiction or taxing district;
6) during the same taxing period; and
7) of the same kind or character of tax.
In the strict sense, it refers to taxing the same subject/object
at least twice. So same object or property is taxed twice by
the same taxing authority for the same purpose during the
same tax period within the same jurisdiction. Thats one
view. But theres supposed to be another element that it
should be taxing all the objects or properties within the
same territory for the first time without taxing all of them
for the second time. So meaning, at first, all objects are
being taxed. Its on the second taxation that is questionable.
So, you have the same object being taxed but not all of them.
It should not be all of them for double taxation to sip in.
What is your ground for questioning double taxation? If
youre taxed under the strict sense, how are you going to
defend yourself?
The equal protection clause; for the equal protection clause
to be violated, it must be persons or properties similarly
situated must be treated equally. But because you are not
treated equally, there is violation of the equal protection
clause. So, for double taxation in the strict sense to actually
exist, it must be that all objects or property are being taxed
for the first time and then in the second time it was taxed,
not all of them were taxed. Thats how direct double
taxation happens. Thats one theory. But other definition, a
lot of cases mentions the one mentioned by Mr. Lim(same
purpose, same taxing authority, etc.). Thats how it was
defined. Others are of the opinion that for there to be strict
sense of direct double taxation, the second element must be
attendant that taxing all objects or properties within the
same territory for the first time without taxing all of them
for the second time.
Broad Sense (Indirect Double Taxation
There is double taxation in the broad sense or there is indirect
duplicate taxation if any of the elements for direct duplicate
taxation is absent.
Sir: So that if you tax the same object or property twice but not by
the same taxing authority, there is double taxation under broad
sense. Take note of your transfer taxes, when you sell your real
property, youll be taxed by the national government in the form
of capital gains tax. How about the local government, can you still
be taxed? Yes, there is this so-called local transfer taxes. Is there
double taxation there? In the strict sense, there is no double
taxation. But in the broad sense, there is double taxation. So,
broad double taxation only means that one of the elements of the
strict sense is not present. Thats how you distinguish one from
the other.
Constitutionality of Double Taxation
Sir: Its not actually specifically provided in the Constitution that
double taxation is prohibited. Its just that if there is direct
duplicate/double taxation in the strict sense, it will violate the
equal protection clause and thats what you raise. You dont raise
to court that I will not pay this tax because its double taxation.
You raise the violation of the equal protection clause. So as to
constitutionality, its not specifically prohibited.
Modes of Eliminating Double Taxation
1) Allowing reciprocal exemption either by law or by
treaty;
2) Allowance of tax credit for foreign taxes paid
3) Allowance of deduction for foreign taxes paid
4) Reduction of Philippine tax rate.
Allowing Reciprocal Exemption; Explained
Q:Non-resident citizen, what are they exempted from? Interest in
foreign currency deposit di ba? Theyre exempted. What are they
exempted? O sige, do we tax properties of foreign government?
No. Whats the reason? Other than international comity. Will they
be taxed in their own country? Yes they will be taxed. So that If
theyre already taxed in their own country, we might as well not
tax it here. So is there any alienation of double taxation? There is.
So that would be an example.
Allowance of Tax Credit & Deduction; Explained
So how is that applicable? Can you give an example? What tax
grants tax credit? Income tax.
Q: What scenario can you think of that there is double taxation
and by reason of tax credit its eliminated? So this is actually
applicable to what type of taxpayer?
A: Resident Citizen because hes being taxed within and without.
Q: For being taxed within and without, by reason of tax credit,
double taxation is eliminated how?
A: if you pay foreign taxes abroad, you can actually get deduction
from your taxes. Its deducted directly from taxes. So if I pay P1M
taxes in the USA and I have a total tax payable here in the
Philippines, I will only have to pay P99M. Double taxation is
eliminated there. ith the computation of my P100M income, I
actually include my income abroad because I am being taxed
within and without.
Q:Had it been tax deduction, what would have been the
difference? Where do I deduct the P1m?
A: I will deduct the P1m before I even get the P100M tax here in
the Philippines. So for example, lets use nalang small amounts.
Lets use P1M gross taxable income before deduction from
foreign taxes.
Tax Credit
1,000,000
X 30%
300,000
(100,000)
200, 000
Tax Deduction
1,000,000
(100,000)
900,000
x 30%
270, 000
Q: Which will you prefer? Asa may mas dako ug bayranan nga tax?
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A: If we use tax deduction because actually youre being only
exempted up to 30%. Sol its better to use tax credit. So, Three
nato ha: tax exemption, tax credit, tax deduction.
Reduction of Philippine Income Tax Rate; Explained
Its the rate itself that you limit.
Q: Whats the best example? You have dividends of resident ba?
The tax sparring rule, where does it apply? Kinsa may maka-avail
sa tax sparring rule?
A: You have the non-resident foreign corporation provided there
is reciprocity. So instead of paying 30%, you can just pay 15%.
Thats an example of reduction of Philippine income tax rate for
purposes of eliminating double taxation. Di ba, the income would
have been subject to abroad. It would also be subject to tax here
in the Philippines because sa ilahang lugar, theyre being tax for
their income within and without. Here in the Philippines, were
also taxing them. So that they will not bear the burden of double
taxation, what you do is you reduce the taxes taken here. But it
doesnt mean that it is eliminated completely. But at least youre
able to mitigate it.
Tax Treaties; Explained
And then you have the tax treaties. Under tax treaties, it could
come in the form of reduction of Philippine income tax rates or it
could come in the form of tax exemptions.
Royalty tax rates are usually lower if there is a tax treaty.
Q: What is the usual rate of royalties in the Philippines?
A: 20% as a general rule if it does not involve books and literary or
musical compositions. In some treaties, its only 10%. So thats
how you mitigate double taxation. Reduction of rates or
exemption. In some cases, it can even be zero. No tax at all.
CASES:
MCIAA VS. MARCOS
MCIAA was created through a charter and based on

that Charter, there was a provision section 14
exempting it from realty taxes. The Local Government
Code was enacted to empower the Local Government
to impose taxes. There was a provision there that was
all encompassing such that the exemptions granted to
instrumentalities were withdrawn. It was Section 193
of the Local Government Code that withdrew
exemption privileges of natural and juridical persons
including government owned and controlled
corporations for which MCIAA was believed to be
included. Based on this withdrawal, you have the City
of Cebu demanding payment of realty taxes on parcels
of land.
Taxation is exercised by the legislative branch. How do

they exercise such power? No need to be written in
the Constitution or be provided for by law since it is
inherent in sovereignty. We have the concept of
sovereign in nature and legislative in nature. The
power to tax is primarily exercised by Congress but it
may also be exercised by the Local Governments.
CREBA vs. ROMULO
There was a challenge of the constitutionality of MCIT.

The system of collection which is the creditable
withholding tax on sales of real property tax. CREBA is
an association of Real Estate brokers.
The Supreme Court said that the MCIT is not violative

of the equal protection clause because power to tax is
complete and plenary.
Scope of legislative power- legislature have the

discretion to determine the nature, object, extent,
coverage and situs of taxation. Bolsters the settled
principle that it is inherent and exercised by the
legislature
PKSMNN VS. EXECUTIVE SECRETARY
Case on the Coco Levy fund
Constitutionality of coco levy fund. The nature of coco

levy funds is public in nature. Considered a tax because
of the term levy which is synonymous to tax.
The coco levy fund is in the nature of taxes and could

only be used for public purpose.
SOUTHERN CROSS CEMENT VS. CMAP
The case discussed on the safeguard measures
The Supreme Court mentioned a parallelism on sin

taxes and safeguard measures
Implementation as police power
(1)
(2)
(3)
ESCAPE FROM TAXATION

Tax Avoidance
Tax Evasion
Tax Shifting
TAX SHIFTING
The transfer of the burden of a tax by the original payer or the
one on whom the tax was assessed or imposed to someone else.
What is transferred is not the payment of the tax but the burden
of the tax.All indirect taxes may be shifted; direct taxes cannot be
shifted.
It is the passing of the burden by the person statutorily liable to
pay the taxes to someone else. Only the incidence is transferred.
The best example is the VAT. Who is statutorily liable? Seller. But
they may shift the burden to the consumers such that the end
user is the one who pays. Added to the cost/price of the goods. It
is still the seller who is still required to remit. Take note that it is
only the burden which is shifted.
Tax incidence is that point on which the tax burden finally rests
or settles down. It takes place when shifting has been effected
from the statutory taxpayer to another.
Tax impact is the point on which a tax is originally imposed. In
so far as the law is concerned, the statutory taxpayer, the subject
of tax, is the person who must pay the tax to the government.
Kinds of Tax Shifting
1. Forward from seller to buyer
2. Backward from buyer to seller
3. Onward combination of forward and backward
Examples of Tax Shifting
Documentary stamp taxes, percentage taxes, and VAT
TAX AVOIDANCE
It is the exploitation by the taxpayer of legally permissible
alternative tax rates or methods of assessing taxable property or
income in order to avoid or reduce tax liability. It is politely called
tax minimization and is not punishable by law.
Differentiated from tax evasion because it is the employment of
illegal means to avoid tax liability
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Example of avoidance: availing exemptions and deduction.
Getting pregnant is an example because by getting pregnant could
give you additional deduction equivalent to P 25,000.00
TAX EVASION
It is the use by the taxpayer of illegal or fraudulent means to
defeat or lessen the payment of a tax. It is also known as tax
dodging. It is punishable by law.
Elements:
(1) ends to be achieved lesser/no taxes,
(2) accompanying state of mind which is deliberate or
evil or with bad faith,
(3) course of action/failure of action which is unlawful
fill up of tax returns which higher amounts of expenses
or deductions or when you dont file a return at all
Example of evasion: substantially understatement of income,
overstatement of deductions. If you claim that you actually giving
birth to twins instead of just one child, that could be an example.
a.
b.
EXEMPTION FROM TAXATION

Broad Sense tax does not apply to all persons in the
jurisdiction of the taxing authority
Ex. Exemption of minors from taxation
Narrow Sense the grant of immunity, express or implied,
to a particular person or entity, from a tax on property or
excise tax which persons/entity are generally obliged to pay
Ex. Charitable institutions which are exempted from real
property taxes when used actually, directly, and exclusively
used for charitable purposes.
Exemption is an act of the statein divesting itself of its prerogative

to collect taxes upon certain subjects or objects. Therefore, it
should be construed strictly against the taxpayer if talking about
exemption because it is a necessity of the government to collect
taxes.
KINDS OF TAX EXEMPTIONS
a.
Express specific identification of subject and
objection not taxed
b. Implied there is a failure of the law to specify that
such persons/objects are exempt.
c.
Contractual there must be a contract
Ex. Government bonds and debentures if held by the
person then must be exempted from taxes. If there is
tax, then there is a violation of non-impairment clause
of the Constitution. Take note: there must be a
consideration in the contract
RATIONALE FOR TAX EXEMPTION
Non-revenue purposes of taxation like regulatory purpose, social
justice, redistribution of wealth
REVOCATION OF EXEMPTION
General rule: it can be revoked
Exception: if there is a material consideration which is mutual in
nature which has become a contract like government bonds or
debentures or adherence to Constitutionally granted exemptions
CONSTITUTIONALLY GRANTED EXEMPTIONS
Religious, Educational, Charitable institutions in case of real
property taxes
COMPENSATION AND SET-OFF
General rule: Taxes cannot be the subject of set-off or

compensation
Reasons:
(1) This would adversely affect the government revenue system
(2) Government and the taxpayer are not creditors and debtors of
each other. The payment of taxes is not a contractual obligation
but arises out of a duty to pay.
Exception: If the claims against the government have been
recognized and an amount has already been appropriated for that
purpose. Where both claims have already become due and
demandable as well as fully liquidated, compensation takes place
by operation of law under Art. 1200 in relation to Articles 1279
and 1290 of the NCC, and both debts are extinguished to the
concurrent amount
Doctrine of Equitable Recoupment- a claim for refund barred by
prescription may be allowed to offset unsettled tax liabilities. The
doctrine FINDS NO application in this jurisdiction.
TAX AMNESTY
Q: what is tax amnesty? What is being condoned?
A: It is the penalty that is being condoned. You are still required to
pay taxes. It is a general pardon, which is a pardon that has to
apply to all taxpayers. We even need Congress to effect an
amnesty. It only applies to penalties and it is not limited to civil
and criminal liabilities but includes administrative.
SCOPE AND LIMITATION OF TAXATION
(1)
(2)
(3)
(4)
(5)
INHERENT LIMITATIONS
Public Purpose
Inherently Legislative
Territorial
International Comity
Exemption of Government
Public Purpose
The proceeds of the tax must be used (a) for the support of the
State or (b) for some recognized objects of government or directly
to promote the welfare of the community.
Test: whether the statute is designed to promote the public
interest, as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals might
incidentally serve the public.
The public purpose of a tax may legally exist even if the motive
which impelled the legislature to impose the tax was to favor one
industry over another.
Tests in Determining Public Purpose:
(1) Duty Test - Whether the thing to be furthered by the
appropriation of public revenue is something which is
the duty of the State as a government to provide.
(2) Promotion of General Welfare Test - Whether the
proceeds of the tax will directly promote the welfare of
the community in equal measure.
(3) Character of the Direct Object of the Expenditure it is
the essential character of the direct object of the
expenditure which must determine its validity as
justifying a tax and not the magnitude of the interests
to be affected nor the degree to which the general
advantage of the community, and thus the public
welfare, may be ultimately benefited by their
promotion. Incidental advantage to the public or to the
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State, which results from the promotion of private
enterprises or business, does not justify their aid with
public money.
Inherently Legislative
General Rule: Delegata potestas non potest delegari.The power to
tax is exclusively vested in the legislative body and it may not be
re-delegated.
The primary source of Tax laws is the Constitution. Other sources
of tax laws include NIRC, Tariff and Customs code, the LGC
including all the local ordinances or the local legislations and
Revenue Regulations and even Supreme Court decisions. From
this we can infer that the power to tax can only be exercised thru
legislation and legislature is not supposed to delegate this power
but there are exceptions.
The exceptions are:
(1) Delegation to the President
(a) thru the exercise of his emergency powers
where he can pass tax measures that can
generate revenue for the government or he
can even confiscate or forbid a certain
property of certain citizens
(b) Delegation of tariff powers to the president
by congress under the flexible tariff clause
of Sec. 28 Article 6 of the Constitution.
(c) Delegation to the president by entering to a
tax treaty subject to the concurrence by the
senate.
(d) Executive
agreements
where
the
concurrence of congress is not needed.
(2)
(3)
Delegation to Local Governments Two schools of

thought: The first one is that the exercise of power to
tax is not a delegated power but one conferred by the
Constitution however subject to congressional
legislation. It is limited to whatever the congress may
pass but it is a direct grant to local government. But I
suggest we adhere to the long standing principle
believed by most tax authors that the local
government exercises tax powers due to delegation by
congress because if congress will not pass a law like
the LGC, the local government would not have issued
their own tax laws. But have there been no local
government code, can the local government actually
impose taxes? They actually can but congress can
always temper it. That is the difference. As it stands,
there is still delegation to the local governments but it
is a direct grant subject to the limitation that congress
may provide. The latest case is MTC vs. City of
Cabanatuan.
Delegation to administrative agencies under what is
known as the power of subordinate legislation.
However there are two tests required in order for
there be a valid delegation of administrative agencies:
sufficient standards test and completeness test. The
completeness test states that the law must provide the
policy to be executed, carried out or implemented so
that what the delegate will do is only implement the
law. Under the sufficient standard test, the law fixes
the standard which the delegate must conform in the
performance of his functions. But the limits must be
sufficiently determinate or determinable.
Territoriality
Lets go to Territorialty the territorial boundaries of the taxing

authority limits the exercise of the power to tax. From this
inherent limitation comes the concept of situs of taxation. Situs of
taxation is the authority that has the right to impose or collect
taxes. The factors that affect the situs of taxation are: residence,
citizenship and the source.
a.
Residence of the taxpayer under the domiciliary theory
b. Citizenship of the income earner under the nationality
theory
c.
Source or where the activity is produced
Read the case of CIR vs beyer cricket??? (I cant hear properly)
which discusses the concept of source. So there must be a nexus
to the Philippines for it to be subject to tax. Under Income Tax the
situs is the source of the income for example interest, the situs is
where the interest was earned. Dividends, if foreign corp which
earns 51% up of income in the Philippines, the situs is the
Philippines. Services, where they were rendered. Rentals, where
the properties are located. Royalties? Where it will be used. Those
are sources within the Philippines. Why is it important to
determine if it is sourced within the Philippines or without? To
determine the tax liability of the taxpayer because under
Philippine taxation, only resident citizens are taxed for income
within and without. Can income be partly taxed within the
Philippines and partly without? Yes you can always make the
distinction. How about situs of property taxes? Lex rei sitae or
where the real property is located. For personal property, we
follow the either the domiciliary principle/the domicile of the
owner or where the property is located. Mobilia sequuntur
personam applies for intangible properties like shares of stock,
which states that situs of intangible properties follow the location
of the owner. Situs of excise tax, if domestic product situs is place
of production, if mineral, where the mineral is mined or extracted.
For imported articles, situs is where it s released. For franchise,
the situs is where the privilege is exercised or used. For estate tax,
the situs is based on either the residence, citizenship of the
decedent or the location of the estate of the decedent which is
the same for donors tax except there is an additional basis for the
latter which is where the donation was made. For business tax,
sale of real property the situs is where the real property is located,
for sale of personal property, where the sale was perfected, VAT,
where the services were rendered or the transaction was made
because it follows destination principle.
International Comity
It is the respect accorded by each nation to each other because
they are sovereign equals. We will only tax if it is within the
jurisdiction of the Philippines. Concomitant with that principle is
that we cannot tax if it is a property of another state. If you look
at it from the perspective of the Philippines, we can tax if it is
within the jurisdiction of the Philippines. From the perspective of
the foreign state, you cannot tax if it is within the foreign state.
If outside of the jurisdiction of the Philippines, I cannot tax. Most
especially if it is owned by foreign state because of international
comity.
Exemption of Government
You cannot take money from one pocket and put it to the other
pocket.
Note: Unless otherwise provided by law, the exemption applies
only to government entities through which the government
immediately and directly exercises its sovereign powers. With
respect to government-owned or controlled corporations
performing proprietary (not governmental) functions, they are
Page 6

generally subject to tax in the absence of tax exemption
provisions in their charters or the law creating them.
(1)
(2)
CONSTITUTIONAL LIMITATIONS
Provisions Directly Affecting Taxation
(a)
Prohibition against non-payment of poll tax
(b)
Uniformity and Equity of Taxation
(c)
Grant of the Congress of authority to the president to

impose tariff rates
(d)
Prohibition against taxation of Religious Charitable and

Educational Entities.
(e)
Tax Exemption
(f)
Prohibition of on use of tax levied for special purpose.

If it is imposed as a special fund, it must be set aside
and be used only for such special purpose.
(g)
Prohibition of on use of tax levied for special purpose.

If it is imposed as a special fund, it must be set aside
and be used only for such special purpose.
(h)
President exercise his veto power on appropriation,

revenue and tariff bill
(i)
Non Impairment to the jurisdiction of the SC
(j)
Grant of Power to the Local Governments Units to

create its own sources of revenue.
(k)
Progressive System of Taxation
(l)
Origin of revenue and tariff bill
Provisions Indirectly Affecting Taxation

(a)
Due Process
(b)
Equal Protection
(c)
Religious Freedom
(d)
Non Impairment of Contracts

LIMITATIONS DIRECTLY AFFECTING TAXATION
PROHIBITION AGAINST IMPRISONMENT FROM NON-PAYMENT

OF POLL TAX
Q: If you cannot pay your community tax, can you be imprisoned?
A:NO.
Q:When can you be imprisoned?
A: When you misrepresent your income or when you falsify your
community tax certificate.
That is important, when you become lawyers, you will have to
deal with cedula. It is important to know when it is required to
present your community tax certificate.
UNIFORMITY AND EQUALITY OF TAXATION
Uniformity- people of the same class and situation shall be taxed
similarly.
Equality - is actually equal to equity of taxation. It should be based
on the capacity to pay.
GRANT OF THE CONGRESS OF AUTHORITY TO THE PRESIDENT TO
IMPOSE TARIFF RATES
That was already discussed before the flexibility- the flexible tariff
rates clause.
PROHIBITION AGAINST TAXATION OF RELIGIOUS CHARITABLE
AND EDUCATIONAL ENTITIES
Q: What does the constitution say? Under article 6, section 28?

A:Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all
lands buildings, and improvement, actually, directly and
exclusively used for religious, charitable and educational purposes
shall be exempt from taxation.
They are exempt only from real property taxes. But take note of
the requirements. It must be directly, actually and exclusively
used for their purpose.
Q: What does the SC say about this exclusively used in the Lung
Center of the Philippines case? Is the term exclusive the same
with the word principal?
A: No. it is equal to the word SOLELY. So that means that even if
it is principally used for religious, charitable and educational
purposes, if there are instances these properties are used for
purpose other than religious, charitable and educational purposes,
that property will be subject to tax. The SC is very restrictive in
interpreting the word exclusive. It is synonymous to solely not
principally.
Then you have this case of CIR v. St. Lukes Medical Center
Incorporated. But this is not limited only to real property taxes. It
has something to do with the section 30 of the NIRC about those
entities exempted from income taxes, same with their activities
and of the use of their properties that is the Issue of this case.
Q: What did the SC say?
A:The same, exclusive means solely.
Dont be confused Religious, Charitable and Educational
Institution, Real property tax only.
Q: But if it is Non- stock, Non-profit Educational Institution, What
type of taxes are they exempted from?
A: Taxes and duties.
Q: So that if San Carlos will import computers from Japan it is
being subjected to Vat and customs duties, can it decline to pay
said taxes?
A: San Carlos is not exempted to pay Vat because it is an indirect
tax. The customs duties, it can refuse to pay under the
constitution. In regards to Vat San Carlos did not pay the vat. It
just paid the cost of the computer which includes the vat. It is not
an imposition of tax against San Carlos.
TN of the difference between Non-stock, Non Profit Educational
Institution and Religious, Charitable and Educational institutions.
TAX EXEMPTION
Q: To be granted tax exemption how many votes from congress
are required?
A: At least majority votes from congress voting separately.
PROHIBITION OF ON USE OF TAX LEVIED FOR SPECIAL PURPOSE
If it is imposed as a special fund, it must be set aside and be used
only for such special purpose.
PRESIDENT EXERCISE HIS VETO POWER ON APPROPRIATION,
REVENUE AND TARIFF BILL
Q: Can the president exercise his veto power on appropriation,
revenue and tariff bill? How it is different from other bills?
A: in appropriation, revenue and tariff bill theres item veto,
whereas for all other bills it is not allowed. When you say item
Page 7

what it actually referred there, is the subject of the tax and the
tax rate. It is According to the case of Manila Golf and Country
Club.
NON IMPAIRMENT TO THE JURISDICTION OF THE SC
All appeals must end with the SC. This is what this provision states.
Congress cannot take away any appellate jurisdiction of the SC.
The case always discussed here is the case involving the CA
involving the taking away of CAs power to review cases decided
by the CTA. Because before, the procedure from the decision of
the CTA, you go to the CA. Karon that is already abolished. They
take away the power to review CTAs ruling from the CA.
GRANT OF POWER TO THE LOCAL GOVERNMENTS UNITS TO
CREATE ITS OWN SOURCES OF REVENUE
We already discussed that.
PROGRESSIVE SYSTEM OF TAXATION
Under progressive system of taxation, the higher your income is,
the higher the tax you suppose to pay. The tax rate goes up as
your resources increases.
Q: Does this provision of the constitution prohibit imposition of
indirect taxes?
A: No. first and foremost, it is not mandatory for Congress to
establish progressive system of taxation. Second, it doesnt
automatically mean that indirect taxes are shunned. You can still
impose indirect taxes so long as they are not more than the direct
taxes.
ORIGIN OF REVENUE AND TARIFF BILL
Q: Where must revenue and tariff bill originate?
A: House of Representatives
Q: What if the Senate will make their own tariff bill? Is that a
violation of this constitutional provision?
A: There is this case, when this Vat law was drafted senate has
actually its own version even if the lower house hasnt passed yet
their version of their Vat law. It was questioned then if senate
violated this constitutional provision. The SC said no because they
waited for the House of Representative to submit their own
version of the law, before they submitted theirs (Senate). They
can make their own version so long as they do not submit it until
the house of representative is able to make their own.
LIMITATIONS INDIRECTLY AFFECTING TAXATION
DUE PROCESS
Q: What do you understand of due process in relation to taxation?
A: Under the constitution, no person shall be deprived of life,
liberty and property without due process of law.
Q: Example I will impose 80% tax on your 100 peso bill, is that a
violation of due process?
A: yes, it is confiscatory. It violates your right to life and property
because how can you live with just 20 pesos. Right to Life is also
violated when you are deprived your way of living.
EQUAL PROTECTION OF LAWS
This is where your rational basis test comes in. for there to have
equal protection there must be valid classification. There is valid
classification if:
a.
Theres substantial distinction
b. The classification must be germane to the purpose of
the law
c.
Must apply to the members of the same class
d.
It doesnt apply only to the existing condition but also

