1.

Was there a violation of the constitutional provision on the origin of tariff bills?

NONE. The bill was initiated by the House of Representatives.

It is not the law but the revenue bill which is required by the Constitution to "originate exclusively" in the
House of Representatives. It is important to emphasize this, because a bill originating in the House may undergo
such extensive changes in the Senate that the result may be a rewriting of the whole. . . . At this point, what is
important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue
statute and not only the bill which initiated the legislative process culminating in the enactment of the law
must substantially be the same as the House bill would be to deny the Senates power not only to " concur with
amendments" but also to "propose amendments."
Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even with
respect to bills which are required by the Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private bills and bills of local application must come from the House
of Representatives on the theory that, elected as they are from the districts, the members of the House can be
expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at
large, are expected to approach the same problems from the national perspective. Both views are thereby made to
bear on the enactment of such laws.33
Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate
was acting within its
constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No.
1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of
the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be
introduced by the Senate to the House revenue bill.
2.

No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the
wordshall is used in the common proviso. The use of the word shall connotes a mandatory order. Xxx Thus, it is
the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the
conditions specified by Congress
TAXATION BY LOCAL GOVERNMENT UNITS

Nature: directly conferred by the Constitution

Subject to the limitations provided by the Congress.

These limitations were laid down through the enactment of the Local
Government Code.
VOTING REQUIREMENTS RE: GRANT OF TAX EXEMPTION

Majority of all the members of the congress

DOCTRINE OF JUDICIAL NON-INTERFERENCE

Courts cannot inquire into the motive, policy, wisdom or expediency of legislation.

TAXPAYERS SUIT

In order for a taxpayers suit to prosper, there must be an illegal disbursement of a

public fund.

No illegal disbursement, no taxpayers suit

Was there an undue delegation of power to the President due to the standby
authority granted to the latter?

NONE.
The general rule barring delegation of legislative powers is subject to the following recognized limitations or
exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if
the law
(a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the
delegate; and
(b) fixes a standard the limits of which are sufficiently determinate and determinable to which the delegate
must conform in the performance of his functions
The true distinction, says Judge Ranney, is between the delegation of power to make the law, which necessarily
involves a discretion as to what it shall be, and conferring an authority or discretion as to its execution, to be
exercised under and in pursuance of the law. The first cannot be done; to the latter no valid objection can be
made.

Exception: if the law is arbitrary

Public Interest Center vs. Roxas (January 31 2007)

Fixed another condition for a taxpayers suit:

The taxpayer must show his sufficient interest in preventing the illegal
expenditure.

FORMS OF ESCAPE OF TAX LIABILITY

A.

Resulting to Loss from the Government

1.

Tax Avoidance
Tax minimization
Tax-saving device within the means sanctioned by law.

2.

Tax Evasion
Tax dodging
Scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further civil or criminal liability

3.

Tax Exemption
Grant of immunity from taxes ad when granted, it should be construed strictly
against the taxpayer, following the principle:

Taxation is the rule, and exemption is the exception

ABAKA Guro Partylist vs. Ermita

The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of
facts upon which enforcement and administration of the increase rate under the law is contingent. The legislature
has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition.
It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the
executive.

Page

ORIGIN OF REVENUE, APPROPRIATION AND TARIFF BILLS

FLEXIBLE TARIFF CLAUSE

1.

Shifting
Act of transferring the burden of taxation to the consumer/purchaser
Recall: difference between incidence of taxation (burden) vs. impact of taxation
(liability)

Tax Liability: direct mandate of the law

Burden of Tax: who will shell out the funds

GMYutivoSMI
GM is a distributor.
Yutivo is a wholesaler.
SMI is a subsidiary of Yutivo.
Yutivo imports products for amount of P6M. GM, as the distributor, is imposed with sales tax.
GM then withdrew its appointment as a distributor. Yutivo was authorized as an importer of products and
distributor to SMI and customers.
Yutivo now pays the sales