to future conditions.
If you have all these elements then we say there is valid

distinction.
Tests for Valid Classification
a.
Compelling interest test ;
b. Rational basis test; and
c.
Quasi suspect test
Compelling Interest Test- the purpose of the classification is
substantial, what is required is only compelling. So that if there is
compelling government interest, you establish valid classification.
So that this compelling government interest for you to establish
valid classification, it may be consideredthe presence of
compelling rather than substantial government interest, there
could be valid classification
Q: The PEZA registered companies, they are being exempted from
taxes, whereas those outside the economic zone are subject to
tax, do you think there is compelling interest for the government
in there?
A: It is to encourage investments, It is appropriate to make a
distinction between those outside of PEZA and those within PEZA.
Q:Are those people outside the economic zone, are they
prohibited from registering with PEZA?
A: No, they cannot claim that they are being discriminated since
they are not prohibited from registering with PEZA, and its
because there is the presence of the compelling government
interest and it also generates employment to the people.
Rational Basis Test - The classification is valid if it is rationally
related to a constitutionally permissible state interest.
Q:What is a constitutionally permissible state interest?
-Ex: to empower women, if you want to pursue such
constitutional interest of empowerment of women, what kind
oftax law are you supposed to make? - You exempt women. The
rational basis is the constitutional interest which is to empower
women. So that is how you look at this rational basis test, you
look at what is the interest supported by the consti and you make
it as a basis of the classification.
Ex- Encouragement of domestic industry like furniture, if you
grant exemptions and concession to those individuals engaged in
furniture making, you could say there is valid classification there
because it follows the constitutional interest.
Quasi-Suspect class Test, (this is not much applied here in the
Philippines.)
- Ex: Going back to the exemption of women, if the reason is to
empower the women, then under the quasi suspect class test, it
will still pass, because there is a compelling government interest.
but then again we only follow 2 tests, the compelling interest test
and the rational basis test.
RELIGIOUS FREEDOM
Under the Consti, we are granting real property exemption to
Religious organization, is that not a violation of the non
establishment clause?
Q: Why do we allow exemption to this religious organization?
A: Because it will just foster excessive government entanglement
because if we will not exempt them, they would always ask from
the government for funds.
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When Pope John Paul came to the Phil, People were questioning
why we are spending so much for the coming of the Pope, The SC
held that just because there is a non secular purpose, that is only
incidental and we are also welcoming not only a Pope but the
head of the State. It is not in violation of the non establishment
clause if there is a secular purpose which is to establish
relationship with another state. The fact that the Catholic church
is being benifited by such visit, it is only incidental.
Bible Society vs. City of Manila- The city of Manila is imposing a
license fee for the sale of bibles, the SC held that the Bible is
considered as the book of faith, it is used to propogate religious
faith. If you will impose taxes, it will be considered an interference
of religious freedom, since a bible is used as a means to propogate
Faith.
Q: How about religious articles? are they treated the same?
A: No it would not violate the religious freedom because these
articles does not contain the faith, you can still continue to
promote the religion without these articles, unlike in a Bible.
NON IMPAIREMENT OF THE OBLIGATION OF CONTRACTS
Q: When is it allowed that tax laws can impair obligation of
contracts?
A: In the exercise of Police Power. It is superior over tax laws only
if the contract is based from a material consideration.
Ex: Government Bonds and Debentures.
Debentures- Are unsecured bonds as compared to secured bonds.
it is a type of debt instrument that is not secured by physical
assets or collateral bonds. So if the contract is based on a
substantial consideration the government cannot impair the
contract.
Ex: U.S. case- involving an Airline that engages in mailing services,
the exemption of the airline in one state was revoked, the US
supreme court held that it actually violated the non-impairment
clause because there is an agreement that this airline continue to
engage in the assistance of the faciliation of the mailing services
of the government in excahnge for tax exemption. This entity
continues to serve the government, therefore the government
cannot take away the tax exemption.
CASES:
Planters Products, Inc. v. Fertiphil Corporation
This was about the imposition of 10 pesos for the support of
Planters Product Inc. What the Supreme Court had said, it was
not for public purpose, the reason is because the contribution
was to rehabilitate a private corporation; it was made to benefit
not the public in general, but just one corporation.Thus it violates
the inherent limitation of taxation, that it must be for public
purpose.
NPC v. City of Cabanatuan
Sir: So you have the delegation to the local government of the
power to tax. However such delegation is supposed to be limited
by Congress. Since congress made the LGC and it took away the
exemptions on these entities, it is appropriate then for the City of
Cabanatuan to impose the franchise tax on NPC because the NPC
is no longer tax exempt. And under the LGC, local governments
can impose franchise tax, specifically on the general provision on
other businesses.
Abakada Guro Party List v. Ermit
Sir: What do you remember being said by the SC here? Okay so
you have this case discussing again the two tests(of delegation):
The Completeness test, and the Sufficient Standard test. So if

youve read this case youll realize that it is valid for congress to
allow the president to dictate the imposition of the 12% from 10%
VAT because what is being determined by the president is not a
legal matter but simply a FACTUAL matter. The president is just
supposed to affirm thepresence of the conditions set forth by law.
The SC said that that is a valid delegation as far as the two tests
are concerned. You read this case; there are a lot of issues,
especially on VAT. You read this case for purposes of the BAR.
Question by Fiona: In re power of taxation of LGUS. (I think this
has been clarified by sir during the next meeting)
Fiona: Previously, you emphasised that the power of the LGU to
tax is more of a delegated power of congress. I just want to clarify,
because in the case of MCIAA, the SC thru justice davide said that
the power to tax is primarily vested by congress, however in our
jurisdiction, it may be exercised by LGUs no longer as a valid
delegation, but pursuant to a direct constitutional provision.
Sir: That is being quoted also by one authority stating that it
could be a direct source of power, not a delegated power.But
looking at taxation, for purposes of stating the inherent nature of
taxation being legislative, you really cannot say that it is inherent
in the part of the LGU. Because In the first place, is required to
have a local government in a government? No. You need to have
an enactment of a law to have a LGU. If that happens, it doesnt
mean that these local governments have inherent powers on
their own. Their powers should have to be delegated to them. I
dont adhere to Justice Davides opinion.Because If you look at the
constitution, it still provides there that there is a limitation to be
set by congress. Had it been direct; in a way an inherent power,
the LGUS could have exercised the power whenever they want
and they are the ones to set its own limitations, other that the
inherent limitations.
For bar purposes, it helps if you can discuss 2 opinions.
For purposes of my class in taxation, I would prefer that the
power of the LGUS to tax is a delegated power because they are
still to be limited by the congress. It is a CONSTITUTIONALLY
provided, but it is not INHERENT in the local government units.
So still the power must have to be delegated. That is my take. Im
not saying that the case(MCIAA) is incorrect, but it is just most
authorities believe that the local government power to tax is a
delegated power rather than an inherent power of the local
government.
CIR v Central Luzon Drug Corporation
Sir: For our purposes, what is relevant to the decision made by the
SC there? Can you impose taxes thru the exercise of eminent
domain? How did the supreme court illustrate the imposition of
taxes thru eminent domain using the Senior Citizens discount?
Dba this was mentioned last meeting, that because of this
discount, how do you understand eminent domain? Dba theres
just compensation? In the case of Senior Citizens discount, where
is the just compensation? Its actually a tax deduction, that is
considered as JUST COMPENSATION.
CIR v. Baier-Nickel.
Sir: This is where the SC discussed the concept of source of
income. How did they define SOURCE OF INCOME? In this case,
this is a service. In the rendition of service, what is the situs of
taxation? Okay, where the service was performed, on there it is
sourced. Then how do we define source here? The SC uses the
case of BOAC. Source is the activity which gives you the income.
In this case the petitioner failed to prove that the service was
rendered in Germany. And because tax exemptions are strictly
Page 9

construed against the taxpayer, it was decided that it is sourced in
the PH, but only because she failed to prove the source.
Center only for property not exclusively used for charitable

purposes.
Preceding from the case of BOAC, we realized that even if the

earner is a resident of other countries and even if the activity or
part thereof may have been performed outside, like there is no
flight here in the PH for a particular airline, but because the
source of the activity is the sales of transport documents, where
the income actually comes from, it is considered sourced from the
Philippines. TAKE NOTE OF THE DEFINITION OF THE TERM
SOURCE FOR DETERMINING THE SITUS OF TAXATION.
Q: Does it matter who owns the property?

A: No, USE determines the exemption, not the OWNERSHIP.
CIR v. American Express International, Inc. (Phil Branch).

Sir: Were talking about situs. In this case what did the SC say? Is
the activity rendered here or abroad? Here the SC distinguished
the term CONSUMPTION under the destination principle. 1.
Consumption refers to the use of a thing as to exhausts it. 2.
Consumption is the performance of the service itself and it when
it is complete, it is considered consumed. We distinguished here
the 2 products or services rendered by the Ph company which is
the American Express in the PH and HongKong. The credit
transaction is said to be completed in HK, because the credit
happened in HK. But its just that the services rendered by the PH
company which is the connection for which it earns a commission,
is considered completed in the PH. So still the situs is still in the
PH. But since there is an exemption under the VAT law where if
the services is rendered here in the ph, paid for in foreign
currencies, thru the facilities of the BSP, it is considered zero rated.
That is how the SC discusses the case. Even if there is the so called
destination principle, you distinguish what is the service being
rendered.
Q: Will USC be exempted for portion used by JB?

A: No, It doesnt matter who owns the property. Its the use.
NB: SCs actual definition: Consumption is "the use of a thing in a

way that thereby exhausts it." Applied to services, the term
means the performance or "successful completion of a
contractual duty, usually resulting in the performer's release from
any past or future liability.
Tolentino v. Secretary of Finance
Issue: Whether or not RA 7166 violates the principle of
progressive system of taxation.
Held: No violation; Congress is required by the Constitution to
"evolve a progressive system of taxation."
The constitution does not mandate the establishment of a
progressive system of taxation but rather to encourage Congress
to come up with a progressive system. The term used is evolve.
Just because there is imposition of indirect taxes does not
necessarily mean that our system is no longer progressive. There
has to be imposition of indirect taxes. But for so long as indirect
taxes are not higher than direct taxes then it is still progressive.
Lung Center
Lung Center is a Charitable hospital exempted from taxes.There
are paying, non-paying patients, clinics rented out to private
practitioners.This is where SC defines the term exclusively in the
constitutional provision that charitable institutions are exempt on
their properties for so long as these properties are actually,
directly and exclusively used for charitable purposes.
Exclusively means Solely property used alone for charitable
purposes.Solely here does not mean that the entire hospital must
be used for charitable purposes.But if u can make a delineation of
certain properties, only those properties exclusively used for
charitable purposes will be exempt from tax. Here, SC taxed Lung
Example:
USC as educational institution; Under the Constitution,
educational institutions are exempted from tax for so long as
properties are used for education purposes.For example, USC
properties extend to Sto Rosario where Portion used by Jollibee.
Q: Portion of Sto Rosario? Will USC be exempted?

A: Yes, since church uses it w/c is a religious institution which is
also exempt from tax.
Camp John Hay/CJH
Controversy stems from Proclamation 420 w/c declared CJH as a
special economic zone therefore granting tax exemption. WON
P420 was constitutional? SC held unconstitutional since it is only
the legislature that can declare and it requires concurrence of the
majority of Congress for the exemption.
The basis of CJHs declaration as a special economic zone was not
covered by the law of Subic Eco Zone. So incentives of zone cant
be granted to CJH as it requires congressional act before the
exemption or the incentives can be granted to CJH.
MlA Golf Course
Q: Was it a valid veto of the President to just mention hotels?
A: Yes, Item allowed for veto includes appropriation, revenues,
tariff laws item refers to the subject of the tax and tax rate. So
item veto is valid because hotels/motels are proper subject of
taxes which may be vetoed.
Smart Comm v City of Davao
City of Davao imposed a franchise tax on Smart. Smart assailed
that it is exempt fr franchise taxes based on charter and Most
Favored Treatment clause.SC said that franchise is a privilege
granted by the state which is not a perpetual privilege and that it
can be revoked. In lieu of all taxes is interpreted not in favor of
smart as tax exemption construed against taxpayer. Thus, SC
defined it so as not to include local taxes.
American bible society/ABS
American Bible Society (ABS) is a foreign, non-stock, non-profit,
religious, corporation. Pursuant to its mandate, ABS distributed
and sold bibles and religious pamphlets. The City Treasurer of the
City of Manila considered ABS to be conducting the business of
general merchandise and so required ABS to secure a business
permit and pay license fees. ABS paid said amount under protest,
however, it assailed the validity of the aforementioned municipal
ordinances, contending that these ordinances provide for
religious censorship and restrain the free exercise and enjoyment
of its religious profession.
Court held that the ordinances are inapplicable to ABS business,
trade or occupation. The City of Manila is powerless to license or
tax the business of plaintiff ABS involved herein because it would
impair ABS right to the free exercise and enjoyment of its
religious profession and worship, as well as its right of
dissemination of religious beliefs.
Q: Is Imposition of business permit valid?
Page 10

A: Yes, but not to apply to ABS for reason that this violated free
exercise of religion but limited only to items that disseminates
religious information.
government. Payment of tax also includes the options, schemes or

remedies as may be legally open or available to the taxpayer. (UP
Taxation Reviewer)
Q: What rights were violated?

A: Rights to religious freedom and press freedom.
Some books discusses only two stages of taxation, aspect of

taxation. We have the legislative and the administrative. The
legislative that is to the levy, the imposition of taxes through law,
that is the act of Congress, administrative refers to the
assessment portion. But take note that this assessment could also
include the collection, so 2 components of administrative aspects
we have the assessment, the determination of the amount to be
paid of and the collection which is he actual receipt of money or
actual payment. But sometimes they consider payment as
another aspects. Some books considers 4 aspects of taxation, they
include payment plus refund but most books even in undergrad
books have only legislative and administrative aspects. So take
note of the aspects of taxation.
TN:what type of merchandise?

A: One that propagates religion; So religious merchandise such as
statues, rosaries will be subject to tax.
Southern Cross Case
Q: What is the requirement for the Safeguard Measures Act?
A: That the tariff commission to give affirmative decision before
the DTI Secretary can impose stiffer tariff measure.
Q: Is it valid for this grp of manufacturers to question the
Safeguard Measures Act? Requirement that the measure be
approved by the Tariff Commission?
A: Yes since constitution grants president to impose the flexible
tariff clause. Although found in the Tariff & Customs Code (not
the Tax Code nor Constitution), some authors loosely refer to the
provision in the Constitution as the flexible tariff clause. The
flexible tariff clause only means that the President can determine
certain aspects of tariff like quota & even tariff rates can be
adjusted. In this case, this is exercised thru DTI as alter ego of the
president.
St Lukes
St Lukes is a non-stock, non-profit hospital. BIR assessed realty
taxes.On the ground that the preferential tax rate of 10%
(inaudible). Well actually the BIR wants to tax it as an ordinary
corporation not as a proprietary hospital. So the SC mentions that
the Lung Center of the Philippines is applicable in this case as
what is the definition of what is a charitable institution, because
the taxes involve here is different from the taxes involve in Lung
Center because in Lung Center we are talking about real property
taxes while in this St. Lukes case we are talking about income
taxes and then what did the SC say as enunciated in the case of
Lung Center? That even if a charitable institution (inaudible), it
does not divest itself of its charitable nature and so St. Lukes may
still avail of the privileged, the preferential tax rate of 10% but
because it is still engages for profit, remember your Section 30 of
the tax code, list of corporations exempt from tax, the last
paragraph, the very important paragraph, if this corporations
engage in activities for profit, or there is profit but the use of real
property regardless of how the income is being dispose it will be
subject to taxes, but St lukes made use of the Predominance Test,
SC said that under the Predominance Test, St Lukes is still
exempted.
STAGES OF TAXATION
The exercise of taxation involves three stages, namely:
(1) LEVY ORIMPOSITION This process involves the passage of tax
laws or ordinances through the legislature. The tax laws to be
passed shall determine those to be taxed (person, property
orrights), how much is to be collected (the rate and the base of
tax), and how taxes are to be implemented (the manner of
imposing and collecting tax). It also involves the granting of tax
exemptions, tax amnesties or tax condonation.
(2) ASSESSMENT AND COLLECTION This process involves the act
of administration and implementation of tax laws by the
executive through its administrative agencies such as the Bureau
of Internal Revenue or Bureau of Customs.
(3) PAYMENT this process involves the act of compliance by the
taxpayer in contributing his share to pay the expenses of the
DEFINITION, NATURE AND CHARACTERISTICS OF TAXES

Tax Defined
These are enforced proportional contributions from persons and
properties, levied by the State by virtue of its sovereignty for the
support of the government and all its public needs.
Characteristics of Tax
(1) It is an enforced contribution, meaning its not
voluntary, it is enforced so you have no choice but to
pay your taxes
(2) Levied by the state, that means that we have Congress
or the LGUs for valid delegation imposing taxes
(3) Generally payable in money, exception is tax credits
(4) Proportionate in character which means that we
adhere to the constitutional mandate of equity and
uniformity in taxation, it depends on the ability of the
taxpayer to pay and supposed to apply similarly to
people under the same circumstances or class
(5) Levied on persons and properties within its territory,
these are subjects of taxation and only those subjects
within the territory of the govt will be subject to tax
(6) For public purpose, in planters bank it says that public
purpose now has become elastic it could include
imposition of the social justice
(7) Imposed on regular periods and intervals, so there are
limits as to subjects, place and as to time. You have
several deadlines.
And from this actually we can gather the nature of taxes, inherent
in State, imposition may only be made by the legislative
department, plenary or unlimited.
Requisites of a Valid Tax
It should be for public purpose, it should be uniform, due process
in its imposition and last must not impinge inherent and
constitutional limitations. Primary element you must look at is
public purpose because after all if no public purpose the tax
automatically becomes invalid. You take note of public purpose.
TAXES FROM OTHER IMPOSITIONS
Tariff vs tax
TAX
TARIFF
Scope
General; includes tariff
Specific; limited only to

customs and imports
Taxing Authority
National Govt
National Govt or Local Govt
Page 11

Property Involved
Domestic or Imported
Agency Involved
BIR or LGU
Imported
BOC
Toll vs Tax
TAX
TOLL
Purpose
Revenue Raising
Reimbursement of cost;
private purpose
property for public purpose

a business or calling
Assignability
Not assignable
Assignable
Payment
Payable in money
Payable in kind or in money
Set-off
Generally not subject to setoff
Subject to set-off
Effect of Non Payment
May result to imprisonment
Does not result to
imprisonment
Basis
Power of taxation
Unjust enrichment
Subjects
All persons, properties or even
Actual users of property
exercise of a right
Amount
Unlimited
Limited only to the cost
incurred
Authority
Government
Private entities or Government
Time of Payment
After privilege
Before or after
You can be imprisoned except
Closure or suspension
for poll tax
Tax vs License fees
TAX
LICENSE FEE
Definition
Enforced proportional
Exaction for the right to use or
contributions from persons or
dispose the property to pursue
property for public purpose
a business or calling
Purpose
Revenue
Regulation
Basis
Power of Taxation
Police Power
Amount
Unlimited
Limited
Time of Payment
After privilege
Before
Does not make the business
Makes the business illegal
illegal
Tax vs special assessment

TAX
SPECIAL ASSESSMENT
CLASSIFICATION OF TAXES
AS TO OBJECT
(1) Personal or poll tax;
(2) Property tax; and
(3) Excise tax
AS TO WHO BEARS THE BURDEN
(1) Direct - you cannot transfer the burden; and
(2) Indirect- shifted by taxpayer to someone else
AS TO DETERMINATION OF THE AMOUNT
(1) Specific it is fixed amount; and
(2) Ad valorem based on value
AS TO PURPOSE
(1) General tax- which means govt is free to use it for
whatever purpose; and
(2) Special tax - it should only be for specific purpose
AS TO SCOPE
(1) National; and
(2) local tax
AS TO PROPORTIONALITY
(1) progressive tax - rate increases as the tax base
increases;
(2) regressive tax - rate decreases as tax base increases;
and
(3) proportional - it has fixed percentage
AS TO TAX BASE
(1) gross taxation; and
(2) net taxation
------------------------oOo----------------------
Subject
Persons or property
Land
Liability
Personal liability of the
Cannot be made a personal
taxpayer
liability of the person assessed
Scope
Regular
Exceptional as to time and
locality
Purpose
Expenses of Government
Contribution for public
improvement
Tax vs debt
TAX
DEBT
Basis
Enforced proportional
Exaction for the right to use or
contributions from persons or
dispose the property to pursue
Page 12

PRINCIPLES OF INCOME
TAXATION
(1)
INCOME TAX SYSTEMS IN THE PHILIPPINES

Global system- only one tax rate imposed on any kind of
taxes; no need of any distinction as to the tax imposed
(2)
Schedular- you need a distinction between the nature of the

taxes imposed; you need to distinguish between passive and
active income; different tax rates for different kinds of taxes
(3)
Semi-schedular/semi-global- followed in the Philippines;

uses either a fixed rate for several types of taxes and uses
different types of taxes depending on the nature
How do you illustrate this? Schedular? The distinctions of passive

income: different tax for interest, royalties, etc.
Global? Corporate income tax
But again just remember that we use semi-schedular and semiglobal
FEATURES OF INCOME TAX
1. Direct tax- as a general rule, whoever is imposed the taxes must
pay the taxes; example income tax, if you earn the income, youre
the one who is supposed to pay
2. Progressive- tax rate increases as tax base increases, at least for
individual income tax
3. Comprehensive- it covers everything, even without the
Philippines, you can be taxed if you are a resident citizen
1.
2.
CRITERIA FOR IMPOSING INCOME TAX

Citizenship- citizen and alien; you have resident citizen, nonresident citizen, resident alien and non-resident alien
Source Principle- income taxable within the Philippines and
income taxable without the Philippines
KINDS OF TAXPAYERS
Taxpayer
RC
NRC and OCW
RA
NRA
DC
FC
Within
T
T
T
T
T
T
Without
T
X
X
X
T
X
INDIVIDUAL
Citizen Defined
We have the constitution as basis: born of Filipino parents; who
elects Filipino citizenship at the age of majority. Ill leave that to
you.
Aliens Defined
If you do not comply with the definition of citizens in the
constitution, then you are an alien.
Residents
If you are staying here in the Philippines, otherwise youre not a
resident.
RESIDENT CITIZEN
Filipino residing here in the Philippines

NON-RESIDENT CITIZEN
Filipino who:
(1) Establishes to the satisfaction of the Commissioner of
his presence abroad
a. How do you satisfy the Commissioner?
Certificate of Residency from foreign
country; passports, embassy stating to the
effect that you are residing abroad
(2) Leaves the Philippines for purposes of employment or
immigration
a.
In this instance, is there a requirement of
number of days? NO. You will only take
note of the number of days if you are
talking about employment which is not
permanent. If you talk about permanent
employment or immigration, regardless of
what day of the year you leave, you are
considered a non-resident citizen.
b. Example: I will leave the Philippines to be
an employee in McDo US and my job is
regular and permanent. If I leave in October,
it will not matter, I am a non-resident. So if
it mentions about immigration or
permanent employment, automatic it is
non-resident.
(3) Leave the Philippines and you have to reside abroad
for reason of your employment where you will have
to reside abroad most of the time during the year
a. 365 days divided by 2= 183 days (we see
this from the viewpoint of the foreign
country and the accepted number of days is
365 days)If you stay abroad for at least 183
days by reason of employment, you are a
non-resident. Your job requires you to stay
abroad most of the time.
b. Does the 183 days need to be continuous?
No. It is aggregate- you total the number of
days within the year.
c.
If the reason is only vacation, are you a nonresident? NO. Your reason should be your
job.
(4) Used to be non-resident citizen and you decide to
stay here for good
a. If you arrived here in the Philippines on
June 30: you will be considered partly nonresident and partly resident citizen. You will
be considered non-resident from January 1
to June 30 and a resident citizen from July 1
to December 31.In this case, take note you
were considered a non-resident citizen and
you decided to stay in the Philippines for
good.
RESIDENT ALIEN
He should stay in the Philippines for more than 12 months
counted from the date of his arrival. That is the general rule.
However, if you can establish that your residency will be
permanent, for example you have already applied for
naturalization, it doesnt matter.
RESIDENT ALIEN
This we have to further classify: engaged in trade or business and
not engaged in trade or business:
Page 13

360 days divided by 2= 180 days (we view this from the viewpoint
of the Philippines and here, our accepted number of days in a year
is 360 days)
If you stayed in the Philippines for more than 180 days, more than
half of the year, you are engaged in trade or business. So take
note:
Non-resident citizen- at least 183 days
NRA-ETB- at least 181 days.
Examples:
1. John, Filipino, entered into a contract in the US involving real
property in the Philippines. He earned income from the sale, will
he be taxed in the Phils? Yes, first, he is a resident citizen. Second,
the real property is located in the Philippines so situs is here.
2. What if in the above example he is a non-resident citizen? Will
it still be subject to tax here? Yes. First, the property is located
here in the Philippines. Second, the income is sourced in the
Philippines and he is a non-resident citizen, thus, taxable for
income here in the Philippines.
OVERSEAS CONTRACT WORKER
How will you be classified? You will be classified as NONRESIDENT
CITIZEN. But, the requirement there is that there must be an
employment contract. There must be an employment contract
from an employer outside the Philippines.
Q: How about seamen? Is a seaman included in the term OCW?
A: Yes. But, whats the requirement for the seaman?
(1) He must be a Filipino, of course, and
(2) He must be a member or complement of a vessel,
engaged in international trading/trade.
The vessel must be engaged in international trade for him to be
considered as a seaman under the definition of the OCW. Kay naa
bayay mga seaman nga inter-island, right? For instance, Sulpicio
lines. If you are a crewmember of Sulpicio lines, you are a seaman
but not for purposes of the definition under the tax code to be
considered as an OCW. Cruise? It could cover trade for the reason
that the business is cruising. You pay for having to be on board
the vessel. So its still considered as international trade. They have
to go outside the Philippines.
CORPORATIONS
So, for corporations, you will only have to refer to domestic and
foreign. And we know that under the tax code, that encompasses
only business corporations, Non-stock, non-profit corporations,
and also partnerships, whether for trading or General Professional
Practices.
DOMESTIC CORPORATION
Q: When is a corporation considered domestic corporation?
A: If it is organized and registered under Philippine laws.
FOREIGN CORPORATION
Q: When is a corporation considered a foreign corporation?
A: If it is registered or organized other than in the Philippines,
other than the law of the Philippines.
You will have to distinguish whether its resident or non-resident.
Resident Foreign Corporation
Q: When is it considered a resident foreign corporation?
A: If it is engaged in business in the Philippines.
Q: When is it considered engaged in business in the Philippines?

A: Continuity of commercial dealings or transactions. Now,
thats very general.
Example: What if Im engaged in investment in shares of stocks
here in the Philippines. Diba, a stock of a Philippine domestic
corporation, I keep on investing and Im using my corporation.
Im an American citizen, I have a corporation registered in US and
I keep on buying shares of a Philippine corporation. Will my
corporation then be considered a Resident foreign corporation
because I keep on buying shares of stocks of a domestic
corporation?
A: No. what should be your gage then? It should be best to look at
your foreign investment law, your FIA (Foreign Investment Act).
So how are you considered doing business in the Philippines.
Non-Resident Foreign Corporation
Q: When is it considered Nonresident Foreign Corporation?
A: If youre engaged in isolated transaction only. And then, you
must of course, not establish your presence in the Philippines in
any capacity. So, you dont have a resident agent, you dont have
any branch or you dont have any representative office. Otherwise,
you may be considered as resident citizen (sic).
TAX PERIODS
Now, lets go to tax periods. Remember our definition
of taxes? There has to be a limit as to the period of taxation. So,
what are the types of tax periods in the Philippines?
CALENDAR YEAR
Any 12-month period ending on December 31.
FISCAL YEAR
Any 12-monthperiod ending other than December 31.
SHORT PERIOD
How about a short period? You have the change in accounting
period. When you change your accounting period, you will be
required to issue a short-period return. One of the undertaking of
a corporation changing its taxable period from calendar to fiscal
or from fiscal to calendar will have to issue a short period return.
Q: What is the coverage of the short period return?
A: It would be the period not covered by the latest financial
statement.
Example:You used to be a calendar year taxpayer which ends in
lets say December 31, 2013. Now, it decided to change its
accounting period to fiscal year ending in March 31, 2014. So
when do you apply the short period return? So, when are you
supposed to file your financial statement if youre ending
December 31, 2013?
A: April 15, 2014.
Q: How about if youre ending on March, when are you supposed
to file your income tax return? It should be on the 15th day of the
fourth month following the close of the taxable period. So, when
is that?
A: It should be on July 15. So from the period January to July, you
are supposed to file a short period return because this is the
period not covered by your latest financial statement. And then
theres supposed to be a financial statement to be submitted on
July. So, look at the 15th day of the 4th month following the close
of the taxable period. The same with your usual income tax return
Page 14

which is also due on the 15th day of the fourth month following
the close of the taxable period.
But take note, the short period only happens when you change
your accounting period or when you close your business. The
period that has not been covered by your latest financial
statements, youre supposed to make a short period return for
that.
So, sa atong example, kung fiscal puros. Currently, you end on
June 30, 2014, thats your supposed close of taxable period. What
if you decided to change it some time to September 2014. What
should cover your short period return? It should be the end of
your current accounting period and its supposed to end at the
end also of your amended accounting period. So, in this case,
when is the deadline for your amended accounting period?
Naglibog na nuon mo. So again, going back. The period that
should be covered by your short period return should be the end
of your current accounting period and then it should end on the
deadline for the filing of return under the amended accounting
period. So, kato, kanus-a man ni end sa atong current?June 30, so
meaning ang wala nacover na period starting July 1. Nya kanus-a
man ta mo-file sa atong return if mo-end tag September. So,
fourth month man daw, so January. So that means from July 1 to
January 15 of the following year. So, thats the coverage of the
short period return. So, again it begins on the end of your current
accounting period and its supposed to end on the deadline of
your amended accounting period. And the deadline is always on
the 15th day of the fourth month following the close of your
taxable period. Dont worry, they will not ask you in the bar exam
when is the short period.
Income Tax
Defined
What is income tax? Its a tax on your yearly profits. When is there
income? There is income when there is a flow of wealth other
than a mere return of capital. Very generic based on that
definition. Is it automatic that just because you have an income,
you are already subject to income tax? No. The other question is,
when is there taxable income? So, we know that income is a flow
of wealth other than a mere return of capital but when does it
become taxable. First, there must be presence of income. So,
there is income, there is profit Second, that income should be
received, realized, or constructively received. It must be realized,
actually received or constructively received. This matters. There
could be actual receipt or constructive receipt. When is there
constructive receipt and it is automatically subject to tax? Like
your partnership, whether its declared to be divided or not, those
who are engaged in partnership, the partners are automatically
taxed on their share in the partnership, whether it is declared as
distribution or not. Other requirement would be, that it is not
exempted from taxes otherwise; it is not subject to income tax.
Classification of Income Taxation
Q: As to its nature, how do you classify Income Taxation?
A: It is an Excise tax. It is a tax on the privilege of a person who
earns income or engaged in a profession or engaged in a business.
TAX RATES APPLICABLE
INDIVIDUALS
TAXPAYER
Resident citizen
Nonresident citizen
Resident alien
TAX RATE
5-32%
5-32%
5-32%
TAX BASE
Net income
Net income
Net income
Nonresident
alienengaged in trade or
business
in
the
Philippines
Nonresident
alienNOT engaged in trade
or business in the
Philippines
5-32%
Net income
25%
Gross income
CORPORATIONS
TAXPAYER
TAX RATE
Domestic Corporation
30%
Resident
Foreign 30%
Corporation
Nonresident Foreign 30%
Corporation
Master that. Master the rates and tax base.
TAX BASE
Net income
Net income
Gross income
Net Income vs. Gross Income

So, whats the difference between net income and gross income?
Gross income does not account for personal deductions and for
itemized deductions or even your OSD. While net income
accounts for these deductions. But, does that mean that you dont
deduct anything f its gross income? No. What do you deduct for
gross income? Your cost of sales or your direct costs, in other
words. Your direct costs, you still have to deduct it in order to get
your gross income.
Do you have to memorize the tax table? You dont have to class.
Even I cant memorize it. In the Bar exam, you will be given the
rate. But only the tax table. All other rates, you have to memorize.
Kung table gani, ayaw na memorize. Unsa may tables nimo?
Income tax on individuals, estate tax, donors tax. Dont memorize
the tables there. But individual rates, like gross Philippine Billings,
memorize that. Vessel? 4.5%. Aircraft 7.5%. Remember, if theres
a decimal, always .5.
Income vs. Capital Gain
Q: So how do you distinguish income from capital again?
A: Capital is the tree and income is the fruit. For me thats the
best distinction. Income is the frit of whatever you gain from your
business or in your undertaking. There is no income if you dont
gain anything. Even in lottery there is income. The capital in
lottery is the P20.00 ticket and if the jackpot is Php 200M, the
income is Php 199,999,980.00.
INCOME
Income Defined
Income is a flow of wealth other than a mere return of capital. So
these are cash or its equivalent coming to a person within a
particular period. It is a service of wealth. So when you put up an
investment or a certain business, whatever you earn out of your
capital is considered income.
We made a distinction between a tree and a fruit. The tree is for
capital and the fruit is for income.
As to its nature, it is for a particular period. It is a pool of your
wealth within a particular period.
When Taxable
Q: When is an income taxable?
A: So first you must determine when there is an income.
Q: When is there existence of an income?
Page 15

A: There must be a value received in the form of cash or its
equivalent or from the result of a particular activity, use or service
of labor or use of an asset or engaging in a transaction.
Now you must realize such income. You have these so called tests.
Elements for Recognizing Income
(1) there must be an existence of an income, gain or profit.
(2) it must be realized or received during the taxable year.
So we just mentioned the test of realization. Well
expound more later.
(3) it must not be exempt from income tax otherwise we
cannot tax it. So the purpose for recognizing such
income is so that we could determine whether you can
tax it or not. So if its exempted through a treaty or a
provision of law, then theres no use for recognizing
income at least for our purposes.
TESTS IN DETERMINING WHETHER INCOME IS EARNED FOR TAX
PURPOSES
REALIZATION TEST
1st element: That the earning process must be complete or
virtually complete. Why virtually complete? Because you will
learn later on that you need not actually receive it; you can
constructively receive it as well.
2nd element: That the exchange or transaction has actually taken
place.
Actual vs. Constructive Receipt
Actual receipt physical transfer or transfers of its equivalent
provided that it complies with the definition of what income is.
Constructive receipt there must be control. So if were looking at
the constructive receipt, were looking at the right to receive, not
necessarily actual receipt or physical receipt. So there must be
control on the part of the taxpayer without any restriction by the
one who paid or who gave him income.
Example: You were employed by X Corporation. So you report to
office everyday for the next 15 days. It is mentioned in your
contract that every 15 days you will be given compensation. So
during the entire 15 days that youve been reporting to office,
there is an earning process. On the 15th day it is deemed complete
or actually, everyday it is deemed completed so long as you
reported to the office. Now youve already realized the first
element which is a Complete Earning Process. Now second
element of the Realization Test is that the exchange or transaction
has taken place. Now this may not be very evident in such an
example but this will happen on the payment of compensation. So
on the 15th day when your employer deposits to your ATM there
is said to be an exchange or transaction that took place. So thats
the Realization test. You look at whether there is an earning
process and you look at whether the exchange has actually taken
place. Thats an example of the Realization test.
CLAIM OF RIGHT DOCTRINE OR THE DOCTRINE OF OWNERSHIP
OR REIGN OR COMMAND OR CONTROL
It says that the taxable gain is conditioned upon the presence of a
claim of right to the alleged gain and the absence of a definite
unconditional obligation to return or repay.
So of course, 2 elements!
There must be a Presence of a Claim of Right. When is there a
presence of a claim of right? You have to relate it to the
Realization test. There must be a complete earning process diba?
For example, the one that Ive just given you, compensation while
working with an employer, when is there a claim of right? Once
youve already rendered services to your employer, in that
instance you have already a claim of right. So the principle in

Labor that a fair days wage for a fair days labor, you already
have a claim of right.
Q: Are you required to return it? Whenever youve been given
income out of the services you rendered, are you required to
return it to your employer?
A: No. So in that case you already have this claim of right doctrine.
But we usually apply this to illegal income. Like gambling gains.
Example: You went to a casino. You placed a bet on the slot
machine. Then you played the Slot Machine. Then you won the
jackpot. Is there a claim of right in that instance?
A: Yes, because you have a contract with the casino operator that
if you place a bet on the slot machine and then it gives you a prize,
then that prize is yours. Are you required to return it? No. So in
that case, there is income because you are not required to return.
So thats where Claim of Right Doctrine is applied. Now later on
we will discuss whether this is applicable in the Philippine
Jurisdiction.
ECONOMIC BENEFIT TEST OR DOCTRINE OF PROPRIETY TEST
Q: Economic Benefit Test or the Doctrine of Proprietary Test, what
is this?
A: As the name suggests, economic benefit, there is taxable gain
only to the extent that the taxpayer is economically benefited.
Example: sale of real property; When you bought the property,
you paid P100,000. When you sold it, you were able to sell it for
P300,000. What is your economic benefit there? Can you say that
the entire P300,000 is your economic benefit? No. Take note that
you let go of something before youre able to get the entire
P300,000. So when you mention of benefit, you dont account for
cost of what you had let go, that is, you dont deduct what you
paid. So from P300,000, you deduct your P100,000 cost, you will
benefit P200,000. So that is considered as your income for
purposes of taxation. We will learn later on if it were a sale of real
property it is not deducted to cause for purposes of Economic
Benefit Test, it is how it is. Or otherwise known as the Doctrine of
Proprietary Interest. This is also defined by the phrase there is
income on the part of the employee if there is an increase in his
net worth.
What is net worth? For accounting purposes it is assets minus
liabilities. You have your net worth. But in ordinary parlance its
just your total resources less the amount that you spent, that is
your net worth.
SEVERANCE TEST
We could recognize income if there is separation of capital of
something which can be exchanged for value.
Example: You have your dividends. Youve put in money to buy
shares. Lets say you have 100,000 shares. So the corporation
declared dividends equivalent to P1 per share. So if you will not
receive the cash, you decide to reinvest it, then how much will
your total capital be? P200,000 na. Is there income there? Well in
effect there is, diba? Kay Makita man nimo ang increase sa imong
net worth. Under the Economic Benefit Test, there is said to be
income. But under Severance Test, there is said to be no income.
Because you did not separate man. There is no separation of
something of value from your capital. You received a dividend, I
mean physically get it out of the corporation just once, then there
is severance of something which you exchange for value. You can
pay something out of your cash diba, so thats understandable. In
that sense, the Severance Test is deemed realized. So something
of value is separated with capital, so that is Severance Test.
Page 16
ALL EVENTS TEST

A: Its actually more or less the same with Realization test diba
that all transactions have something completed and must have
been accounted for within a particular period so that whatever is
the excess is your income. But this is applied in a case involving
liabilities.
1. Now it is said that there is a fixing of a liability to be
paid.
2. Then the availability of Reasonable Accurate
Determination of such liability.
So it is not required that you can accurately determine how much
is the income, so long as there is reasonable opportunity to
determine it, it is enough that the All events test is deemed
completed. This is best applied for accrual purposes.
Example: Like your accounts receivable. So you sold chips to your
classmate and then it is on credit. Can you recognize income there?
Can you automatically recognize income the moment that you
sold the chips? Even if you havent received the income yet? Yes.
Because in accordance with the All Events test, has all the
transactions been completed?
A: Yes. Can you determine how much it is? Yes. Just tell your
classmate, This is supposed to be 100 pesos for these chips.
Even if you havent received the 100 pesos, but because you know
can how much it is supposed to be paid from your classmate, then
there is reasonable opportunity to determine how much is your
income. So for purposes of All Events Test there is already income.
Its not required to be accurate so long as you can determine how
much it is. So all events of the transaction must be there. All
events. Everything must be accounted for.
Sir:So with those tests, you can determine when income is earned
or realized for purposes of income taxation. Just keep it simple.
You dont account for whatever you gave or let go, but if you
received more than what youve let go then it is considered as
income. You will be guided on the tax provisions when is a
particular income taxable. Because of these provisions you would
already know if there is income or not. Diba e-specify lang nila
what type of income is subject to tax. Its not actually considered
when can you determine when the test would be applied, its
more of knowing what type of income that is subject to tax.
Gross Income
A: According to James Doctrine. Even if its illegally earned, it will

still be subject to tax.
But if you adhere to the Wilcox Doctrine, it is not taxable because
you really have no right over an illegally earned income. It would
also perpetrate illegal acts.
There is this Claim of Right Doctrine. We just mentioned that it
must be conditioned on the presence of a claim of right to the
alleged gain, and the absence of a definite unconditional
obligation to return or repay a particular gain. Our Tax laws are
patterned after the U.S. Tax Code diba? In the US Tax Code, this
claim of right is being applied by providing for a deduction from
the taxable income of a taxpayer if ever previously accounts for
an income which in the current period it will have to return.
Example:In 2013, youve earned an income, an alleged gain.
Youre not yet sure if youre required to return it or not. For
example you just saw one million pesos on the road. K, so youre
supposed to recognize income there, diba? Because theres
economic benefit. Did you let go of something? You did not. But
youve earned so that means you dont deduct anything from it.
Your net worth has increased so you recognize it. Now under the
US Tax Code, if next year you will be required to return the one
million pesos, because it turned out to be government money or
lets just say someone won a case in court and they determined
that the owner of the P1M is Mr. X, then you will have to return
the money to Mr. X. In your current income, you are allowed to
deduct that amount. That is provided for in the US Tax Code.
In the Philippines, it is not provided. So that means we do not
adhere to the Claim of Right as enunciated in the US Tax Code
because we dont have such provision. For purposes of Philippine
jurisdiction, we dont adhere to Claim of Right. We more or less
follow the James Doctrine. Everything is taxable regardless of the
source whether its legal or illegal.
Gross Income vs. Net Income
Q: How do we distinguish Gross Income from Net Income?
A: Gross Income all income without any deductions. Is that
accurate? There are still deductions, but only direct costs. But for
income taxation under the tax code, you distinguish Gross Income
from Net Income by stating that Gross Income does not allow the
deduction of itemized deductions or Optional Standard Deduction
whereas Net Income accounts for such deduction. So thats how
we distinguish Gross Income from Net Income under the tax code.
Defined
Q: What is Gross Income? For purposes of income taxation. What
does the Tax Code say?
A: Gross Income refers to all items of income derived from
whatever source. And so you have this several doctrines whether
a particular income is covered by the so called Gross Income.
Taxable Income
Q: How about Taxable Income? You have Gross Income, Net
Income and Taxable Income.
A: Taxable Income would be Gross Income less Itemized
Deductions or OSD, less Personal and Additional Exemptions so
you can get your Taxable Income.
First and foremost, the definition mentions of an enumeration. Is

that enumeration exclusive? No. How is it stated there? including
but not limited to. Not everything is exhaustively specified. It is
clearer now that it is not exhaustive because of the phrase not
limited to. It is important to know that just because it is not
enumerated in the items of income in the tax code, that particular
item is not subject to tax.
So Taxable Income would be the last amount that you can get;
would be the result after all the deductions are accounted for.
Q: What are these doctrines? It mentions from whatever source

so does it mean that income is subject to tax if it illegally earned?
James Doctrine
Taxable income is the net amount after accounting for all

allowable deductions.
1.
2.
3.
CLASSIFICATION OF INCOME AS TO SOURCE

Gross income from sources Within the Philippines,
Gross income for sources Without the Philippines,
Income partly within and without the Philippines.
An enumeration provided for in the Tax Code depending on the

Situs of Income.
Page 17
Q: So when is income partly within and partly without?

A: If its purchased abroad and sold in the Philippines; or
purchased in the Philippines and then sold outside the Philippines.
But its actually not very clear diba? It might be clearer if its
manufactured here in the Philippines because there is only a first
level of taxation for manufacturing alone, this is the excise tax
that you know of for every production you impose taxes. And
then if you sell it outside the Philippines theres another tax there.
So there are two sets of tax involved when you say partly within
and partly without. There is actually no tax na you tax here in the
Philippines then the same tax will also happen in the US from just
determining the proportion.
When you ask sir when an income is partly earned abroad and
partly here in the Philippines, you will have to proportion. Diba
naa man nay, there there, like in the case of a non-resident alien
engaged in trade or business. Hes only taxable for income within
the Philippines. So what if that income is not clear whether it is
attributable to this transaction within the Philippines or abroad?
Then you are required to apportion it. Then in that case you could
say that it is partly within the Philippines or partly taxed abroad.
But that is not the contemplation mentioned in the tax code. Ang
contemplation mentioned in the Tax code where it is taxed partly
within and then partly without the Philippines is about two taxes
being imposed on different jurisdiction. If you purchase a
particular item here in the Philippines you will be subject to input
tax diba? Oh, you sell bags or similar items abroad, you will be
subject to output tax there in the country where you sell it. Thats
partly within and partly without. Two types of taxes taxed by
different jurisdiction.
Then you have sources of income subject to tax.
Q: In All Events Test sir, do we base it on all the elements of a
contract?
A: Well you could say elements of a contract, if want to be
technical about it. Well you could say that a contract is present
then you have a complete transaction. But it is more of a period,
actually. When you say all events test diba like your accounting
period, your entire business period is being divided into smaller
periods like the life of your corporation is 50 years but your
accounting period is per year, 12-month period. If within a
particular taxable period or accounting period, the entire
transactions that youve earned during that year has already been
completed, then you account for your entire income for that
particular year and then thats the amount that will be subject to
tax for that year alone. You dont include those transactions that
may happen next year or on the other periods. So this should be
cut off. So thats the All events Test. All events are accounted for
for a particular period. But you can also say na all elements of the
contract has been accounted for so all events as to that particular
transaction is already complete and so we can apply the All Events
Test saying there is already income. Its more of a period when
you say All Events Test. And theres a case again where it was
applied in determining liability.
INDIVIDUAL SITUS DEPENDING ON THE TYPES OF INCOME
INTEREST INCOME
You look at the residence of the debtor
Example: Kim, a Filipina, lends money to Rayner, a Japanese, the
loan contract was executed in Japan. The contract provides for an
interest income of P100,000.
Q: Who earns the interest income?
A: Kim, the debtor.
Q:Will the income of Rayner be subject to tax?

A:First and foremost there is no income, it will never be taxed
because who is taxed? Kim, the debtor. (TN)
Q:The debtor, Rayner is a Japanese and residing in Japan. Will the
income of Kim be subject to tax?
A:Yes. It does not matter where the income is earned if the
income earner is a Resident Citizen, Kim is a resident citizen. You
always look at the earner of the income whether he is a resident
citizen or not. Kim, the income earner is a resident citizen, she
will be taxed regardless of the income is from within or without.
Q:Lets change the situation, what if Kim is a Non-resident Citizen,
is the income subject to tax? Yes or no.
A:No, because it is considered sourced without the Philippines.
The debtor is a non-resident debtor. Not subject to tax.
Example: Zenaida, a German, residing here in the Philippines lent
money to Arl, a Filipino residing here in the Philippines.
Q: Will the interest income of Arl be subject to tax?
A: No, because the income earner is Zenaida, Arl is the debtor.
Arl cannot be taxed because he has no income in that transaction.
Q: So, will the interest income of Zenaida be subject to tax?
A: Yes because it is sourced within the Philippines and Zenaida is a
Resident Alien and so taxable for income within the Philippines.
DIVIDEND INCOME
FROM A DOMESTIC CORPORATION
From a Domestic Corporation, it is always sourced within the
Philippines. Regardless, it does not matter where the dividend is
being given, it is always taxable here in the Philippines.
Example: Miguel, a Spanish individual invested his savings in
PLDT. PLDT decided to declare dividends, sent the money to Spain
to Miguel. Is the Dividend income subject to tax in the Philippines?
Take Note, who is the dividend earner? Miguel who is a Spaniard ,
a Non-Resident Alien Not engaged in Trade or business here in the
Philippines. He is in Spain.
Q:Will he be subject to tax?
A:Yes, it is sourced within the Philippines because PLDT is a
domestic Coporation.
Example: Abegail is a Filipina residing in Singapore. While in
Singapore, she invested her savings in Jollibee. Jollibee declared
dividends, sent the money to Singapore. Will it be subject to tax
here in the Philippines?
A: Yes. Sourced in the Philippines because a domestic corporation
is the one giving the dividends and it is earned in the Philippines
and you have a taxpayer who is a non-resident citizen.
FROM A RESIDENT FOREIGN CORPORATION
Q:How about if the one declaring the dividend is a Foreign
Corporation, how is it taxed in the Philippines? What do you look
at?
A:You look at the 3-year Gross income of the Foreign Corporation.
If 50% or more is earned in the Philippines, then whatever the
dividend is, we consider it earned in the Philippines. If it is less
than 50%, it is earned without the Philippines.
Q:So what type of Corporation is considered here?
A:Resident Foreign corporation. If it is a non-resident foreign
corporation, even if you invested in that corporation, the income
Page 18

you earn is automatic sourced without the Philippines. Why?
There could be no operations here in the Philippines. Otherwise, it
could not be considered non-resident foreign corporation.
A:Yes. The situs is in New York , without the Philippines. The

taxpayer is a resident citizen, taxable for income within and
without the Philippines.
Example: Deutsche Bank, a resident foreign corporation,

declared dividends to its stockholders who included Clement, a
Filipino residing in Indonesia. Will the dividend income be subject
to tax if 50% of the earnings of Deutsch bank is earned here in the
Philippines for the last three years? (of course in my exam, I will
only put the numbers and you will have to compute for the 50%)
Is it subject to tax? Yes or no.
A: Yes. First, Sourced within the Philippines. Second, the income
earner is a non-resident citizen taxable for income within. You
have a taxable income here in the Philippines.
Example: Property location in Cebu City. A condominium Unit

owned by John Bee, a Filipino working in Brazil for the world cup.
He stayed in Brazil for a period of 183 days, he earned rent
income for his condo unit in the amount of P100,000. Taxable?
A:Yes. The situs of the income is within the Philippines. The
taxpayer is a non-resident citizen taxable for income within the
Phils.
Q:Will it matter if less than 50%, lets say 49% is earned here in the
Philippines and then it declared dividend income to its
stockholder, Clement, a Filipino residing in Indonesia. Subject to
tax here in the Philippines? Is the income sourced in the
Philippines?
A: No, not taxable. It is sourced without the Philippines.
Q: who is your income earner?
A:A non-resident citizen who is taxable for income sourced within
the Philippines.
Q: What if a dividend is declared to Clement who is a Filipino
residing in Cebu City?
A: Taxable in the Philippines. The income is sourced without the
Philippines but clement is a resident citizen taxed for income
sourced within and without the Philippines.
Re: question on the Revenue Regulation that the threshold must
be If less than 50% automatic outside the Philippines, 50-85%
partly within and partly without and if more than 85% is sourced
without the Philippines but Sir answered that we must adhere to
the Tax Code and not with the Revenue Regulation. For purposes
of the bar, stick to the tax code. The RR should have been an
invalid regulation because it expanded the law.
SERVICE INCOME
Q: What is the basis?
A:Place of performance of the service.
Example: Gwendolyn, a Swedish citizen residing in the Phils
performed services for X corporation. Was a given a service fee of
Php 100,000. Taxable in the Philippines or not? Situs of the
income?
A:Taxable. Situs is here in the Philippines because service is
rendered here in the Philippines. The taxpayer is Gwendolyn, a
resident Alien, taxable for income within the Philippines.
Example: Rhea, a Filipino, living in the Philippines but went
abroad to render a song number in the concert of Lady Gaga in
Japan. She was given the amount of 100,000 yen. Will it be
taxable here in the Phils?
A: Yes, Taxable. The situs of the income is without the Philippines,
in Japan. But the taxpayer is a resident citizen taxable for income
within and without the Philippines.
RENT INCOME
The basis of situs is the location of the property.
Example: The apartment is located in New York owned by a
Filipino, Kristie. Renting it out to American. Kristie is residing in
the Philippines, she is studying law but she earns income abroad.
Will the rent income be taxable in the Philippines.
ROYALTY INCOME
The basis of situs is the place of exercise or utilization; where the
royalty is being used.
Example:Clyde, a famous author of fictional book. The book is
being sold in south Africa for which he earned income of 1M USD.
Clyde is living in Cebu City. Will the Royalty income be subject to
tax here in the Philippines?
A:Yes. Situs-South Africa. Taxpayer-resident Citizen, taxable for
income within and without.
Look at the situs of the income and look at who the taxpayer is.
ITEMS OF GROSS INCOME

Q: What are the items of Gross Income? I suggest you memorize
them.
A: Sec. 32 NIRC:
CGGIRRDAPPP
1. Compensation or services in whatever form paid;
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. Interest Income (you mention income since we have
interest expense)
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and Winnings
10. Pensions
11. Partners distributive share in a general professional
partnership.
COMPENSATION INCOME
Defined
Compensation is defined as a remuneration for services rendered
in an employer-employee relationship.
Example: Employee A is a clerk and he receives monthly salary of
P15,000 (basic pay). There will still be deductions for SSS, HDMF
and Philhealth. But just assume P15,000 is the net monthly
income. Since income tax is a tax on yearly profits, we have to
multiply P15,000 by 12 months. Its P180,000 yearly. Then you
deduct the personal exemptions. For example, P50,000 personal
exemption. So P180,000 minus P50,000 is P130,000. So this is the
amount subject to tax. If youre given monthly salary, you always
multiply by 12.
Form
Compensation income is in whatever form paid.
Q:What if youre given living quarters based on a lease contract?
Page 19

Example: The employer is leasing for and in behalf of the
employee. The rent is P10,000. So in addition to the basic pay,
there is an addition of rent that you freely receive of P10,000. So
the total monthly income is now P25,000. So compensation may
not be in the form of cash.
(6)
Sir: If you are availing of maternity leave and youre receiving

maternity benefits, P30,000 is the maximum maternity benefit that
SSS gives for normal delivery. If your employer gives you P50,000,
how is that supposed to be taxed? You dont tax the P30,000 because
that is exempt (SSS). The remaining P20,000? P10,000 could be
included in the de minimis benefits, which leaves P10,000 which is
taxable.
Q:But what is the value of the non-cash compensation?

A:It should be the fair market value which could come in the form
of gross selling price, zonal value as determined by the BIR, and
the fair market value as determined by the city assessor. While we
term it as assessed value, that is a misnomer because the
assessed value is actually multiplied by the assessment level, but
for brevity, lets just term it as assessed value. So you have gross
selling price, zonal value, or assessed value, whichever is higher.
Q:What if youre given a promissory note?
A:The value should be the face value if it is interest-bearing.
Q:If non-interest-bearing?
A: Discounted value; The face value less the interest thats
supposedly earned. If you will exchange your promissory note
with a particular bank, they will have to deduct your interest. So
the discount is the amount that you pay to the bank. Thats why it
is termed as discounted value. The value that you received
already accounts for the interest since the note is non-interestbearing.
COMPENSATION INCOME EXEMPT FROM INCOME TAX
MINIMUM WAGE EARNER
If you are a minimum wage earner, you will not be subject to tax.
The minimum wage in Cebu is now P327. If youre paid P327 daily
rate, how much is your monthly income? Lets just assume 20
days. Its P6,540. So if youre only earning that much per month,
you will not be subject to income tax. Theres no withholding tax.
What if you worked overtime and your wage reached P8,000? Still
not subject to tax.
How about if I add hazard pay or night shift differential? Still not
subject to tax.
If youre not a minimum wage earner, like your income is P7,000 a
month, theres a disparity. You will now be subject to tax. There
are minimum wage earners gets to take home more income than
people who earn higher than the minimum wage rate.
DE MINIMIS BENEFITS
De minimis benefits are also not subject to tax. What are these?
Benefits of relatively small value to establish goodwill and morale
to your employees, including contentment, efficiency, loyalty. In
other times, small values that would make your employees happy.
Is the enumeration of these benefits exclusive? Yes. RR 5-2011.
All other benefits given by employers which are not included in
the above enumeration shall not be considered as de minimis
benefits, thus shall be subject to income tax as well as withholding
tax on compensation income.
Q:What are these benefits?
(1) Monetized unused vacation leave credits of private
employees not exceeding 10 days
(2) Monetized value of vacation and sick leave of government
employees (no period)
(3) Medical cash allowance to dependents of employees not
exceeding P750 per employee per semester (per 6 months)
or P125 per month
(4) Rice subsidy of P1,500 or 1 sack of 50-kg rice per month
amounting to not more than P1,500
(5) Uniform and clothing allowance not exceeding P4,000 per
annum
Actual medical assistance not exceeding P10,000 per annum

(covers medical and health care needs, annual medical or
executive checkups, maternity assistance, and routine
consultations).
The P20,000 could fall for actual medical assistance. But the limit is
only P10,000 per annnum. The remaining P10,000 is taxable.So you
look at the maximum provided by law, then you look at the de
minimis benefits then the excess will then be taxable.
(7)
(8)
Laundry allowance of 300 per month.

Employees achievement award -10,000 per employee.
Sir: 30,000 worth of gift certificate is not considered as de minimis
benifit becuase under thiss enumeration, the award must be in the
form of tangible property other than cash or gift certificate, hence,
30, 000 is taxable.
(9)
Gift given during xmas and major anniversary celebration

not exceeding 5,000 per employee per year.
Sir: the term to use should be gift not xmas bonus for it may fall
under the 30,000 limit.
(10) Daily meal allowance for overtime work and night or

graveyard shift not exceeding 25% of the basic minimum
wage per region basis.
Sir: - 25% of 327, that is 81.75 meal allowance for the de minimis
benefit.
IF IT FALLS WITHIN THE ENUMERATON AND FALLS WITHIN THE

AMOUNT GIVEN, THEN, NOT SUBJECT TO TAX.
SEPARATION PAY
What if you are paid certain paid certain benefits when you are
separated from your employment, will that be subject to tax? We
know that from the enumeration of exclusions from Gross
Income, you have retirement benefits excluded from the taxes.
Then you have separation pay but these have to comply with
certain conditions before they are exempted from taxes.
Separation pay is not subject to tax if the separation is involuntary
on the part of the employees. This is one condition for separation
pay not to be subjected to tax. Other conditions include physical
disability, sickness or death. If these conditions are complied with
then the separation pay is not subject to taxes.
ALLOWANCE FOR TRANSPORTATION
How about your allowance for transportation? Will it be subject to
income tax? If the allowance for transportation or representation
or RATA, is to be liquidated by the employee and to be spent for
the benefit of the employer, then it is not subject to tax.
Otherwise, we go back to the general rule that it is subject to
taxes.
PERSONAL RETIREMENT ALLOWANCE
Now under the PERA law, or Personal Retirement Allowance, the
employer will set up a fund for employees and may earn income
throughout the years. Will the income under this account which
may earn income throughout the years be subject to tax. Under
Page 20

the PERA law, the income earned from this fund may not be
subject to tax.
FRINGE BENEFITS
Fringe benefits - are benefits granted to managerial and
supervisorial employees.
Managerial v. Supervisory
Managerial employee is one who is vested with powers or
prerogatives to lay down and execute management policies and
or to hire, transfer, suspend, lay-off, recall, discharge, assign or
discipline empoyees.
A supervisory employee is one who effectively recommends such
managerial actions if the exercise of such authority is not merely
routinary or clerical in nature but requires the use of independent
judgment.
Rank and file employee
The residual, meaning, all those who are neither managerial nor
supervisory.
Rates of Fringe Benifit Tax (FBT)
32% - Ordinary employee (citizens, residents aliens and nonresident aliens engaged in trade or business in the Phils.)
25% - Non-resident alien not engaged in TRB
15% - individuals employed (alien/filipino) in technical/managerial
positions of the regional or area regional operating headquarters
of multinational companies, offshore banking units of a foreign
bank established in the phils, foreign service contractors or
subcontractors engaged in petroleum operations.
Grossed-up Monetary Value
It is important to know the tax rates because they are the basis of
the Grossed Mark-up Value ( GMV).
FBT is on the GMV. GMV= monetary value of FB/1-tax rate.
We sort of infer that what is received by the
managerial/supervisory employee is already the net of FB that is
why it should be grossed-up because it is the employer that
should shoulder the FBT.
Ex. 68,000 is the FB. How much is the amount you will use to
compute the FBT? 100,000 but you are not entitled to 100,000,
you are just entitled to 68,000. You get 100,000 by dividing 68,000
with 68%.
Illustration:
FB
68,000
GMV
100,000 (FB/.68 = 68,000/.68)
FBT
32000 (GMV FB =
Vehicle of any kind

Household personnel, such as maid, driver and others
Interest on loans at less than the market rate to the extent
of the difference between the market rate and the actual
rate given
(6) Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic club or
other similar organization
(7) Expenses for foreign travel
(8) Holiday and vacation expenses
(9) Educational assistance to the employee or his dependents,
and
(10) Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
NON TAXABLE FRINGE BENEFITS
(1) Those which are authorized and exempted from income tax
under NIRC or special law
(2) Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization
benefit plans.
(3) Benefits given to rank and file employees w/n granted under
a CBA
(4) De minimis benefits
(5) If required by nature of or necessary to the trade, business
or profession of the employer
(6) If it is for the convenience or advantage of the employer.
Note: Though the following are exempted from FBT, they may still
be subjected to other tax. Ex. De minimis exceeds the amount
allowable.
RULES IN VALUATION OF FRINGE BENEFIT TAX
(1) If money, the value is the monetary value that is granted or
paid.
(2) If property other than money and ownership is transfered
to the employee - FMV whether the Zonal value as
determined by BIR or Assessed value whichever is higher
(3) If property other than money but ownership is NOT
transferred - Depreciation value of the property. Ex.
Microphone worth 120,000 that is god for 1 year. When I let
you enjoy the microphone without transferring the
ownership for 1 month. 120,000 divided by 12 months so
10,000/mo depreciation value. It is just the depreciation
value to be considered since you are presumed to have
caused the depreciation of the property when you are using
it.
FRINGE BENEFITS SUBJECT TO TAX
HOUSING
Q: If the employer leases a residential property for the use of his
employee.
Note: The employer is allowed to deduct in its taxable income the

entire amount of GMV - that is the amount of the FB plus the
amount of FBT.
FB is not included in the Gross income of the M/S employee that
is subjected to the 5%-32% dumping ground computation. FB is
already subjected to final withholding tax.
TAXABLE FRINGE BENEFITS (HEV-HIM-EHEL/give
hell)Computation differs on the item of FB
(1) Housing
(2) Expense acount
(3)
(4)
(5)
him
A: The value of the benefit shall be equivalent to the amount of

the rental paid by the employer as evidenced by the leased
contract. As mentioned, this will be the monetary value.
However, the regulation provides that only 50% will be
considered as monetary value for purposes of computing the
fringe benefit tax.
Again, this only applies to housing, only applies if the employer
leases the house for the benefit of the employee.
Page 21

Example: If 10k per month, how much should be the monetary
value that we should compute?
A: Assuming ordinary employee, so 10,000 x 50%, because only 50%
if the employer leases the property
You will realize later on that every time that the employer is not
the owner, only 50% will be recognized. As for the reason why,
the regulations does not provide. But it assumes that 50% is said
to be benefited by the employer.
Because the employer is sort of benefited (diba supposedly, you
dont subject to FBT if its for the benefit of the employer?) so
50%, thats what the revenue regulation provides. Since 50% is
said to be for the benefit of the employer, only 50% will be
subject to FBT. Because the employee is also benefited.
In this case, [(10,000 x 50%) /1 Tax Rate]. How much is the
answer? How much is the grossed-up monetary value? 7,352.94.
That is the grossed-up monetary value. In the question how much
is the fringe benefit tax, how much is it? what do you do? You
multiply this rate with the tax rate of 32%. And that will be
equivalent to how much? 2,352.94. this is now your FBT. Because
the fringe benefit tax is equal to grossed-up monetary value
multiplied by tax rate.
And then we said you have to gross it up before you can compute
the fringe benefit tax, so we gross it up. How much was our
answer? 7352.94, how is it computed? So 5000 divided by 68%.
Why 68%? Cause of the formula. We compute the monetary value
50% of 10,000, 1 minus the tax rate we said he was an ordinary
employee, so 32%, so 68% diri (1 32% so 68%). So thats your
answer, this is your grossed up monetary value.
When you compute for your FBT, its grossed up monetary value
(GMV) x tax rate. So this is now your computation your GMV x
32%, that is your FBT. If ganahan mo madali, its as simple as GMV
Monetary Value (MV). Just the same, well get the same answer.
Mao na, 7352.94 MV of 5,000. Well still end up with the same
answer nga 2352.94. para di namo kinahanglan nga mu multiply
ug 32% if ever. Okay?
Q: What if the property is owned by the employer and he let the
employee use the property? How do you account for the
monetary value?
A: Should be equivalent to 5% of the market value of the land
and the improvement declared in the real property tax
declaration or zonal value thereof, whichever is higher.
Again, ang basis is FMV which is zonal value or assessed value,
whichever is higher. That is always the basis if there is real
property involved.
So lets assume the property is worth P1M being used by the

employee. How are you supposed to get the market value? what
is our basis? We said that it should be 5%. What is actually the 5%?
It represents the depreciation. (sort of the depreciation value,
because land does not depreciate. But thats what the regulation
provides).
How much is 5% of P1M? 50,000.00. however, again, kai sort of
the employer is also benefited, you multiply by 50%. And then we
divide it by [1-32%]. How much is the GMV then? So [25,000.00 /
68%] = 36,764.71.
Q:How much is the FBT?
A: Equal to 11,764.71. that is your fringe benefit tax (for property
owned by the employer)
Q: Now, what if it is paid by installments? And then it is allowed

to be used by the employee? But the title, of course, will not be
transferred to the employee. It will still be with the employer,
but gibayran rana niya by installment. So sort of mura rana siya
nag lease, but its rent to own daw. Ma own siya by the
employer at the end of the contract period. How are you
supposed to compute for the monetary value?
So again, it should be the 5% of the acquisition cost of the
property and monetary value shall be 50% of the value of the
benefit.So it doesnt matter whether its by installment. The
reason is because the title still remains with the employer.
Q: What if the employer will transfer ownership to the employee?
How will it differ this time?
A: It should be the full value of the acquisition cost or the zonal
value as the determined by the BIR, whichever is higher.
In other words, its still the fair market value. But because its
newly bought, you will have to look at the gross selling price. So
the GSP, the FMV determined by the BIR, or the city assessor,
whichever is higher.
The term is, actually, acquisition cost or zonal value, whichever is
higher. So, in that case, for example, its worth P1M, thats the
acquisition cost. The zonal value is P900k, how much is the MV?
Monetary value is P1M because it is whichever is higher.
So [P1M / 68%] then you get whatever is the GMV, multiply it by
32%. That is your FBT. How much is that? Times 32%, thats
470,588.25. so for tax purposes, you truncate the decimal, you
dont account for the centavos anymore unless its .5. and then
you add 1, rule of rounding off.
So in this case, for example lang, again unsay difference ani? The
property is owned by the employer. Take note of the difference
ha. Kato ganina, gi rentahan lang sa employer. This time, owned
by the employer. Lets assume that the property is worth P1M,
kani class, unsa maning FBT? Good only for how many months?
MOTOR VEHICLE
If the employer purchases the motor vehicle in the name of the
employee, the acquisition cost is considered the monetary value.
So what is the monetary value if the motor vehicle is worth P1M?
just the same, diba?
The same process! Basta what is important, is you must know
what is the monetary value.
Good only for 1 month, diba? Kai 10,000 monthly man to. Dapat imultiply pana nimog 12 kung ganahan ka makibaw kung pila ang
yearly FBT. Kani, automatic nani siya annual. 5% mana atong
automatic.
Again, for purchases of motor vehicle in the name of the

employee, it shall be the acquisition cost.
Q: Do you multiply it 50%?
A: DILI kai you transfer the title to the employee.
Page 22
Q: If the employer pays for the car on installment basis and the
ownership is placed in the name of the employee, what is the
monetary value?
A: Still acquisition cost. But divided by 5 years. (monetary value)
Why 5 years? Because you now account for the depreciation cost
kai on installment man ang pag bayad.
Example: if 100k per year, good for 5 years. So 500k ang total
acquisition cost. How much is the monetary value?
A: So it should be [500k / 5 years] = 100k.
Q: What if instead if the employer gave you cash? Instead of the
employer buying the car?
A: It should be the value of the cash. The value of the cash is
considered as the monetary value.
Q: What if the employer owns and maintains a fleet of motor
vehicle and the employee gets to use it? what is the monetary
value?
A: Acquisition cost divided by 5 years. So pariha ra sa installment.
But only for vehicles not used for sales.
Meaning nag maintain kog motor vehicle tanan, lets say 10. 7 of
which are used by salesmen. Tag P1M each ang motor vehicle.
How much of that will consider as fringe benefit to my employees?
It should only be the other 3 for non-sales. Ayaw i-apil ang mga
motor vehicle nga gi gamit for sales.
Q: Why do you not consider them?
A: Because its for the convenience of the employer. Its used for
the business of the employer. Its not a fringe benefit on the part
of the employee.
Katung wala gigamit for sales, you will consider it as part for the
benefit of the employee if they get to use it. but you have to
account though, for the property nga gigamit lang sa imohang
employee. Its important that you know it. (only account for
vehicles NOT used for sales, delivery, service, etc.)
So acquisition cost divided by 5 years. But because the title is not
transferred to the employee, pila? 50% lang ang i-account.
Example: 1 million divided by 5, 200k multiplied by 50%, only
100k is considered as monetary value for motor vehicles.
Q: What if its a yacht? Whether owned or leased.
A: It should be the depreciation value of the yacht. Value of the
yacht divided by 20 years. That is considered as the monetary
value.
FOREIGN BUSINESS TRAVEL

This is part of the expenses class. Expense account. Expenses for
foreign travel.
Q: If its a first class plane ticket, how much is considered as
fringe benefit?
A: 30%, whether youre going to a convention or going to a
business trip. Because diba supposedly, if its for the benefit of the
employer youre not subject to FBT unta diba? But it only applies
man kuno to economy and business class lang.
If first class ang gi bayran sa employer on your behalf, 50% of that

is considered as fringe benefit
Example: so if the worth of your ticket is 100k, how much is the
fringe benefit?
A: 30%, or 30k. that is your monetary value. Again divided by [132% = GMV] multiply it by 32%, that is your fringe benefit tax.
Q: How about if gi bayran apil imong family?
A: Of course the entire cost of your familys expense. Regardless
whether its first class or not. Because its for your family na. So
that means extra nagyud na nga benefit diba? So all of that
amount is considered fringe benefit.
EXPENSE ACCOUNT
If its expense account, of course, its understandable that the
monetary value will be equivalent to the value of the expense
that is totally paid by the employer.
However, if the expenses will have to be liquidated, will it be
included in the fringe benefit of the employee? You dont. that is
considered an expense in relation or pursuant to the business of
your employer.
Example: Ni adto ka sa Lapu-Lapu because you will have to follow
up on something with the local government there, you incurred a
total transportation expense of P300, then you are asked to
liquidate it. will the P300 be considered a fringe benefit on the
part of the employee?
A: Of course not, klaro kaayo na siya nga expense on the part of
the employer.
LOANS EXTENDED BY EMPLOYERS
Q: What do you have to be mindful about loans extended by
employers?
A: The interest.
If the loan does not mention of an interest, whatever is the
supposed interest will be considered as the monetary value of the
benefit. As a rule, its the legal rate of 12%.
Example: So if P1M is the loan granted to you by your employer,
and you were not asked to pay interest, how much is your annual
fringe benefit there?
A: It will be equivalent to 12% of P1M, which is 120k.So [(120k /
68%) x 32%)]
Q: What if you were charged an interest of 5%? How much is
considered as a fringe benefit?
A: The difference between 12% and 5%. That is 7%
Again, if its loan, you look at the interest. You should be mindful
of the interest and the legal rate of 12%. So again, if theres no
interest, automatic 12%. If there is an interest, then you deduct
from the 12%, whatever is the difference between the 12% and
the lower interest will be considered fringe benefit.
Q: What if its more than 12%?
A: Then theres no fringe benefit. Alkansi na gani ta. Theres no
fringe benefit to speak of if its higher than the legal rate.
EDUCATIONAL SUPPORT
Page 23

General Rule: the cost of educational assistance to the employee
which is borne by the employer shall be considered as taxable
fringe benefit.
Exception: If the employee is granted a scholarship by the
employer for an education or study which is related or directly
connected to the business of the employer.
(1) Granted a scholarship
(2) Must be for a course directly connected to the
business of the employer
(3) there must be a written contract between employer
and employee that the employee is supposed to
remain in the employ of the employer for the
particular period
in other words, theres a tie up
FBT; WHEN PAYABLE

Required to be paid on a quarterly basis. And then every 25th day
from the close of the quarter when the withholding was made.
So if January march, when ang payment? April 25.
April june, july 25. So on and so forth.
In other words, 25th day following the close of the taxable quarter
when the withholding was made.
NOTE: Fringe benefit only applies to managerial and supervisory
employees so that if you give benefits akin to fringe benefits to
your rank and file employees, they are not subject to fringe
benefit tax but the dumping ground computation. We defined the
dumping ground computation as the 5-32%.
So those are the requisites for it to be considered NOT subject to

FBT. But that only accounts for the employee.
Q: What if its the dependent of the employee? When is it not
subject to FBT?
A: If the assistance was made through a competitive scheme for
purposes of availing of the scholarship
Example: So ani ha, kamo tanan empleyado nako, naghatag ko ug
scholarship to Harvard. Naa kay anak, ganahan ka makakuha ug
scholarship. When is it considered fringe benefit tax?
General Rule: fringe benefit gyud na kung imong anak maka avail.
Automatic, akong ihatag sa inyong mga anak. Kamo tanan.
Exception: It will not be a fringe benefit if I will select through a
competitive scheme.
Example: there will be an exam before the child gets to qualify. So
dependent ang term. You will be the standout. Basta competitive
scheme. It does not mention what competitive scheme but it has
to be a competitive scheme.
PROFESSIONAL INCOME
Lets go to another type of income: Professional Income which is
derived from the exercise of a profession so whether you are an
individual professional or a general professional partnership, you
are taxed the same way. Whatever income earned from the
practice of your profession, you will be subject to tax. Its just that
GPPs are required to report to the BIR the activities and the
income that they earn. But the GPP is not subject to tax, it is just a
pass-through entity. It is still the individual professional partner
who is subject to tax. There is a separate item for GPP, the
partners distributive share.
INCOME FROM BUSINESS
Income from business you must be engaged in a trade, either as
a sole proprietor, partnership, or corporation. Whatever income
earned from any of these entities, will be subject to tax. If sole
proprietorship, dumping ground computation applies. If
partnership or corporation, tax on corporation applies, which is in
general 30%.
So thats when its not subject to fringe benefit tax (competitive

scheme)
INCOME FROM DEALINGS IN PROPERTY

There are 3 classifications when discussing income from dealings
in property.
INSURANCE
Q: When is this considered fringe benefit?
So going back, for purposes of classification of Assets, there is the

Ordinary and the Capital.
General Rule: As a rule, the cost of life or health insurance and

other non-life insurance premium paid for by the employer for
the benefit of the employee shall be considered taxable fringe
benefits. (taxable)
ORDINARY ASSETS
Ordinary assets are the assets used in the taxpayers business
thats the general definition, except that in the Tax Code, it gives a
negative enumeration. So that if it does not fall in any of the
enumeration, it is not considered an ordinary asset.
Exception: However, the cost of life insurance or health insurance

borne by the employer if paid under SSS or GSIS or similar
contributions arising from the provisions of any existing law is
NOT taxable. (not taxable)
Kai government man, thats the reason why its not taxable.
Automatic mana diba? Nga ang employer muhatag ug
contribution?
Another instance when it is not taxable is when the premium is
borne by the employer for a group insurance of the employees.
NOT subject to fringe benefit tax. Dapat group. (not taxable)
Thats all the discussion for fringe benefits that you will have to
remember.
Q: So what is the enumeration of ordinary assets?

(1) Stock in trade or inventoried assets, meaning, the
products that you sell which are considered your
inventories. So for example, you are in the
merchandising business selling canned goods so these
canned goods are considered your stock in trade,
considered ordinary assets.
(2) Then you have assets ordinarily held for sale. There is
a thin line separating stock in trade and those held for
sale. But if you are engaged in real estate business, the
assets that are held for sale are the real properties,
you cannot consider them your inventories, but they
are assets held for sale by real estate dealers of
developers. The land that you are selling are ordinary
Page 24
(3)
(4)
assets whereas for any other type of business, they are

considered capital assets. So it depends on what type
of business you are engaged in.
Then you have assets used in business subject to
depreciation. Examples are furnitures, fixtures, and
machineries. These are usually personal properties.
Furniture in your house is not considered as an
ordinary asset since these are not used in your
business. So if you have a car registered under your
name and you have a sales business, it is still not
considered an ordinary asset because it is registered
under your name even if you use it for your business.
But in the same way, if the car is registered under your
business, and you use it for personal purposes, it will
still be considered an ordinary asset. So look at under
whose name it is registered, for purposes of
administration.
And lastly, you have your real property used in
business. For example, the land where your principal
place of business is located. That is considered an
ordinary asset. So if you sell it, it will be subject to
regular income tax, not capital gain tax.
CAPITAL ASSETS
If the assets do not fall under any of those enumerated, then they
are considered as Capital assets. Mind you, there may be certain
assets that does not necessarily fall under any of the enumeration
but is still considered an ordinary asset like Accounts Receivable.
If you sell these and discount it, it will still be considered as an
ordinary asset because it is related to your business.
Going back to the 3 classifications of dealings in property for
Capital Asset and for purposes of Taxation.
(1) Real Property,
(2) Shares of Stock, and
(3) Other Capital Assets.
REAL PROPERTY
Q:So, if you earn income out of your transfer, sale, conveyance
out of the sale of your real property? What is the tax that should
be applied?
A: You apply the Capital Gains Tax equal to 6% based on Gross
Selling Price or Fair Market Value, whichever is higher. Then you
go back to Section 6 of NIRC which says that if it involves fair
market value of real property, you use the zonal value or the
assessed value. Again, we are using assessed value loosely.
The assessed value we are talking about here is not the one
referred to in the Local Government Code but the assessed value
as determined by your assessor. There is said to be a presumed
gain, so even if you sell your property less than how much you
acquired it for, it is still subject to income tax because of the
presumption of gain.
A: You have 5% and then 10%. 5% for the first 100K and 10% for
the excess, based on net capital gains.
A: So that if your shares of stock is bought at 100K and is sold at
200K, how much is your tax?
A: Take note that the base is net capital gains, unlike land which is
subject to presumed gain. Hence, in actual gain, you look at the
difference between gross selling price and the cost of stock and
the answer is the tax base. The cost is the amount that you paid
for the stock. BIR Circular RR 6-2008 tells us that the cost basis of
your shares of stock is the fair market value which is always the
book value.
The book value is important because if you sell your stocks at less
the book value, it will be subject to donors tax.
So these
stocks:
(1)
(2)
(3)
(4)
are what you look for when you sell your shares of
first, you look at your gross selling price,
then you determine the cost
and then determine the book value.
Then you determine the capital gains tax.
So based on the example, you have 100K as cost, 200K as gross

selling price. The difference is 100K. Since the first 100K is subject
to 5%, your capital gains tax would be 5K.
Q: But what if your book value of the shares is 250K? What
happens to the 50K difference of your selling price and your book
value?
A: The 50K will be considered a donation. And in donations to
strangers, the tax rate is an automatic 30%.
The BIR made it even more difficult. Ordinarily, to get the book
value, it is just equity divided by the number of shares
outstanding.
Example: Equity is worth 1M and outstanding shares are 1M, how
much is your book value? P1.00.
But it became difficult since April 2012 when the BIR issued RR62012, where if the corporation has real properties, it will have to
appraise these real properties to come up with the book value of
its shares. So there is now a net adjusted value method under this
regulation.
If the Corporation owns real property, you just dont compute the
BOOK VALUE (Equity/Weighted Average Common Shares
Outstanding). You will have to determine first how much the
appraised value of the real property, before you compute for the
book value.
If property being sold is a HOUSE AND LOT what do you look at

as tax?
6% of Gross Selling Price or FMV whichever is higher.
Example:
In the Books of the Corporation:
Land Php 1M (you record your property based on cost; so you
bought it at this price)
10 years after you sell shares of stock, so you want to determine
how much is the appraised value of land, it turns out that now it
now worth Php 2M. You will have to adjust because of the change
of the value of your real property.
SHARES OF STOCK
Q: How do we subject it to income tax?
ADJUSTED BOOK VALUE= Php 2.00

1M + 1M (adjusted value of the real property)
1M
Reason: Real property assets appreciate so even if there is a

legitimate business purpose for selling it less than what it cost, it
will still be considered as sold for an income.
Page 25

Thinking that your book value is only 1M, you would sell your
stocks at Php 1.5 so that you could minimize taxes, but because
the adjusted book value is Php 2.00, the difference constitutes as
a DONATION of Php .5.
If property is shares of stocks?
The stocks referred to here is not listed or traded in the local
stock exchange. So that if its traded in the Local Stock Exchange,
the rate is of 1% not capital gains tax but Stock Transaction Tax.
If property being sold is JEWELRY:

Classified as other capital asset. You look at the HOLDING
PERIOD.
Does it matter if the seller is a Corporation?
Yes. The net capital loss carry over and the holding period do not
apply.
Where do you base the Stock Transaction Tax?

On the Gross Selling Price.
E.g For the month of January, you sold shares of stocks and gained
an amount of 100, 000 (Net Capital Gains) . When are you
supposed to pay the tax? 30 days after the transaction. How much
is the Capital Gains paid then in the month of February? 5,000.
TAX. 5% of 100,000.
If property being sold is a REFRIGERATOR? What do you look at?

You look at Other Capital Assets.
What if in the month of March you have a Capital gains of

100,000 how much is the tax?
10,000 which will be paid in April.
Dumping Ground Computation if you are a corporation you will

be subjected to 30% and if an individual, then 5 to 32 %
(Therefore, the ordinary income tax applies)
Why 10,000?
Because the capital gains for shares of stocks is supposed to be
cumulative.
Net Capital Loss Carry Over

If any taxpayer, other than a corporation, sustains in any taxable
year a net capital loss, such loss (in an amount not in excess of the
net income for such year) shall be treated in the succeeding
taxable year as a loss from the sale or exchange of a capital asset
held for not more than 12 months
How is it computed? How much is your Capital Gains as of the

month of March?
It now totals 200,000 so when we compute the tax, ho much is
our rate? 5% for the first 100,000. For the excess, 10%. So for the
first 100,000, 5% is 5000. For the excess it is 10% so thats why
you pay 10,000 for the month of April.
RULES IN DEALINGS WITH PROPERTY

Capital Loss Limitation Rule Loss can only be recognized to the
extent of its capital gains. So if there are no capital gains then
there is no capital loss to be deducted.
Example:
What if on the month of May you again sold shares of stocks, its
100,000 net capital gains. How much is your tax to be paid on
the month of June?
Your Capital Gains is now 300, 000. This taxed 5% on the first
100,000. So 5,000. And 10% on the excess which is 200, 000.
20,000. So total tax payable is 25, 000. But in Feb, 5000 was
already paid. In April, 10, 000 was paid. You only deduct the
payments already made. So the total tax payment will now be 15,
000.
In June and July you again sold another shares for which you
gained 100, 000 more. How much tax is to be paid in August?
Compute. Total gains is 400, 000. Again, 5% for the first 100, 000 =
5,000. For the excess, 10% of 300,000 is 30,000. Total tax is 35,
000. Total tax payments made is 25, 000. So 10,000 will be paid in
August.
What if 300,000 was your Net Capital Gains in September. How
much are you supposed to pay in October?
The total is now 700,000. Compute. First 100k, 5k. For the excess
60k so total of 65k. Payments made amount to 35000. So you pay
30,000 in October.
TAKE NOTE: IF CAPITAL GAINS FROM SHARES OF STOCKS, it is
CUMULATIVE throughout the 12 mo. period. In other words, it is
good for one taxable period only.
BAR and TN: Remember what the rule says.
OTHER CAPITAL ASSET
If you have furniture and Fixtures and you want to sell them.
Q: How are you supposed to tax these pieces of furniture?
A: Using the dumping ground computation. Which takes into
consideration your capital loss limitation rule.
Page 26
Cost of Furniture
Selling Price
Capital Gain (Loss)
2013
SITUATION A
1,000,000.00
500,000.00
(500,000.00)
2014
1,000,000.00
2,000,000.00
1,000,000.00
if held for one year

Capital Loss for
2013- 500,000.00
if held for 3 years
Capital Loss for
2013- 250,000.00
How much can
you carry over?
NOCOLCO
TN: only up to the
extent of the Net
Taxable Income
on the year such
Capital Loss was
incurred
Net Capital Gain
(Loss)
How much will be
deduct for the
year?
Net
Taxable
Income
Total Net Taxable
Income
Rate
Net
taxable
Income
How much can
you carry over?
NOCOLCO
(300,000.00)
BAR: this can be a possible problem for income tax (dealings in

property)
TN: Net Capital Loss Carry Over only applies to individuals
Another limitation is even if it is 100%, you can not carry over
more than the net income before taxes in the year that it was
incurred.
How much can you carry over?
TN: only up to the extent of the Net Taxable Income on the year
such Capital Loss was incurred
700,000.00
We dont recognize
because there is no
capital gains
300,000.00
2,000,000.00
2,700,000.00
5-32 %
SITUATION B
600,000.00
500,000.00
the
Maximum,
because you did not
exceed your taxable
income of last year.
500,000.00
Net Capital Gain

(Loss)
Total Net Taxable
Income
Capital Gain (Loss)

Net
taxable
Income
How much can
you carry over?
NOCOLCO
Net Capital Gain
(Loss)
Total Net Taxable
Income
What if the business is sole proprietorship, what is the rule now?

You get to carry over the loss and then youre supposed to treat it
as if it is held for just one year.
What is it important that you know about this holding period?
Because it determines the percentage youre supposed to
recognized, If the holding period is:
Good for 1 year 100 percent of the Capital Gain or Loss
More than 1 year- 50 percent of the Capital Gain or Loss
TN: The property is as if it is held for only one year. Example: on
the fifth year recognized 250,000.00. On the sixth, you dont
divide the amount, it is still 250,000.00
This is important for purposes of the net capital loss carry over
What if 2015, the same situation. How much do you carry over in
2015?
You dont carry over anything because there is no capital
gain/capital loss from last year. This came from 2013 but the carry
over is only for 1 year.
EG. 50, 000 Cap Gains this year. So the net capital loss is 100,000.
So what do you do here? How much do you recognize?
Again, go back to the Capital Loss Limitation Rule. You recognize
only to the extent of the gain.
Q: Asset sold for 2013 is held for more than 1 year., lets say 2
years. The asset sold in 2014 was also held for more than 1 year,
lets say 3 years. How much do you recognize as capital loss for
2013? 250,000. But when you carry it over next year, how much
do you carry over?
A: The net capital loss carry over is only 100,000. This cap
gain/loss was good for asset held for 3 years. How much do you
recognize as cap gain? 250,000- cap gain for 2014. Then you have
a net cap loss of 100, 000- how much is the net cap gain then?
Its 150,000. Always recognize the net cap loss carry over as 100%
of how much it was in the year it was incurred.
2,500,000.00
To make it simple, you recognize 100% of gain or loss when you
carry it over.
(250,000.00)
600,000.00
1,000,000.00
Q: If its a gain, will it matter?

A: No., because you only carry over the loss.
(250,000.00)
EXEMPTION FROM CAPITAL GAINS TAX

IF what is being sold is a PRINCIPAL RESIDENCE:
a. Make use of proceeds within a period of 18 mos.
b. Inform the BIR Commissioner within 30 days after the
transaction
c. Enter into an escrow agreement with the BIR. Deposit with the
bank the proceeds equivalent to the Cap Gains Tax supposedly to
be paid.
If 18 mos has elapsed and you are able to make use of the
proceeds, you can get back the Cap Gains Tax held in Escrow. If
you were not able to make use of proceeds, BIR will get the fund
held in escrow.
750,000.00
2,750,000.00
Under 2013, can you deduct the Capital Loss to your Income?
No, because youre supposed to recognize the loss only to the
extent of the gain (Capital Loss Limitation Rule).
Page 27

INTEREST INCOME
This is passive so this does not apply to tax then. Because for tax,
interest income is not a passive income, it i s an ordinary income.
So what if you lease your money in a time deposit and it earns
interest of P100,000, how much is your tax?
General Rule = 20% so that means P20,000 RC, RA, NRC, NRAETB
NRA-NETB = 25%
Domestic corporation = 20%
Resident foreign corporation = 20%
Non-resident foreign corporation = 30%
Q: What if interest income is not earned through a bank deposit
but earned through ordinary transaction like a loan, how are you
supposed to tax that income? Mr. A loaned money to Mr. B in the
amount of P100,000 with interest equivalent to 10%. After one
year, the interest is P10,000. How is this taxed?
A: Not Final tax of 20% since it is not a passive income. The
passive income mentioned in the Tax code only refer to bank
deposit. So this will be considered active income now, subject to
dumping ground computation.
supposedly, the tax rate is 20% for dividends, i-spare ang 15% lang.
Before it used to be 35%, what was spared was 20%.
What if the resident foreign corporation issues dividends to
domestic corporation, how much is the tax rate? Is that a passive
income? Does a domestic corporation earn dividend income?
What is the tax rate of domestic corporation earning dividend
income?
It is not exempt. This time declared by foreign corporation so
considered not a passive income, subject to ordinary tax rate of
30%.
Resident foreign to resident foreign 30%. Resident foreign to nonresident foreign corporation, no situs. Non-resident foreign
corporation to domestic corporation, 30% , because domestic
corporation is taxed for income both within and without. For nonresident foreign corporation to resident foreign corporation, we
dont care, its without, so much more for this one (referring to
NRFC declaring dividends to NRFC).
Issuing
Q: What if deposit substitute, how much is the tax rate?
A: Its 20 % Final withholding tax, so considered passive income.
Q: How is it considered a deposit substitute?
A:There should be at least 20 lenders for it to be considered a
The 19 lender rule: anything in excess of 19 will be considered a
deposit substitute.
For a deposit substitute the tax rate is 20% FWT. If not deposit
substitute, 20% but CWT.
Q: What if part of the top 10,000 corporations, what is the tax
rate?
A: 2% CWT. If you want to know more about it, read RR 14-2012.
RMC 64-2012, 81 and 82. But for purposes of my exam and the
bar exam, just take note that for deposit substitute, 20% FWT; if
not deposit substitute, 20%CWT.
DIVIDEND INCOME
CASH DIVIDEND
RC = 10%
NRC, RA, NRA-ETB= 20%
NRA-NETB = 25%.
Domestic corporation receiving cash dividends from another
domestic corporation is tax exempt
A resident foreign corporation receiving dividend income from a
domestic corporation considered exempt still.
Non-resident foreign corporation receiving cash dividends from a
domestic corporation, it depends: Tax Sparing Rule: 15% or 30%
depending on reciprocity.
Intercompany Dividends
If a domestic corporation declares cash dividends to another
domestic corporation, it is exempt
A domestic corporation declares cash dividends to a resident
foreign corporation, still exempt
Domestic corporation declares cash dividends to a non-resident
foreign corporation, tax sparing rule applies, its either 15% or
30%, depending on reciprocity. So part of the tax is spared. Kay
DC
DC
Exempt
RFC
NRFC
30%
30%
Recipients
RFC
Exempt
30%
/
NRFC
15% or 30% Tax
Sparing Rule
/
/
Does it apply to property dividend?

Yes. It is both for cash and property dividends. So the
same rule applies. Thats intercompany.
PROPERTY DIVIDEND
Earned by resident citizen, 10%.
By a Non-resident citizen 10%. (RA 9337)
By a resident alien 10%.
By a non-resident alien engaged in trade or business 20%.
By a non-resident alien not-engaged in trade or business 25%.
NIRC
SEC. 127. Tax on Sale, Barter or Exchange of Shares of
Stock Listed and Traded through the Local Stock Exchange
or through Initial Public Offering. (A) Tax on Sale, Barter or Exchange of Shares of Stock
Listed and Traded through the Local Stock
Exchange. - There shall be levied, assessed and
collected on every sale, barter, exchange, or other
disposition of shares of stock listed and traded
through the local stock exchange other than the sale
by a dealer in securities, a tax at the rate of one-half
of one percent (1/2 of 1%) of the gross selling price
or gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed which
shall be paid by the seller or transferor.
so if gross selling price. FMV applies if what is exchanged is a
property,
STOCK DIVIDENDS
GR: stock dividend is not subject to taxes.
Exc:
(1) If out of the declaration of stock dividends, it changes the
proportionate interest of the stockholders. This happens if some
will not accept the stock dividends while others did accept.
A - 50
B - 30
C 20
Changes in proportionate equity interest
Page 28

A 49
B - 30
C- 21
But it seldom happens since stock dividends is uniformly applied.
So it is not supposed to change any proportionate equity interest.
There must have been some circumvention in the rule which led
to the changes in proportionate equity interest.
(2)Stock dividends are later on redeemed or cancelled.
what is important here is the period involved within which the
stock dividends were redeemed or cancelled. So that after few
months, you declared stock dividends, then later on you redeem
them or cancel them by the act of the corporation declaring that
all stock dividends are cancelled, or all stock dividends are
hereby redeemed. Then all of the stockholders would agree and
they will receive cash. So that is why it is taxable as the
stockholders were able to receive cash. Otherwise, it will easily be
circumvented by the stockholders. First they will be declared
stock dividends, then they will have it redeemed or cancelled.
LIQUIDATING DIVIDENDS
It is not supposed to be a dividend. It is supposed to be
a return of your capital plus income so there is a return
of investment.
There must have been liquidation. under the tax code
it is supposed to be Full liquidation or dissolution
In practice it could apply to partial liquidation or
dissolution
So if ever you declare liquidating dividends, it is taxed
under the dumping ground computation (5%-32%) not
a passive income anymore, it is an active income. A
return of capital.
The term liquidating is actually a misnomer. It is not
supposed to be a dividend but a return of the capital
plus income. So theres a return of investment.
Example:
You initially invested P 1 Million in the shares of stock of a
corporation which has a waiting asset, usually those engaged in
mineral assets. Later on the corporation has expended all
resources so that it cannot anymore extract minerals from its
property so it has to close. But prior to the closure, it has been
giving liquidating dividends. As time passes by, your shares lessen.
If P 1, 000, 000 before, the liquidating dividends is now P 800, 000.
P200, 000 has already been returned to you. Let us assume that
the corporation closes and distributes assets to each shareholder
in the amount of P 2, 000, 000 each, how much income do you
recognize? How is it taxed?
Answer:
You recognize P 1, 000, 000. It will be taxed as a liquidating
dividend subject to your ordinary income tax rate of 5-32%. It is
not a passive income. It is already a return of your investment.
In most cases what is being declared is not cash, it is property.
Example:
If the corporation gives you part of the land, this may be
considered as liquidating dividends.
ROYALTY INCOME
Q: what are the types of royalty income and how are they
supposed to be taxed?
A: Two types of royalty income
1) Active this is the income for the continued
services given by the corporation.
Tax Rate: 5-32% ordinary income if individual

30% if corporation.
Example: Franchise.
You have Jollibee, it franchises to a certain individual. Then part of
the earnings received by this individual for using the name of
Jollibee, will be given to the original owner of the franchise.
2)
Passive the mere use of intellectual property.

Books, musical composition and literary writing.
Tax Rate: Resident Citizen, Non-resident citizen,
Resident Alien, Non-resident Alien ETB
10% Passive income tax.
20% if other than copyright, like
patent.
Non-resident Alien NETB
25% Passive income tax
(Same rate for Corporations)

Example: Publisher of a Book, song writer, musician.
RENTAL INCOME
Not a passive income but an active income supposedly.
Q: Where do you subject your rental income?
A: There is a withholding tax for your rental income, 5%. It applies
to all types of rental income specifically operating lease.
If it is a finance lease, which comes in the form of a sale, you dont
apple the tax rate for your income, it may be considered as your
capital gain which is a sale by installment.
If it is an operating lease, it is an ordinary income, 5-32% but
subject to creditable withholding tax of 5%. There is not final tax,
it is not a passive income.
TAX RATES
1) Cinematographic films 25%
2) Lease of Vessel to Philippine National 4.5%
3) Lease of an Aircraft 7.5%
TAX TREATMENT OF LEASEHOLD IMPROVEMENT BY THE LESSEE
Q: You are renting out a piece of land, and the lessee built a
building there. It is stated in your contract that at the end of your
lease term, the building will belong to the lessor. How will
recognize the improvement?
A: Two methods of recognizing the leasehold improvement by
lessee.
(1) Outright method - lessor shall report as income FMV of the
buildings or improvements subject to the lease in the year of
completion
(2)
Spread out method- lessor shall spread over the remaining

term of the lease the estimated depreciated (book) value of
such buildings or improvements at the termination of the
lease, and reports as income for each remaining termof the
lease an aliquot part thereof. ->estimated BV at the end of
the lease contract/ remaining lease term = Income per year
Q: How about during the lease term, how much will the lessor
recognize as income?
A: It will be the amount of the rental paid by the lessee.
Q: Who will recognize the depreciation of the building?
A: It will be the lessee because he will continue to enjoy the
building during the lease period. However after the lease period,
Page 29

the lessor will recognize the income and will also recognize the
depreciation then.
Q: What if VAT is added to the rental and paid by the lessee?
A: The VAT will be considered as part of the income of the lessor
and so it will be considered as taxable on the part of the lessor.
TN: Any taxes paid for by the lessee for and in behalf of the lessor
will be considered as income of the lessor.
ADVANCE RENTAL
If subject to the control of the lessor, it is considered as income on
the part of the lessor at the time it was received.
However, if the advance rental, cannot be used because it will
only be applied to whatever expenses that will have to be
incurred after the lease term, it will not recognize as income just
yet. You will have to wait at the end of the lease term for you to
recognize it as income.
As to advance rentals, it will be dependent as to whether there is
control or if there is allowance for use on the part of the lessor
over the said advance rent. So if the advance rent can be used by
the lessor during the period of the lease, then it may be
considered as income on the part of the lessor, if the advance rent
can be used by the lessor. Just determine who has control over
the advance rent. If it can be utilized by lessor, then it is income to
the lessor. If it cannot be utilized, then dont include it as income
just yet(meaning dont; recognize it as income just yet). It is NOT
also the income of the lessee because it is the lessee who is
paying diba!
what if the improvement will be completed on the fifth year, and
the lease contract has a total term of 10 years. In that case you
will have to include the total value of improvements together with
the
rent
on
the
fifth
year.(outright
method)
For spread out method, lets say for example the lease term is ten
years, the useful life of the improvement is 20 years, the value of
improvement is 1M. So when will start reporting the depreciated
value/year of the improvement together with the rent, you will
start at the end of the lease term.(the reckoning point for
determining the income that will redound to the lessor). So what
is the value of the improvement at the time of the end of lease
term. So we have 1M(FMV) divided by economic life of 20 years.
You obtain 50K as your annual depreciation. You then multiply the
annual depreciation of 50K with the remaining life of lease(say for
example 9 years).
You will get 450,000. Now you subtract 450,000 from the value of
the building (1M). you will subtract 450K from 1M because this is
the depreciation which will occur to the value of the building for
the entire 9 years(remaining life of lease term).
so 1M minus 450K is 550K. so the depreciated value of the
building is 550K. after which the 550K depreciated value will be
divided by the total lease term of 10 years. Hence you will get 65K
which is the aliquot part to be reported as income for each year.
So at the end of the lease term, pila ang nagamit sa lessee- diba
equivalent to 10 years man kay 10 years gyud ang lease term!)
OUTRIGHT METHOD:
The Value of Improvement...1M
Economic Life.15 yrs
Lease Term.7 yrs
Q: How much do we recognize as income if it is leasehold
improvement(OUTRIGHT METHOD)? It will be equivalent to the
value of the property at the time the lessor is suppose to enjoy it.
So when will the lessor enjoy said property? Diba at the
termination of the lease. So the income that will be recognized is
the DEPRECIATED VALUE OF THE BUILDING AT THE END OF THE
LEASE TERM.
So first we have to determine how much is the depreciated value.
Determine the depreciation per year(annual depreciation) by
dividing 1M over 15 yrs(economic life).
Hence :
1M/15yrs = 66666.667. so this is the per year
depreciation!
Next, so how many years man ka magdepreciate? Diba 7 yrs kay
maw mana ang total lease term. So:
66666.667 x 7yrs= 466666.669 466666.67 is the total
depreciation. Take note depreciation pa ni cya, ANG ATONG GI
PANGITA gyud kay deprecation value
So, the value of the property which is 1M minus the value of the
depreciation(466666.67) is 533333.33
533333.33 THIS IS THE INCOME THAT WILL BE RECOGNIZED BY
THE LESSOR. Nganu man? Because that is the value at the time he
gets to enjoy it. Meaning when the lease term ends
So kung mag himo kag time line:
0 yr -------------------------7th yr-----------------------------------15th yr..
So from 0yr to 7th yr, who enjoys the improvement? The lessee!
So from the end of the 7th yr to the 15th yr, who enjoys said
improvement? The lessor.
So thats why from the end of the 7th yr and imong i-recognize as
income is the 533333.33 not the total 1m VALUE of the
building(which was the original value at the time it was
introduced).. nganu man? Because from the first year when it was
introduced until the 7th year, WA MAN gyud ka nakagamit ana. So
dont recognize 1M as the income in your income tax return.
What will appear in the ITR is the 533333.33. the TOTAL
DEPRECIATION VALUE at the end of the lease term, since this is
the value at the time ni enjoy ang lessor sa improvement.
SPREAD OUT METHOD
Same gihapun ang pagcompute sa depreciation value( 533333.33
japun!)., pero kanus-a ka mag start? When nga year ka magsugud
ug spread sa depreciation value? AT THE START OF THE LEASE
TERM! (SO start sa first year until the 7th year)
To illustrate: diba 533333.33 ang total depreciation value. You
divide 533333.33 by 7yrs. So pila mana? 76190.48.thus pag start
sa 0yr to the 7th yr, 76190.48 ang value of improvement imo ireport as income. So 0yr-76190.48, 1st year-76190.48, 2nd76190.48,so on and so forth until the 7th year.(IN ADDITION NI
SIYA SA RENTALS). THUS 76190.48 plus rent on the 1st, 2nd,3rd,
until 7th year.
ANNUITIES, PROCEEDS OF LIFE INSURANCE, AND OTHER TYPES
OF INSURANCE
ANNUITIES
It is periodic payment of income, but it should be other than life
insurance and pension. So if it is not life insurance and pension
and it calls for periodic payment of income.
Example
Private insurance that gives income but not based on life. It is
actually like an endowment. Meaning, there is this number of
years you have to pay premium then after the lapse of that
number of years wherein you are required to pay, say for example
Page 30

10 years, after 10 years and until lifetime, the insurer will pay you
periodic income payments. Like a private pension, which is not
paid by your employer, kanang ikaw mismo nagpay sa premium.
So the interval of payment has to be fixed and the value has to be
fixed. If these are not fixed, then dont call it annuity.
LIFE INSURANCE
It is not subject to tax, regardless of the beneficiary. So whoever
the beneficiary is, unless the one who receives the proceeds is the
insured himself. Kay kung ang insured ang mo receive, dili na
nalife insurance. When you say life insurance it is based on your
life, meaning ni-presuppose ni nga namatay ang insured and
someone has to benefit from your death. But in this case, if ang
insured ang mu receive, this scenario is merely a return of
investment. So in this case the premium is not taxable but the
value in excess of the premium is the portion subject to tax.
Can it be exempted from income tax? Yes. The amount received

will be exempted from tax if the following are present: 1. You did
something for civic purposes; 2. There was no intention to join a
particular contest or competition, or there was no effort on his
part; and 3. You are no required to render substantial future
service.
Under the Tax Code prizes and awards are exempted from tax
when:
1.
Made primarily in recognition of: ( CARCELS)

a.
Charitable;
b. Artistic;
c.
Religious;
d. Civic achievement;
e. Educational;
f.
Literary; or
g.
Scientific
2.
The recipient was selected without any action on

his part to enter the contest or proceeding; and
3.
The recipient is not required to render

substantial future services as a condition to
receiving the prize or award.
PROCEEDS FROM LIFE INSURANCE

It is not taxable regardless of the beneficiary. However, if the
insured himself receives the proceeds, then it is not proceeds
from life insurance because it presupposes that the insured is
dead and the proceeds are received by another person. In this
case, the proceeds may be subject to tax but only the amount in
excess of the capital. For example, the insured invested P 1000.00
per year for 10 years. So, in 10 years he will have a total
investment of P10,000.00. If in the contract the insured will
receive a cash surrender value of P15,000.00 if he will not die
within 10 years, the excess of P5, 000.00 (15,000-10,000) will be
subject to tax. This is because the P 10,000.00 represents return
of capital, and thus not subject to tax.
However, if the insurance contract provides for an interest, then
the interest will be subject to tax. For example, if the contract
provides that the proceeds of life insurance will earn interest of
10% per year until it is actually distributed to the beneficiary. So, if
after the death of the insured, the proceeds of life insurance
amounting to P1,000,000.00 were actually distributed only after 5
years. So for 5 years, the P1,000,000.00 earns P500,000.00
[(1,000,000.00 x 10%)x5]. The total proceeds in this case will be
P1,500,000.00, and only the P500,000.00 will be subject to tax
because it is an income already out of the proceeds. Only the
P1,000,000.00 is exempt representing the proceeds of life
insurance.
PRIZES AND AWARDS

PRIZES and WINNINGS
Not exceeding 10,000 is tax at a rate of 5-32% (dumping ground)
Exceeding 10,000, the whole amount is subject to final tax rate of
20%
Winnings: subject to 20% final tax regardless of the amount as a
rule. PCSO winnings is exempt.
ATHLETIC COMPETITIONS
In athletic competition like Manny Pacquiao, the prize he won in
boxing is subject to tax. It can be exempted from taxes if
professional boxing is sanctioned by Philippine Olympics
Committee.
PBA players, they earn salary, and in addition to that if they win
they receive bonuses. The salary and bonuses they receive are
subject to regular income tax (5-32%) because it is already an
exercise of Profession. So, even if Basketball is sanctioned by
Philippine Olympics Committee it is not exempt.
So far its the Philippine Olympic Committee pa ang association. It
being an exemption, so we have to be strict in interpreting.
Q: So we have to distinguish amateur and professional?
A: No. The discussion only applies to Manny Pacquiao. Kadtong sa
Philippine Olympics Committee ang ila man gyung gi-recognize
nga boxing there is amateur, not for professionals. Thats why
Manny Pacquiao is subject to tax. Mao bitaw if you notice in the
news, what theyre pushing for is a congressional exemption, not
just an exemption under the Tax Code. Because they know under
the Tax Code, it will not apply. Hes really subject to tax.
Q: Sa kadtong bonus sa mga PBA player?
A: How did he win it? Di ba its out of his profession. He has to pay
so its related to his compensation. So its not actually a prize. The
bonus is not given because its the prize of the competition. It
was given by their employer.
PENSIONS AND RETIREMENT BENEFITS
Prize is based on effort, while winnings is based on chance

Prize not subject to tax
The prize must be something that youve worked on. For example,
you help an elderly cross the street, and because of that, you
were given P20,000.00, Is it subject to tax? Yes. You can argue
that it is a prize because you did something to earn it.
PENSION
Then you have pensions, retirement benefits and separation pay.
Under pension class, there could be:
1.
Payment for current services; and
Page 31

2.
Payment for past services.
If its for current services, its as is. You recognized it as is. But if
its payment for past services, youre supposed to spread it out for
a period of 10 years. You call this in accounting as Corrigidor
Method.
Anyway, there is that difference in determining the cost that
apply or the income that you recognize. If the payment of the
pension is related to a current cost, you recognized it as is. If its
payment for past services, it is to be distributed for a period of 10
years. Example: (This was the wrong example where he
emphasized that what he wrote on the board was about the cost
for pension.) Im sorry class this is the cost. Nganung ni-recognize
paman diay ta for past services nga youre supposed to receive it
naman diay right away. Di ba, murag its given na as is. This is the
cost ha. This is the cost. Unsa ni siya? Cost!
RETIREMENT
You know of 2 retirement laws. You have your
1. private benefit plan and
2. you have your retirement law.
Q: Under retirement law, what are the requirements?
A: You have rendered at least 5 years. It must be for the same
employer. And you must have an age of at least 60 years for
voluntary. You have 65 for compulsory. There is no requirement
of how many times you can avail of it. Its just that it is exempted
when you receive it.
If it falls under the retirement law. So theres no requirement for
a private benefit plan. Retirement law lang itself. Thats the
requirement. If you comply with all of those requirements, that is
exempted from taxes. So actually, its easier if theres no
retirement plan given by your employer. Its easier to be
exempted. But of course that would probably happen twice lang
sa imung lifetime. Kay first pagka 60 nimo. Second pagka 65 nimo.
Under, reasonable private benefit plan, ang iyang requirements is
stringent and you get to avail of it only once.
Q: So what are the requirements under the reasonable private
benefit plan?
A: First, there must be a reasonable private benefit plan.
Q: How is it defined?
A: It must come in the form of pension, gratuity, stock options.
That will only happen only twice in your lifetime, once 60 years
old and second 65 years old.
Under Reasonable Private Benefit Plan, there are stringent
requirements:
1.
2.
3.
Reasonable private benefit plan come in the form of

stock options, pensions, gratuities, public sharing plan.
Maintained by the employer for the benefit of the
employee. There is a requirement of contribution on
the part of the employer.
Registered with the BIR most common mistake of the
employers
Employee must be at least 50 years old
4.
Service of at least 10 years not required to be

continuous as long as the same employer
5.
It can only be availed of once in your lifetime
Q: What could be an instance wherein you get to be exempted in

your retirement?
A: Work in a private company til 50 years old and then must satify
all the requirements. Work again for the government because it is
also exempted. So, twice exemption of retirement benefit.
Q:Is there a limit as to the amount?
A: None but just take note of the requirements.
(Recap)
General Rule: Resident Citizen, taxable on income sourced within
and without the Philippines. Of the three Individual Taxpayers,
there is only one which is subject to tax on income within and
without.
Taxation on Compensation income.
Regular Salary or wage. Separation Pay. Remember that is it is
within the control of the Employee, it is taxable.If it is beyond the
control of the employees, not taxable.
Retirement Benefit
Make a distinction between whether the company has a benefit
plan or retirement plan OR it follows the law/the general rule on
the new retirement law.
If its the New Retirement Law, the requisites are: 5 years/60-65
years old, then it is automatic exempted.
If theres a retirement plan partly sponsored by the Employer, that
is considered a reasonable benefit plan, REGISTERED with the BIR
and has requisites that are complied with by the employee: 50
years old and has rendered at least 10 years of service not
continuous, registered with the BIR and then the requisites have
to be complied with by the employee, meaning he is at least 50
years old and rendered at least 10 years of service, need not be
continuous, it is availed of only once in his lifetime, then it may be
exempted. Other than that, it is taxable.
Bonuses, 13th month pay and other benefits, exempt to the extent
of P30,000.
Then directors fees, still considered as compensation subject to
regular income tax. But what if the director is not employed by
the corporation? Still the same, taxable, because it is
compensation in whatever form paid according to the Tax Code.
Non-monetary compensation? Fringe benefits. Not subject to
income tax but subject to fringe benefits tax. But this only applied
to managerial and supervisory employees. Exclusions are de
minimis benefits mentioned, familiarize yourselves with them.
SEPARATION PAY
Q: When taxable?
A: Must be voluntary.
Q: What if it is out of a program? Like a redundancy program of a
company, is it taxable or non-taxable?
A: Not subject to tax if found to be involuntary on the part of the
employee
Page 32

Requirements to be non-taxable:
(1) Involuntary beyond the control of the employee
(2) Separation is due to sickness, death, or physical
disabilities
Q: What if the separation pay is more than that under the law?
A: 1 month per every year of service (under the law). More than?
It remains to be a gray area. If I were to take a position, not
subject to tax. But if they want, employer should be subject to
donors tax.
Minimum Wage
P 340.00 good for six months from the time of promulgation
So, again, take note of the diff between retirement benefits under
retirement law (RA7641) and under the reasonable private benefit
plan.
Q: When is it taxable and when is it not taxable?
A: For separation pay, the voluntariness or involuntariness defines
whether it is taxable
FORGIVENESS OF INDEBTEDNESS
Q: Is this subject to tax?
A: Yes, and it depends on certain circumstances.
If it is a stockholder, who has a receivable from the corporation
and then this stockholder forgives the corps debt treated as an
additional investment; NO TAX
If it is the other way around, the corporation forgiving the debt of
the stockholder treated as a distribution of dividend; SUBJECT
TO TAX ON DIVIDENDS
If the reason for forgiveness is out of the kindness of the
creditors heart considered as gift; SUBJECT TO DONORs TAX
TAX BENEFIT RULE

WRITTEN OFF DEBTS
If its written off, it means that something was deducted. Where is
it deducted from? From your income because part of your sales
was written off. It was not taxable at the time the write-off was
made. If you were able to recover, then automatic, it should be
recognized as income but only to the extent of the amount you
were benefited in terms of taxes.
A/R written off.......................................................................... 400k

Q: Assuming the written off receivables were recovered, how
much do you recognize as benefit?
A: You dont recognize any benefit because you were not
benefited by the recovery.
Sir, naa pamai MCIT? But for purposes of discussion, leave it as is.
There is no benefit, because there is automatic 0 income taxable.
You dont pay more taxes; you dont also pay less tax. Its as is.
Third example:
IBT .............................................................................................100k
A/R written off...........................................................................400k
Taxable income...............................................................................0
Q: If ever the entire 400k was recovered, how much is your
income the following year?
A: Your income should have been 100k had there been no writeoff. This 300k is treated as if 0. Whats the difference? Its the
100k you should recognize as income (your benefit had there
been no write-off)
RULE: DIFFERENTIATE THE SHOULD-BE INCOME AND THE
INCOME W/ WRITE-OFF THE DIFFERENCE IS THE BENEFIT; IF ITS
ALREADY NEGATIVE, TREAT IT AS 0
Q: When do you recognize?
A: At the time it is recovered
TAX REFUND
The same rule applies, also the benefit.
Difference
Its just that under Tax Refund, you have to determine first what
taxes are deductible, because if its not deductible and you got a
refund out of it, then theres no benefit after all.
Taxes Not Deductible
(1) Income Tax
(2) Estate and Donors Tax
(3) Special assessment
(4) Stock transaction tax
(5) VAT
Q: What if you got a refund out of your Income Tax the following
year, what is your benefit?
A: NO benefit; NO income; If its not a deductible tax, and you got
a refund, no need to recognize any income because you were not
benefited.
The same also applies to tax refund.

First situation:
Income before tax 1M
A/R written off 400k
Net income subject to tax ..600k
Q: What if the entire 400k was recovered the following year? How
much do you recognize as income for that year of recovery?
A: It should be the entire 400k because had the A/R been not
written off, the TI should have been 1M. The diff. between them
should be the benefit that you recognized. Thats the tax benefit
rule.
Second Situation:
Net loss........................................................................................1M
Example:
Local Taxes are usually the taxes deductible. You are engaged in
the practice of a profession and you are computing your income
for this year. Because of your professional tax, you have to deduct
P300 from your P1000 income. The same situation rana class. Still
income before tax, instead of write off, you have to account for
the taxes paid and deducted.
IBT...........................................................................................P1000
Erroneous Tax Paid....................................................................P300
IAT.............................................................................................P700
Q: What if you got a refund the next year because of wrong
assessment, i.e. the tax should not have been assessed. You have
Page 33

a refund of P200. How much do you recognize as income the next
year?
A: First you compute the benefit.
IBT...........................................................................................P1000
Correct Tax..................................................................................(P0)
Should-be Income...................................................................P1000
IAT (From day of incurring liability)..........................................(P700)
Total Benefit..............................................................................P300
Therefore, you recognize an additional income the year of refund
of P300
EXCLUSIONS FROM GROSS

INCOME
PROCEEDS FROM LIFE INSURANCE
Regardless of who the beneficiary is - Not subject to income Tax;
but the interest should be subject to tax.
AMOUNTS RECEIVED BY INSURED AS RETURN OF PREMIUM
Example: What if you invested 10000 for the next 10 years and on
the 10th year you receive 15000. You have a difference of 5000.
The 10000 is considered return of premium, the remainder is
considered income.
GIFTS, BEQUESTS AND DEVISES
Its not subject to income tax because it is subject to donors tax.
COMPENSATION FOR INJURIES OR SICKNESS
TAKE NOTE that the compensation must be for personal injury or
sickness.
Q: What if you are driving a car and you bumped another car; you
receive the insurance on your car. Is the insurance subject to tax?
A: Yes, because it is not insurance for your personal injury or
sickness; its on the car.
Q: Assuming you were hospitalized, and its through a court
judgment and then the court awarded you actual damages of
100k; moral damages of 10k; exemplary damages of 1M. How
much is taxable?
A: The actual damages is not taxable it is your compensation for
personal injury. The moral damages and exemplary damages are
taxable not a compensation for personal injury and sickness.
That is a contentious area but that is how it is now; it is taxable. It
is not a compensation for personal injury or sickness.
INCOME EXEMPT UNDER TREATY
Very Obvious Pacta Sunt Servanda. There has to be good faith
on the compliance of tax treaty.
RETIREMENT BENEFITS, PENSIONS AND GRATUITIES
As already mentioned.
AMOUNT CONSIDERED AS SEPARATION PAY FOR INVOLUNTARY
SEVERANCE FROM EMPLOYMENT
AMOUNTS RECEIVED BY VETERANS FROM A VETERANS FUND
MISCELLANEOUS ITEMS
Income Derived From Foreign Govt
Take note itis only income derived from investments in the
Philippines in loans, stocks, bonds or other domestic securities.
Income Derived by the Government or its Political Subdivisions

Prizes and Awards
Prizes and Awards in Sports Competitions
13th month pay and other benefits
Your 13th month pay has a limit of P30,000. In addition to your
13th month there are also bonuses you have to consider;
Christmas Gifts, Longevity Pay These are considered bonuses
subject to the limit of P30,000
GSIS, SSS, Medicare and Other Contributions
Considered not subject to tax
Gains from Sale of Bonds, Debentures, or other Certificate of
Indebtedness
Take note its the gain. How about interest earned on these items?
It is subject to tax. There was a ruling by the SC limiting the term
gain It should not include interest
Gains from Redemption of Shares in Mutual Fund
It has to be a redemption of mutual fund.
Q: What if the mutual fund gives off dividends, is the dividends
subject to tax? Yes. Only a redemption would be exempted from
taxes. Dividends are subject to tax.
PERSONAL AND ADDITIONAL

EXEMPTIONS
50, 000
Uniform for all whether you are a single individual or married or
head of the family. All are entitled to 50,000.
DEPENDENTS
While if you have a legitimate, illegitimate or legally adopted child
you are entitled to 25,000 additional exemptions for every child
for a maximum of 4 children.
Q: What if you are legally separated and the other partner already
have another family with children of their own, how are you
supposed to compute the additional exemptions?
A: You are only allowed four children. In the bar, the questions
relating to this are very simple. What is important is what can be
considered as dependent for purposes of additional exemptions.
Q: Can you claim a senior citizen that you are taking care of as
additional exemption?
A: No. You can only claim a child for purposes of additional
deduction.
Requisites for a child to be considered a dependent:
1. Not more than 21 yrs. old
2. Unmarried
3. Not gainfully employed
4. Must be chiefly supported by the tax payer
5. Living with the taxpayer doesnt literally mean to live
with the taxpayer at all times of the year. The child
could be away for purposes of school, vacation or if the
taxpayer works in a different area
Who can avail Basic Personal Exemption (Rules on Reciprocity)
Page 34

Only RC, NRC, RA and NRAETB (subject to the rules of reciprocity
so that the maximum is whichever is lower between what is
granted in the Philippines or the foreign country of such NRAETB,
if it is a deduction whichever is lower if it is income whichever is
higher) are the only ones who can avail of the basic personal
exemption. For additional exemptions, only RC, NRC, RA.
the building? No, its not a major repair unless of course, you
are operating one building composed of 20 units and you
have to replace the faucet for each of the units then that
would be considered as a major repair.
The status at the end of year of the dependent would be

construed as to which is favorable to the tax payer. If you get
married at the middle of the year, you would be considered
married at the beginning of the year so that the entire year during
which you mere married, you will be considered as a married
individual because it will be construed whichever is favorable to
the tax payer.
Its as if everything happens which is favorable to the taxpayer. So,

if you get married at the middle of the year, you will be
considered as if you were married at the beginning of the year. So
that the entire year during which you were married, you are
considered as married individual. Just remember, which is
favorable to the taxpayer. For example, you were pregnant during
the year and then you gave birth to a child at the end of the year,
say December, its as if the child was born at the beginning of the
year, January so that you may claim the full 25,000. If twins? Then
50,000.
Example
You were pregnant during the year and then you gave birth to a
child at the end of the year say December, its as if the child is
born at the beginning of the year January so that you can claim
the maximum deductions. Take note, status of the end of the year
rule applies when for example, your child celebrated his/her 22nd
birthday at the end of the year, its as if he celebrated his birthday
at the end of the year so that you can still claim the deduction.
Basta the rule is whichever is favorable to the taxpayer for
purposes lang of basic and additional exemptions.
Q: What are the exemptions claimed by NRA?
A: Make a distinction if NRA is ETB or NETB. The former can claim
the basic personal exemption to the extent of the rule on
reciprocity while the latter cannot claim the deduction.
STATUS-AT-THE-END-OF-THE-YEAR-RULE
This rule applies when for example, your child celebrated his 22nd
birthday at the middle of the year. Its as if he celebrated his
birthday at the end of the year so that you can still claim him as a
deduction. So, the rule is whichever is favorable to the taxpayer
but only for purposes of the basic and additional exemptions.
So, what are the exemptions claimed by nonresident aliens? You
make a distinction if the NRA is engaged in trade or business so
that if he is engaged in trade or business, he can claim basic
personal exemption to the extent of the reciprocity rule while the
non resident alien, not engaged in trade or business is not allowed
any exemption.
For individuals, who are allowed to deduct additional

exemptions:
a.
Basic personal exemptions
i.
Resident citizen
ii.
Nonresident citizen
iii.
Resident alien
iv.
Nonresident alien - engaged in trade or
business, subject to the rules of reciprocity
so that the maximum is whichever is lower
between what is granted in the Philippines
and the foreign or home country of such
NRA-ETB
b.
SUMMARY OF ALLOWANCE OF PERSONAL EXEMPTIONS

Individual
Basic Personal
Additional
Taxpayer
Exemptions
Exemptions
RC
Allowed
Allowed
NRC
Allowed
Allowed
RA
Allowed
Allowed
NRA-ETB
Allowed
Not Allowed
(Reciprocity)
NRA-NETB
Not Allowed
Not Allowed
DEDUCTIONS FROM GROSS

INCOME
Additional exemptions
i.
Resident citizen
ii.
Nonresident citizen
iii. Resident alien
ITEMIZED DEDUCTIONS
ORDINARY EXPENSES
ITEMS NOT DEDUCTIBLE

(1)
Personal or living family expenses because they are already

taken care of the personal exemption.
(2)
Amount paid for new buildings or for permanent

expenditures the reason is because the amount is already
part of the cost of your building and then you can claim
depreciation for them. Thats why it is not deductible as a
full item.
(3)
Amount expended to restore property only applies to major

repairs. Why only major repairs? Because if its small lang,
like for example, naguba imong gripo, imong palitan og bagong gripo, do you think you will still include it in the cost of
(1)
Expenses- it must be ordinary or necessary to the trade or

business of the taxpayer or
professional activities of the
tax payer.
Ordinary Expense
It is ordinary when it is normal and usual. You look at the
business of the taxpayer. Just because it is a one time
expense, it doesnt necessarily follow that it is not ordinary.
Like your one time incorporation fees, even if it a one time
expense, it is still considered as an ordinary expense.
Repainting of building it may be considered as an ordinary
expense, but of course it depends on the cost. If the cost is
too high it may be considered as a capital expense. Depends
on the industry you are in. It also depends on the type of
business youre engage in. Theres no hard and fast rule as
Page 35

to what is considered as an ordinary expense because it
depends on the industry you are in.
The reason of this rule is to prevent speculation. Commonly, the

taxpayer invest in a bank, and he will also borrow from the bank.
Necessary Expense
When it helps the business, something that adds value to
the business.
Illustration 1:
Assuming that the gross taxable income of 1m and you have an
interest expense of 500,000, so the net taxable income shall be
500,000 with a tax rate of 30%. So the tax liabilty is 150,000.
Assuming there is no interest expense. 1M net taxable income
times 30% equals 300,000.
(2)
Of course, it must be related to your business, otherwise

what is the point of deducting it.
(3)
It must be incurred for a particular period. If it is not

incurred you cant deduct it.
(4)
There must be withholding of taxes if it is required under the

law.
Q: What happens if theres no withholding? Does that mean
that you cannot deduct at all the entire expense, wala
nalang juy i allow nga expense nimo?
A: No, You have the Cohan Rule. The commissioner has to
estimate or proximate the particular amount for the
expenses of the taxpayer. It is usually 50%...what the BIR
considers as allowable deduction because we adhere to the
Cohan Rule, that they cannot altogether eliminate or
disregard all expenses. Part of it has to be recognized.
Classmates Question: How to withhold rent expenses ( to
that effect.. inaudible)
Atty. Amagos Answer: under Revenue Regulation 2-98 that
mentions about expanded withholding tax. Your rent
expense or any rental you suppose to pay to your lessor is to
be withheld at 5%. So if your total rental to be paid is
100,000, you will only remit the 95% because the 5% is
supposed to be withheld. So that you will give 95,000 to
your lessor and then you withhold the 5%, the 5000 and
report it to the BIR as a withholding agent.
There must be receipts to support your expenses, that is also a

requirement. However under the Cohan Rule, even if you cannot
substantiate it, you will still be allowed deduction based on the
estimate. Because the substantation requirement is provided in
the tax code itself, that is why you have to comply with it.
Bribes, kickbacks
You are not allowed to deduct. Otherwise it will encourage
kickbacks and illegal acts.
INTEREST EXPENSE
REQUISITES FOR DEDUCTIBILITITY
(1) It must come from an indebtedness, therefore there has to
be a specific provision or interest for it to be deductible. The
contract must specify that there is an interest, for it is a
requirement under the civil code, that interest is
demandable when it is in writing.
(2)
So how much is the difference? 150, 000. so we try to divide 150k

with 500k, so its 30%. The benefit derived is 30% because you are
allowed an interest expense. Tax Arbitrage is interest expense less
the percentage of interest income. *this must come from a bank,
an interest income subject to final tax.
Example 2:
Palit ka ug Nike, unya naa baligya sa nike park, factory outlet.
what people usually do is that they would check first the price,
because most likely these markets sell the same thing so you go
from one market to another to get the lowest price. You are given
the opportunity to gain out of the difference in the prizes of
goods sold in different markets. Your interest income is subject to
20% and you are allowed to deduct up to 30% so you benefited
for 10%, so that is the reason why there is a tax arbitrage rule. 10
divided by 30. the rate is 33% I am not making this up. there is a
logic to this, the 10% is the arbitrage gain out of the difference
between the interest expense and the interest income. This one
i'm just trying to prove to you that the benefit is 30%.
Q: How do you apply the 33%?
A:: Its the interest income x 33%. Whatever is that amount, you
deduct it from your interest expense.
Illustration:
You have an interest expense of 500k, supposedly. Interest
expense, 500k. You have an interest income subject to final tax of
600k. You have an interest income from a loan you extended to a
friend of 100k. Compute the interest expense that may be
deductible by this tax payer.
GIVEN:
Interest EXPENSE = 500k
Interest INCOME subject to FINAL TAX = 600k
Interest Income from loan= 100k
So first (to arrive at the deductible interest expense), you have
interest expense of 500k less the ARBITRAGE GAIN. How do you
compute the ARBITRAGE GAIN? It is the interest income SUBJECT
TO Final Tax times 33%. How was 33% derived? It is the difference
between 20-10 divided by 30.
ARBITRAGE GAIN = Interest income subject to final tax (600k, in
our example) times 33% = 198,000
So you have income of 600k times 33%, how much is that?
198,000. So how much is the interest expense deductible? Thats
302 thousand.
The indebtedness must be related to your business.
TAX ARBITRAGE RULE

A portion of your interest expenses is deducted an amount
equivalent to a certain percentage to your interest income but
this will only apply if the interest comes from a Loan. The reason
for the tax arbitrage rule, is that you invest your money in the
banks, Your interest income will be subject to a tax rate of 20%
but because of this interest expense, you are allowed a deduction,
Deductible Interest Income Expense = 500k-198k= 302k

This is the interest expense that you place in your deductions,
because of the tax arbitrage rule. *SUS KA NINDOT ANI I.EXAM
Q: (Inaudible)
A:: So what happens is that first, I have 1M I deposited it in a bank.
Lets assume the interest income is 600k. What I did, so I can save
from taxes, I borrowed from the bank. Lets say I borrowed 1M
Page 36

and incurred an interest expense of 500k. So I have an arbitrage
gain.
For purposes of financial statement, as is.

Financial statement for sec & bir, the same.
Q: Isnt iit (Inaudible* something about banks and final tax and
the reason behind the 33%)
A: The reason is that you have an arbitrage gain, because you
have an interest for which you will only be subjected for only 20%
final tax, whereas you can deduct 30% for your interest expense.
Thats the reason. The difference is 10%. Again, 10% divided by 30%
you get 33%. Ayaw nalang kuana nga gi unsa pag compute, basta
33%.
Q:interest income subject to final tax?
A: Yes, interest income subject to FINAL TAX. So that if the
interest income is not subject to final tax, but just from you loan
to a friend, do you have to apply the arbitrage gain? No. Okay?
Dili siya mu apply.
(*PROMISE MU GAWAS JUD NIS EXAM. NAA NAGUD NI. Of course,
I will not make it as complicated as this. Less lang. 100. )
The reason is that they want that practice to be prevented. And
this is how they devised it. Instead of you depositing in a bank
only to loan the same amount later on, so that you can deduct
much taxes, oh ila ning gi devise.
BUT TAKE NOTE: This will only apply if you have an interest
income subject to FINAL TAX, because only then will you have an
arbitrage gain. If you dont have this, you wont be subjected to
arbitrage gain. It makes sense, well, at least to me.
Q: still inaudible. (probably interest income subject to final tax,
from the bank deposits)
A: But take note, it refers to one and the same income. Income
gyapon siya. Its just that gi subject siya to a different tax. But
naka benefit naka. There is still a benefit out of your interest
expense. As I showed you before, youre able to benefit.
Thats the reason why they want it taxed again. Kay ga duwaduwa mankas taxes. So aside from your 20% tax, they want you to
be taxed again. But how do they do that? BY USING THIS. Why?
What happens here? Because you are deducting the arbitrage
gain, IN EFFECT, na wala ang gain of 10%. Mao na siya.
But of course, there is a reconciling item in the Income Tax

Return/ITR.
Between interest expense in the financial statement and in the
ITR, it will still present the same thing bec there is a portion for
reconciliation.
Q: (inaudible)
A: It is not necessary. It will be discovered bec u are subjected to
final tax and, in the financial statement, u need to recognize
interest expense so bir will know.
In bank, there is auto reporting to BIR
NON-DEDUCTIBLE INTEREST
First, if it not stipulated in writing. As a rule, it is considered VOID.
Under the Civil Code, interest must be in writing before it
becomed enforceable. If it is not in writing, you cannot deduct it.
Q: How about theoretical interest? Can you impose theoretical
interest even if it is not mentioned that there is an interest it is as
if there is an interest? (Which is common for inter company
advances or even loans to employees)
For Loan on Employees, it is obvious because there is Fringe
Benefit Tax.
For intercompany Loan, like a foreign corporation extending loan
to its subsidiary here in the Philippines, you are related
corporations but not necessarily related parties, there are
separate personalities for these two entities.
Q: Can you deduct interest on the intercompany loans even if
there was no mention of interest?
A: NO. you cannot deduct interest. There is already a case
deciding that there should be no theoretical interest imposed
anymore. But it more related to the BSP issue (not included in the
list of cases).
TAXES
Q: Is it necessary that the amounts for the interest income subject

to final tax and the interest expense be the same? Like 1M worth
of bank deposits and 1M worth of loans?
A: No. Its not required. Na tunong lang. Its not a requirement.
The requirement only is that there is an interest income subject
to final tax and an interest expense. So ato daw ipa illustrate
*Sir was not able to prove this part. You can skip this.
So ato daw ipa illustrate. Para ma convince mo. Kani ha tan.aw
kung pareha ba jud nga tax.
Q: Pila may tax man nimo sa interest income subject to final tax
daan?
A: Naa nakay 20% of 600k, thats 120k. This is the tax, FINAL TAX.
Supposedly, kung wa pay tax arbitrage rule, pila ang tax? So it
should be 1M minus 302k, pila mani? 698k times 30% pila class?
209, 400. How much is the difference between this and 150k?
59,400? So kungso mao na di nako siya ma prove.
Requisites for deductibility of taxes:

1. Must be related to your business &
2. You can substantiate it
Q: How about surcharges, interest, fines for delinquency, can it be
deducted?
A: as a rule, it cannot be deducted but interest for deficiency
taxes can be deducted. Thus, if it doesnt come in the form of
penalty, you can deduct. So, if in the form of penalty, you cannot
deduct.
Q: Treatment of special assessment, can u deduct?
A: No.
Special assessment
Tax imposed by the local govt for reason of improvements made
on ur property. U are made to pay taxes w/c cannot be deducted
for income tax purposes since value of property already accounts
for the taxes, in the form of depreciation.
Ill try to prove next time.

Tax credit v. Deduction
Page 37

Tax credit can be deducted after the computation of the taxes
while tax deductions are deducted before the tax is computed. In
tax deduction, if u hv a gross income of 1M & tax allowed as
deduction is 300t, net taxable income is 700t. Multiply by 30% to
get tax which is 210t. if tax credit, where 1m is net taxable
income, 30% of 1m is 300t as tax due and payable minus the tax
credit of 300t, so net tax payable is zero.
You only benefit 30% in the first case while you benefit 100% in
the second case. Thats the difference between tax deduction
and tax credit. Tax credit is after taxes. You deduct from the tax
itself while tax deduction is deducted from the taxable income.
NON-DEDUCTIBLE TAXES
Estate tax
Philippine income tax
Excise Tax
Donors Tax
Special Assessment
Stock Transaction tax
VAT
If its already claimed as a credit in the previous year, it should not

be allowed as a deduction.
Net operating loss carry-ovr (nolco), differentiate from nocolco.

While net capital loss carry ovr allows 1-yr carry-over, nolco
allows 3 successive yrs.
Nolco applies both to corp & individuals earning business income.
As long as there is a balance, you can carry it over for the next 3
yrs.
After 3 yrs, no need to account for the nolco.
Q: Where will it go?
A: Nowhere.
BAD DEBTS
Requisites for deductibility:
1. there must be a valid debt,
2. collection made in writing (as taxpayer, then lawyer
writes a demand letter),
3. file collection case. Judge then decides. If debtor
cant pay, u can now recognize a bad debt.
Only the difference between the actual loss and the amount that
was indemnified may be deducted.
In case taxpayer is able to recover bad debt, tax benefit rule

applies. If accounts receivable is written off due to bad debt, and
debt is subsequently paid, benefit derived from write-off will be
considered as income subject to tax. There has to be a court
decision declaring the debtor as insolvent. if debtor is deceased,
then go after estate. But if no estate, then court determines if
there is bad debt. In practice, recognize bad debts and it is up to
bir to question. After all, there is cohan rule where taxpayer can
recognize up to 50% as deduction but to be strict about the
requirement, judicial declaration of insolvency is needed.
CAPITAL LOSSES
DEPRECIATION
Securities becoming worthless can be deducted as these securities

are to be given up.
Requisites:
1. Property must be related to the business of the
taxpayer.
LOSSES
Requisites for deductibility:
1. Related to business,
2. Must be substantiated, so that if losses are already
indemnified, losses can no longer be deducted.
But change in the value only during the time that the shares are
being held by the taxpayer, you cannot deduct because it is not
yet realized.
But securities becoming worthless, they are about to be written
off so it is allowed as deduction. You cannot gain anything from it.
Example
Company is bankrupt, you can deduct as loss from investment.
LOSSES ON WASH SALE OF STOCKS OR SECURITIES
Wash sale is the 61-day sale, 30 ds before, 30 ds after. If u
purchase the same security, any loss derived out of this
transaction is not allowed as a deduction, exc if u are a dealer in
securities.
General Rule: Not deductible.
Exception: If is from a dealer in securities
WAGERING LOSSES
Wagering losses can be deducted up to the extent of wagering
gains.
NET OPERATING LOSS CARRY OVER
Q: What are the methods of computing depreciation?

A: under the tax code, taxpayer is allowed straight-line method,
declining balance method, sum of the years digit method.
Straight-line is based on the life of the property.
Q: Thin line?
A: Based on the life of the property.
Example
Property is 1m, economic life of 10 years, salvage value of 100k,
how much is the depreciation expense that you will recognize
during the year? So you have cost of 1m deduct salvage value of
100k, depreciable value.. nganung sometimes class they account
for salvage value? Because even if the property is fully
depreciated, it can still be sold. It has to be accounted for, even if
you already used it. Then divide it to the economic life of 10 years.,
that means every year you get to recognize 90k depreciation
expense.
Declining balance. You have to compute the percentage. Assume
the same example, when you get the percentage it is equal to 1
over N, n is economic life. So that would be 1 over 10, pila
manang 1 over 10 class? 10%.
Page 38
Double declining which is the maximum allowed by law, just

multiply it by 2. 20%. Declining baling, 10% ra xa. Thats how it is
computed. So that sa 1st year, 1m multiply by 20%, that is 200k,
pila may balance? 800k class. 800k x 20% pila? 160k. pila nlang
balance? 640k. and so on class.. dont wori d ko mangutana ani,
ganahan rako makabalo mo unsaun ni. So balance declines as year
passes by.
Sum of the years digit. Denominator is nxn+1 divide by 2. So
10x10+1 divide by 2= 55. This is the short cut formula. Numerator
is equivalent to the years remaining. 1st year looks like 10 over 55
multiply the amount of 900k, then 9 over 55 times 900, 8 over 55
times 900, 7 over 55 times 900. BUT WHAT I WANT YOU TO DO IS
JUST MEMORIZE THIS METHOD.
CHARITABLE AND OTHER CONTRIBUTIONS
Take note not required that it is related to trade. But there must
be actual contribution to a qualified entity if not, no deduction at
all.
How it is deducted? Theres a limit, 10% based on Taxable Income
based on charitable contribution.
Illustration:
Taxable Income(all deductions you have to account), assume 900k,
less charitable contribution para makuha ang Net Taxable Income,
for purposes of determing the 10% or 5%, you dont deduct the
charitable contribution yet. Based it when all deductions have
been made except the charitable contribution. Kasabot? If
individual, allowed is 90000. If corporation, only 10% so 45000.
Take note nay allowed 100%. 5% 10% if contribution is made by a
corpo or individual. If made to the govt for its priority project, it is
100%.
5%, 10% if non government organization accredited by the
Philippine Council for non government organization otherwise you
cannot deduct.
Kasabot class? Dont you love tax?? Tax is ART.
RECAP
We talked about deductions.
The general rules first:
1. Deduction must be incurred in connection with trade or
business of the taxpayer.
2. Deduction must be substantiated.
3. If it falls under rules of withholding, the withholding agent must
withhold and remit the tax to the BIR.
We also discussed the tax arbitrage rule. The 33% is based on the
interest income subject to final tax.
We also discussed bad debts. There are requisites to be fulfilled:
There must be a statement of account; there must be a collection
letter and there must be a case filed before it can be called a bad
debt.
We also discussed about depreciation. We discussed the straight
line method, the declining balance method, sum of all years
method, and any other method.
We also discussed about charitable contributions. Donations to

government, we can deduct 100 percent.
Xxxxx
CONTRIBUTIONS TO PENSION TRUST
We make a distinction between past and current service cost.
With respect to past service cost, youre supposed to amortize it
for ten years. The current service cost is deducted during the year
it is incurred.
OPTIONAL STANDARD DEDUCTION
Q: How do you distinguish OSD for individuals and that for
corporations?
A: For individuals, OSD is based on gross sales or gross receipts
while for corporations, it is based on gross income. This means
that corporations can deduct cost of services/sales before you
determine the OSD so its actually lesser compared to individuals
when you think about it.
Q: How about partnership? Corporations already include the
taxable or trade partnership. But what about general professional
partnership?
A: It is allowed to deduct OSD but the limitation is that if the GPP
has deducted OSD, the individual partner can no longer claim any
itemized deductions pertaining/related to the practice of
profession. However, if they have other income from another
activity, they can still deduct itemized deductions for that activity.
If the income is derived from GPP and the GPP opts for OSD, the
partner can no longer deduct from his income, it is as if that is his
net income subject to tax. However, if the same individual derives
income from another activity or business undertaking, he can still
deduct itemized deductions but only for his income on the
different activity.
Example:
You have partnership ABC. The partnership earns gross income
1M and opts for OSD at rate of 40 percent. The net income is
600,000. Following the principle of constructive receipt, A, B, and
C earn income of 200,000 (the net income divided by 3). Now, if
the partners have no other source of income, they are not
allowed to deduct from this income except their personal
exemptions. However, if they have other income, not from the
partnership, but from another activity like they have other
business. For instance, A is also a sole proprietor and earns
income of 1M. For purposes of computing his taxes, he is allowed
to deduct itemized deductions or OSD here.
For purposes of computing his taxes, is he allowed to deduct
itemized deductions or OSD here? So, lets assume that he opts
for OSD; he can still deduct 400,000 or still you can add 600,000
here not the 1,000,000 because this came from another activity.
So, thats the rule! Take note of that.
So, what if the partnership ABC opted for itemized deduction, can
the partner deduct in addition to the deductions already
deducted by the partnership from their individual income? The
answer is YES. So long as these deductions are not already
deducted by the partnership. If the partnership has already
deducted the items or expenses, then dont deduct it anymore.
Now, its actually difficult to determine what has been deducted
by the partnership. Almost always, whatever has been deducted
by the partnership, the partners can no longer make any
deductions. Because how can you say that it is related to your
income? Most likely the expenses youve incurred is that
Page 39

pertaining to the partnership and not your personal account. So,
thats the difference.
A: NO. Because of the Capital Loss Limitation Rule. You can only
deduct to the extent of the Capital Gains.
(ILLUSTRATION ON THE BOARD)

So, if you continue this one, you will have 800,000 here;
200,000, you deduct, lets just assume all assume all of
them are single, no issue, so you will have 73K, 150K,
150K. This 150K, how is it supposed to be taxed? What
rate are you going to use? Dumping ground
computation.
HEALTH AND HOSPITALIZATION INSURANCE

P2,400 per year or P200 per month per family. Nuclear family,
meaning immediate family. So if youre married, dont include
your parents or siblings, only your spouse or your children. But if
youre single, you include your parents. But make sure youre
earning not more than P250,000 per year. Who must avail of the
insurance? It must be the person claiming the deduction for the
benefit of his family or himself. If for someone else, like uyab, dli
pwede.
So here, you make a distinction between a GPP and a taxable

partnership because in a taxable partnership, income youve
earned from this portion here alone, its supposed to be subject
already to final tax. Its as if its a dividend if it is a taxable
partnership. So, you apply the rates on dividends, like for resident
citizen, non-resident citizen; resident alien is subject to the rate of
10% whereas for the rest is 20% and then for not-engaged in
trade or business is 25%. So, your income in a taxable partnership
is subject to final tax while your income from a General
Professional Partnership is subject to dumping ground.
PREMIUMS PAID ON LIFE INSURANCE POLICY
Insurance Policy covering life or any other officer, any other
employee or financially interested person; What do you have to
look at here?
Q: What if the individual doesnt earn compensation but is

engaged in business? Whats the difference between the 2 types
of individual taxpayers?
A: If youre engaged in business then you are allowed the
itemized deductions or the OSD. It is wrong to say that just
because youre an individual then you cannot deduct itemized
deductions or OSD. Individuals are allowed these deductions if
they earn business income alone, or business income in addition
to their compensation income. Where do you base the OSD if its
individual? Gross sales or gross receipts. Meaning, you do not
deduct the cost of sales or cost of services. So asa ang mas daku?
Ang individual kai mas daku ang gi-base-an sa 40%. But then again
mas daku ang income sa corporation compared sa individual
thats why it was tempered that way.
You have to look at who the BENEFICIARY is.

Q: If the beneficiary is the employee himself or the family of the
employee, Can you claim it as a deduction?
A: YES, you can claim it as a deduction. It is considered as part of
the income of the employee.
Q: If the insurance was for the benefit of the Employer, can you
claim it as a deduction?
A: NO. Because its as if you transferred money to another. It is
considered as an expense on the part of the Employer.
INTEREST EXPENSE, BAD DEBTS AND LOSSES OF SALE OF
PROPERTY BETWEEN RELATED PARTIES
Q: Allowed as Deduction?
A: NO. For the reason that it involves related parties. It is not an
arms length transaction. That is the presumption. But if you can
prove through that it is an arms length transaction, by all means
you are allowed to deduct. If its not mentioned that its an arms
length transaction involved, you presume that it is not allowed as
a deduction.
LOSSES FROM SALE OR EXCHANGE OF PROPERTY
We mentioned that is its a capital loss or an ordinary loss and we
mentioned if the property is related to your business or not. If its
related to your business then you can consider, you can deduct
the losses. But you have to make a distinction again whether it
will be considered as an ordinary asset or as a capital asset. It
could happen that it is related to the business but still a capital
asset.
If it is an ordinary asset- it is automatic that the losses you can
deduct. Ordinary loss is deductible from ordinary income.
Q: What if it is a capital asset? Can you automatically deduct it
from your ordinary income?
1.
2.
3.
PASSIVE INCOME NOT SUBJECT TO FINAL TAX

Lotto winnings not subject to tax
Awards for reason of social, civic, religious, charitable,
etc for which you did not make any application, so
there was no operative act on your part to join such
contest and you are not required to render services
not subject to tax
Awards from sports competitions for an event
sanctioned by your Philippine Olympic Committee
not subject to tax
TAXATION OF CAPITAL GAINS

Remember the classification if it is shares of stocks, real property
or other property.
If shares of stocks, how is it taxed? First P100,000, 5%. For the
excess, 10%. But this should be good for one year, so if theres a
series of transactions, youre supposed to accumulate them, and
then determine if it has already reached P100,000 so that if it has,
whatever are the succeeding transactions, automatic subject to
10%. And it only applied if the stocks are not listed or traded in
the local stock exchange. So if it is listed and traded in the New
York Stock Exchange, you tax it according to the regular income
tax, dumping ground computation. If listed and traded in the local
stock exchange, the tax rate is of 1% based on gross selling price.
If real property, 6% based on gross selling price, zonal value or
assessed value, whichever is higher.
If you have incurred a loss in selling your property, will you be
subject to donors tax? If the zonal value is P8 M but you sold it
for P4 M, is the P4 M difference subject to donors tax? No,
because there is a presumed income. That inadequacy in the
value of the property sold is relevant only to shares of stocks so
that if you sell the shares of stocks for less than its market value,
you may be subject to donors tax. And the fair market value
would depend if its listed or not. If its listed, then whatever is the
value stated in the stock exchange. If its not listed?
Page 40
Q: What if its not listed in the stock exchange? How are you
supposed to determine the market value?
A: You use the book value. We already mentioned before how it
was supposed to be computed.
Q: So income on sale or other disposition of other capital assets?
A: Dumping ground computation. What will apply are the Capital
Loss Limitation Rule, your Net Capital Loss Carry Over (NCLCO),
and the Holding Period Rule pa applies, right?
Q: When would you know that you are allowed to deduct 100%?
A: You look at if it is 12 months or less, then 100%. If its more
than 12 months, then only 50%. Holding period only applies to
individuals.
Sayun ra, MDAS ra, simple math ra class. But if you look at the Bar
biya, theres always a computation. Pananglitan be if naglibog mo
unsa man ni ang 2% kung .2 or .02, para dili mu masayop ayaw lag
butangi ug answer. Ang formula lang ang ibutang. But of course
dili full points. Lahi ragyud tong makabaw jud ka. Para di jud ka
masayop ba. Pananglitan 2% imo computation, nya pag multiply
nimo kay .2, ah, .2 diay ang pasabot niya, dili diay 2%, so gamay
kag score diba. So kung maglibog ka ayaw nalag butangi ug
answer. Ibutang nalang ang formula, k? Kay sakit raba sa dughan
nga kahibaw jud ka nga 2% pero nasayop lang ka. Mauwaw sad ta
oi nakaabot na ta ug law school nya wa pa ta kahibaw unsa nang
2%. Unsa nang 2% be, in decimal form? 0.02
It helps that you know the rule. Ang kasagaran raba mangutana sa
abogado kay kanang not engaged in trade or business in the
Philippines.
INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX
I. Senior citizen, but it must comply with the requirements:
1.
Must be at least 60 years old
2. Your income must not exceed the poverty line.

Kanang poverty line, its actually not fixed. It will be
determined by NEDA. Before it was only P60,000 per year. If
you dont exceed 60k per year then youre not subject to tax.
But karon Im sure the poverty line must have gone up.
Maybe you can research on that although that will not be
part of my exam, but for purposes of Bar lang.
II. Minimum Wage Earners
Person earning the statutory minimum wage in the wage order.
But its not uniform for all, so most likely in your exam or the
Bar it will be mentioned that the minimum wage for this
particular case is this much, so you will know if minimum wage
earner xa. So if minimum wage earner, not subject to income
tax and withholding. In determining minimum wage, night shift
differential and hazard pay, overtime pay etc are not included,
but if the minimum wage earner earns those type of premiums,
those are still considered exempted from taxes.
A: GR: Its taxable only for income within the Philippines.
III. Exemptions granted under international agreements.

Member of the foreign mission here in the Philippines. For
example you are a citizen of the US and you are working in an
embassy here in the Philippines. Actually that applies to all
embassies under the Geneva Convention, not subject to tax.
Q: Most of the rates applicable to Resident Citizens apply to

Nonresident Aliens. Unsa lang sa man sila nakalahi?
A: Cash and Property Dividends the rate is 20%.
Capital Gains on Real Property 6%. It still applies to them.
Capital Gains on Sale of Shares of Stock Not Listed not traded 5%
or 10% also applicable to them.
Q: BUT if you are a Filipino and you work in the embassy of the US,
will you be subject to tax?
A: YES class. That has been the subject of a controversy last year
because the BIR issued a regulation clarifying that although these
individuals are not subject to withholding tax, does not
necessarily mean that they are exempted from taxes.
Q: How about a Non-resident Alien Not Engaged in Trade or

Business? (NRA-NETB). Unsa man ang rule sa iyaha?
A: Taxable for income within, at a rate of 25% based on Gross
Income.
Q: Why do you think they are not subject to withholding tax?

A:Because how can you compel another state for withholding
taxes, and remit the taxes to you, diba? International Comity will
dictate that you cannot compel another country to withhold taxes
in your behalf. So thats the reason why they are not subject to
withholding tax.
TAXATION OF NON-RESIDENT ALIEN ENGAGED IN TRADE OR

BUSINESS (NRA-ETB)
Q: So there is still though income by a NRA NETB, which is subject

to final tax. What are these income?
A: Capital Gains on Sale of Shares of Stock Not Listed not traded, 5%
or 10%
What if Real Property? There is that instance. A Condominium
unit diay. That is still real property. A NRA NETB sold a condo unit.
Will it be subject to the 25%, or the 6%? 6%!
This 6% has only a distinction if Corporation. Kay ang Corporation,
kinsa lang man ang maka avail sa 6%? Domestic lang! ang
Resident Foreign and ang Nonresident Foreign is not covered; it is
part of the dumping ground computation.
So ang 5% or 10% for ALL individuals. 5% or 10% for ALL
corporations pud
Ang 6% for ALL individuals. 6% for Domestic corporation only.
Meaning ang Foreign Corporations kay dili 6% ang rate sa real
property sale, but subject to the dumping ground computation.
BUT you are still required to Assess yourself and pay the tax.
I remember attending meetings with Japanese embassy. They are
very concerned about compliance with the law. Kay mga Filipinos
are working there man in the Japanese embassy. They asked our
opinion whether they are subject to tax and of course we said
that they are subject to tax. Then the USAID, they also asked our
opinion whether they are subject to tax, and unfortunately, they
are not part of the enumerated organizations which are exempted
from tax. The international agreement must specifically provide
that Filipinos or any person working for that organization should
be exempted from taxes. Theres a list, you dont have to
memorize them. I think its Revenue Regulation 7 & 8 2013. It
clarifies the taxability of individuals working for an international
organization.
Page 41

TAX ON CORPORATIONS
Again, whatever we discussed about gross income and deductions,
actually still applies to corporations.
MINIMUM CORPORATE INCOME TAX

Now, the 2% MCIT, what you have to remember here
is that you are allowed to credit the excess MCIT to
your regular income tax.
In corporations, this is not limited to the sense of corporation in

the corporation code. It includes taxable partnerships. Even joint
ventures,
Q: What is the rationale behind this MCIT?

A: The rationale here is you should not be able to get away with
taxes by overstating your expenses.
except
o
o
joint ventures for undertaking of

construction projects with the government.
joint ventures or consortium engaged in
geothermal or other renewable sources of
energy
joint venture or consortium. Well, some really say that it should

be joint venture lang, undertaking construction projects and
consortiums. I remember during my time, thats how it was
discussed joint venture for construction projects.
Kai asa mana siya gi base ang tax? It is right before the deductions,
diba? So bright man inyong mga congressmen before, so they
devised that method. That they should prevent corporations from
getting away with taxes by imposing the so-called MCIT.
Q: The excess MCIT can be carried on for how long a period?
A: 3 years.
Q: So what happens if you are not able to credit it?
A: It goes back also to the corporation. It will still go back to the
corporation. It will form part of its retained earnings.
But that was not how it was stated in the tax code. It should be
joint venture or consortium, for undertaking construction projects.
Joint venture or consortium for geothermal or other renewable
sources of energy operations. So joint venture and consortium
applies to both.
Q: So how do we compute the MCIT? When do you apply the

MCIT?
A: It should apply beginning the 4th taxable year immediately
following the year in which such corporation commences business
operations.
These are exempted from corporate taxes. Including general

professional partnerships. Whatever we will be discussing now
does not apply to them. But I just want you to remember, when is
there partnership? You will be taught in the first two cases that I
gave. The evangelista case, and Nabisco (insurance) it will discuss
when it is considered a partnership. Because there are two
conflicting decisions involving this. If you have time, it was
discussed in the Nabisco case about pascual doctrine, so you may
want to read that as well.
So it should be 4th year following the year you commence business

operations
In that case (Nabisco), it was not considered a partnership. In the

case that I mentioned (evangelista), they were considered as
taxable partnership. But just for distinction you may want to read
pascual. So take not of what is covered by the term corporation
TAXATION OF DOMESTIC CORPORATION
NORMAL INCOME TAX
The Rate is 30%
But in addition to regular tax of 30%, we have gross sales, less
cost of sales or cost of goods sold, whatever is the net amount
shall be considered as gross income.
But take note class that if there is other income, you include the
other income in determining gross income. I-apil gyud nang other
income sa pag determine sa gross income.
So you have gross receipts/sales less cost of goods sold. For
purposes of determining gross income, dont forget to add other
income. Because that is included in the term gross income.
Q:Why is this (determination of gross income) important?
A: Because later on, you will be computing for MCIT. And the
MCIT is based on gross income. So, it matters if you know the
composition of the term gross income. So you should include
other income.
Q: Why is it important that it should be after?

A: Because this has been opined already to apply on the 5th year
of operations. 5th year niya, mao na siya ang considered as the
start of MCIT. But, the come on there is you begin counting on
the year you commece operations.
Example
Im registered (commencement of business operations is defined
as the registration with the BIR) in December of 2012, when are
you supposed to start the MCIT? So you count including 2012.
2016 will be the 5th year of your operations.
So it is best, if youre given an option and its already almost the
end of the year, you should ask your lawyer or whoever
incorporates your business, to start registering with the BIR at the
beginning of the year nalang. So that you can enjoy the free
period from MCIT longer. Take note how it is counted ha. You
include counting the year you register with the BIR.
Example
You have December of 2014, when is your 5th year when youre
supposed to impose the MCIT?
So December 2018. Because you begin counting from the year
you register with the BIR.So, no problem. No question when MCIT
is supposed to be imposed. Theres not much complication on the
imposition of MCIT and when it is supposed to begin.
Q: But the issue usually happens on the excess MCIT. When are
you supposed to credit it?
A: Take note that the term must be subsequent. That means it has
to be continuousSo, if you did not incur any regular income tax for
a particular year, so automatic MCIT. It doesnt stop the running
of the 3 year period (when you can credit excess of MCIT from NIT)
Page 42

1999
2000
2001
2002
NIT
MCIT
2003
25,000
100,000
So here, MCIT is greater than NIT with excess of 75,000.
On the second year, again it incurred a lower NIT compared

with MCIT. So there is still an excess MCIT. If you notice,
more ang MCIT kaysa NIT. So what tax do we apply, normal
or MCIT? MCIT diba?
The excess, you can only credit it to the extent of your
normal income tax. In the second year, if walay income tax,
you can carry it over. But only good for 3 subsequent years.
So the excess 75,000 (2003), you can carry it over for 2004,
2005, and 2006.
So if you notice, even if in 2004, you have MCIT, it doesnt
toll the running of the 3-year period. Mu run gihapun siya.
You can carry over but only for 3 subsequent years.
So your 75,000, you can carry over to 2004, 2005 and 2006.
This 2004 can be carried over to 2005, 2006 and 2007. Even
if in 2004 you have MCIT, it doesnt toll the running of the 3
year period. Mo run ghapon cya.
In 2005 it so happened that it will impose the normal

income tax of 200,000. Why is that? Because mas dako man
cya kay sa sa MCIT involved. So what happens then? Your
normal income tax of 200K, this is good for 2005, you can
deduct how much? You can deduct the 75K excess MCIT,
you can also deduct the 2004 excess MCIT of 20K so that in
2005, how much is your normal income tax supposed to pay?
It will be 105,000. So after all the government is not really
enriching itself in a way, because you are allowed to deduct.
This sort of balances it.
So padayon ta, is there any excess MCIT after 2005? Wala na.
Everything has already been deducted. Pag 2006 again you
had an excess of 300K. Why? Walai normal income tax,
automatic MCIT applies. When does that happen? If you
incur loss or have 0 income. So its automatic.
When do you apply MCIT

First, when you incur loss or have 0 income and second, when
your MCIT is much higher than your normal income tax.
So the 300k, where do we apply this? We can apply this from
2007, 2008 and 2009. However, in all these years the MCIT is
always higher.
Lets change it. What if this is not the case? Atong balihon. So ang
300k nimo if katong situation applies, pag abot og 2009, you are
not able to deduct the excess, what will happen to it? Where will
it go? It will go back to your retained earnings of the company. So
forming part of your equity.
What if that was not the case? What if there was normal income
tax? So 100K. So what if these are the figures given? Take note
that you already have an excess MCIT as of 2006. That means you
can apply the excess to whatever normal income tax you have to
pay. So in 2007, what will happen? I will pay normal income tax of
100K and I can deduct how much? You can only deduct to the
extent of the normal income tax. Dli ka mo ingon na maka deduct

ka og 300k, therefore my NOLCO, net operating loss of 200K does
not apply. Dli na cya ing-ana. Therefore, you can deduct to the
extent of the normal income tax paid. Besides this is the tax
where you will deduct it, not on the income dba? So you deduct
the MCIT to the extent of 100k. so in 2007 you will not pay
anything.
Now what happens to the balance of 300k that you have in 2007?
Theres still an excess of 200K. So in 2008, the 50K I can still
deduct here. So 0 ghapon. Sa 2009, pila na ni? 150K. Sa 2009 piso
na ang difference. Does it make a difference? Asa nimo i-apply?
Apply the NIT. So quite a bit ang piso na difference. Kabaw man
sad mo asa ang mas dako. So the 50k, you will deduct 20k here, so
0. What will happen to the excess? 130K. what will happen in
2010? In 2010, 10K, how much will you deduct? Deduct 0. Why
man? Coz you can only carry over for 3 years, so from 2009, you
cannot deduct anymore. It will revert back to your retained
earnings.
To what type of corporations will the MCIT be applied to? It will
only apply to corporations subject to regular income tax. So
meaning if gi subject ka og 30% based on your net income, the
MCIT also applies. So that if the regular income tax of your
corporation is not the normal 30% income tax what will happen?
No MCIT as well. What is the best example? Proprietary
educational institutions, which is subject to preferential income
tax rate. Do you apply the MCIT? Dili. Imong tan-awn first ang
corporation, if subject to normal income tax rate, then it may be
subject to MCIT. Then you look at the year it commenced
operations. If the year is not given, then assume the MCIT applies,
but most likely they will give a hint that the MCIT is being asked
here. So if regular income tax applies, MCIT also applies. If regular
income tax does not apply, then MCIT does not apply as well.
Asa paman cya dli mo apply? It does not to corporations
registered in the economic zones, however, take note that in
economic zones, the incentives there only apply to registered
activities so that if there is an income from unregistered activities,
it will be subject to normal income tax and corollarily, mo apply
ang MCIT. So it applies then to unregistered activities because for
registered activities, what will apply is the preferential tax rate.
However, even if regular income tax applies and MCIT applies,
there are instances when you may be allowed to ask for relief.
There are 3 provided. What are these? First, reasonable business
reverses. What is reasonable business reverses? If theres
depression, recession, or incurring losses that are not normal
under the circumstances. When is it not considered normal?
When you have been incurring losses for the last 5 years, then
MCIT does not apply. Why? Because the corporation will close.
Thats the reason why MCIT does not apply. Second, force majeur.
When is there force majeur? Acts of God, or even acts of man.
War, fire, theft, robbery, embezzlement, all kinds you can claim it
as force majeur. Third, you have prolonged labor dispute. When is
it considered prolonged? More than 6 months.
PROLONGED LABOR DISPUTES
When is it considered prolonged?
When it is for more than 6 months (based on the Revenue
regulations)
Allowable Deductions:
Itemized deductions are applicable to corporations. Here, the
limit for charitable contribution is only 5 percent.
Page 43
OPTIONAL STANDARD DEDUCTION
GR: Taxable only for income within the Philippines

However, it is subject based on GROSS INCOME. Thus, MCIT will
NOT apply
Yes, they can claim.

Interest on Foreign Loans- Final Tax of 20 percent
PASSIVE INCOME
(TN: The same as individuals the only difference lies in the
dividends)
Intercorporate Dividends - 15 percent if the reciprocity rule

applies (TAX SPARING RULE)
Domestic to Domestic EXEMPT
RECIPROCITY
If the home country of the non resident foreign corporation
extends the same privilege to the Filipino Corporations engaged
in business in that home country
RFC to DOMESTIC- Dumping Ground Computation, it is considered

as ordinary income
Capital Gains for the sale of shares of stocks not traded or listed
in the local stock exchange 5 % - first 100,000; 10% - excess
Interest from Deposit and yield from any monetary deposit

substitute- 20 percent (same as individual)
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
INTERCOMPANY DIVIDENDS
This is only applicable you are a CLOSELY HELD Corporation

Capital Gains for the sale of shares of stocks not traded or listed
in the local stock exchange 5 % - first 100,000; 10% - excess
(remember this is the only passive income that is the same for all
types of taxpayers)
Income derived from expanded foreign deposit system- 7.5 %
Capital gains realized for sale or disposition of lands or buidings
6 % (because we are talking about domestic)
Q: What are the passive incomes of corporation not subject to
income tax/final tax?
A: Domestic Corporation- I cant think of any. (Everything is
subject to income tax).
CLOSELY HELD CORPORATION

Applies to corporation where 50 percent of its Outstanding
Capital Stock is owned by not more than 20 individuals of 50
percent of its total stocks entitled vote is owned by not more than
20 individuals .
If you are publicly held, then you are exempted from IAET.
Q: What is the rate of IAET?
A: 10 percent based on Improperly accumulated earnings
Q: How do you compute for the Improperly Accumulated Earnings?
A: Net Taxable Income plus all income.
TAX ON PROPRIETARY OR HOSPITAL INSTITUTIONS

Preferential Tax Rate of 10 %, subject to the Pre-Dominance Test
TAX ON GOCC AND INSTRUMENTALITIES
GR: Not subject to tax (TN: PAGCOR is not subject to tax read
the case of PAGCOR)
RESIDENT FOREIGN CORPORATION
GR: Taxable for income within the Philippines
Q: Does MCIT apply to RFC?
A: Yes, because it is subject to regular income tax
Q: Tax on Interest of Deposit and Yield or income from other
monetary benefit, Deposit Substitute?
A: Subject to 20 %
Q: Income derived from Expanded Foreign Deposit System?
A: 7.5 %
Q: Capital Gains for the sale of shares of stocks not traded or
listed in the local stock exchange 5 % - first 100,000; 10% excessInter company dividends?
A: If it receives from DC- exempt
If it receives from another RFC- dumping ground computation
Receives Dividends from a NRFC- not subject to tax, because it is
not within the jurisdiction of the Philippines
Q: What is all income?

A: The exempted, subject to final tax and excluded income also
the NOLCO. You add all your income in other words. Deduct the
actual tax paid, final tax paid and the dividends actually paid. You
also deduct reserved funds for reasonable business needs.
Improperly Accum Earnings = net taxable income + ALL INCOMEactual tax paid-final tax paid-dividends actually paid- fund
reserved for reasonable business needs
In IAET, you are not required to file any return. Mura rag
Information. Because it is penalty , not a tax. It is termed surtax
before.
Prima facie evidence of the purpose to avoid the tax:
a. You are merely a holding company or investment co.
Evidence determinative of purpose - it must be the intention of
the taxpayer at the time of accumulation. If intention is proved,
automatic IAET applies.
Instances when accumulation is no longer considered reasonable:
1. retained earnings exceed 100% of your paid up capital
e.g.
Equity portion:
common stock,
addn paid in cap,
revaluation surplus
retained earnings
1m
1m
1m
2m
Non Resident Foreign Corporation
Page 44

Q: is there an excess of the reasonable business needs? What is
considered paid up?
A: Common stock and addn paid in. Revaluation surplus- not
included. THERE NO EXCESS RETAINED EARNINGS. Ergo, not
subject to IAET.
Q: What if Retained earnings is 4m? Do we subject it to IAET?
A: YES.
Q: Do you just automatically compute? Retained Earnings is 4m
so do you subject the excess 2m to IAET?
A: No. That is not the tax base. ( refer to above formula for
computing Improperly Accum Earnings)
Eg. Gross sales 7,500,000
Sales returns and allowances 225, 000
Sales discounts 375,000
Cost of good sold 2,625,000
Deductions 3,275,000
Interest Income from BSA bank under foreign currency dep
system 750,000
Dividends from Landscaping Corp (RFC) 100,000
Gross Sales P7,500,000
Sales returns, allowance, P 225,000
Sales Discounts P375,000
Cost of Goods Sold P2,625,000
Deductions P3,275,000
Interest Income from BSA Banks, FCDS P 750,000
Dividends from landscaping corporation, an RFC P100,000
Interest on Loans receivable P50,000
Dividends from a domestic corporation P65,000
Capital Gains on Sale of Shares to a Direct Buyer P75,000
Dividend Actually Paid P800,000
You were asked to compute, how much is the Improperly
accumulated stocks in that corporation. So lets compute.
First, determine the Net Taxable Income. So, unsa i-apply sa
dumping ground computation. So first, gross sales less sales
returns, allowance and sales discounts
P 7, 500,000 (Gross Sales)
600,000 (Sales returns, allowance P 225,000 + Sales
Discounts P375,000)
P 6, 900,000 [NET SALES]
- P2,625,000 (Cost of Goods Sold)
P 4, 275, 000 [GROSS PROFIT FROM SALE]
+ P150,000 (other gross income i.e. Dividends from landscaping
corporation, an RFC P100,000 + Interest
on Loans receivable P50,000)
P4,425,000 [GROSS INCOME]
P3,275,000 (deductions)
P1, 150,000 [NET INCOME]
_____ X 30%
P 345,000 NORMAL TAX TO BE PAID
MCIT = ( P4,275,000 X 2%) P85,500
Gross Income as Gross Sales less sales returns, discounts,
allowances and cost of goods sold if merchandising business.
SO how much is the Improperly Accumulated Earnings Tax?
Taxable Income
1,150,000
Income Exempt from Tax

65,000 (Dividends from a domestic
corporation P65,000)
Income subject to final tax 750,000 (Interest Income from BSA
Banks, FCDS P 750,000)
75,000 (Capital Gains on Sale of
Shares to a Direct Buyer)
P 2,040,000
- P 1, 205, 000 (total deductions)
P 835,000 [improperly accumulated
earnings]
IAET = 83,500 (10% x P835,000)
Then we deduct the dividends paid P
800,000, the income tax P 345, 000 and
final tax of P 60,000= P 1, 205, 000
Thats why we determine MCIT and Normal
income tax because the tax will determine
how much was actually paid. In this case,
when we compare the MCIT from the
Normal income tax, we determine which
you did actually pay. You pay the Normal
income tax because it is higher. So this is
really a comprehensive problem.
Also deduct taxes actually paid. Income
subject to final tax. Interest from bsa bank
7.5% of P750, 000 = P56,250
Capital gains from the sale of shares of
stock. P75,000 x 5% = P 3,750
So the Total final tax paid on passive
income P 60,000
Class, it may not come in the form of a
problem, you will have to determine
whether it is exempt or not. It will even be a
continuous problem where you determine
which is taxable and which is not. Which is
excluded or not. By doing that you will
actually know what we have discussed. And
it is this tax that could determine that. Kay
naa man xa tanan. Normal income tax,
exclusions from tax, exemptions from tax.
Its a continuous problem, so you have to
do the work. Just because you are given the
computation it doesnt mean that you will
have to deal with the computation. The
exam may not be in a form of computation
but rather determining only whether it is
taxable or not.
Q: So how much is your total deduction?
A: It should be 1, 205, 000. The dividend of 800,000, the income
tax of 345, 000 and the final tax of 60, 000.
Q: So how much is your improperly accumulate earnings?
A: 835, 000. The total of the income 2, 040, 000 less your
deductions, 1, 205, 000 equals your Improperly Accumulated
Earnings of P 835, 000.
Q: From the above answer, how much is your IAET?
A: P 83, 500.
Disregard what I said about adding the gross income for MCIT
because there is a definition of gross income under Section 27 E (4)
Page 45

Q: So when are you supposed to pay the improperly accumulated
earnings tax?
A: It is payable 15 days after the close of the taxable period when
the dividends is supposed to be paid.
Q: When is dividends supposed to be paid for purposes of IAET?
A: within 1 year from the close of the taxable period.
Example:
2013
Q: When are you supposed to pay your dividends for 2013?
A: 2014.
What if in 2014, you did not declare any dividends during that
year and there is already an excess of retained earnings from your
paid up capital, then IAET is already applicable. So IAET is payable
on January 15, 2015.
TN: IAET only applies to closely held corporation.
Added note:
If General Professional Partnership (GPP) has an income,
constructive receipt doctrine applies. It is an automatic income to
the partners. However, the partners cannot automatically claim it
as income yet, without considering whether what type of
deduction is being used by the GPP.
If the GPP uses OSD (optional standard deduction) then the
partners cannot deduct anything unless they have other income
from other activities.
But if the GPP uses itemized deduction, then they can deduct but
only to deductions not claimed by the partnership.
The difference here is that, income of the GPP is subject to
dumping ground computation as compared to a taxable
partnership which is considered as a dividend.
Page 46

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TAXATION REVIEW 2014-2015

The imposition of a valid tax could not be judicially

Marshalls view refers to a valid tax while Holmess view refers to

Taxation is the power vested in the legislature to impose burdens

The judiciary can determine if whether the tax is valid or not. It

TWO-FOLD NATURE OF TAXATION

SCOPE OF LEGISLATIVE POWER TO TAX

IS THE POWER TO TAX THE POWER TO DESTROY?

POLICE POWER VS. TAXATION VS. EMINENT DOMAIN

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How Can You Justify The Senior Citizens Discount As Taxation

PRINCIPLES OF SOUND TAX SYSTEM

Administrative Feasibility there must be convenient in

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Sir: As a rule, theres no prescription for the power of the

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TAXATION REVIEW 2014-2015

MCIAA was created through a charter and based on

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The Supreme Court mentioned a parallelism on sin

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TAXATION REVIEW 2014-2015

EXEMPTION FROM TAXATION

Exemption is an act of the statein divesting itself of its prerogative

General rule: Taxes cannot be the subject of set-off or

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Delegation to Local Governments Two schools of

Lets go to Territorialty the territorial boundaries of the taxing

TAXATION REVIEW 2014-2015

Prohibition against non-payment of poll tax

Uniformity and Equity of Taxation

Grant of the Congress of authority to the president to

Prohibition against taxation of Religious Charitable and

Prohibition of on use of tax levied for special purpose.

Prohibition of on use of tax levied for special purpose.

President exercise his veto power on appropriation,

Non Impairment to the jurisdiction of the SC

Grant of Power to the Local Governments Units to

Progressive System of Taxation

Origin of revenue and tariff bill

Provisions Indirectly Affecting Taxation

Non Impairment of Contracts

PROHIBITION AGAINST IMPRISONMENT FROM NON-PAYMENT

Q: What does the constitution say? Under article 6, section 28?

TAXATION REVIEW 2014-2015

It doesnt apply only to the existing condition but also

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The Completeness test, and the Sufficient Standard test. So if

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Center only for property not exclusively used for charitable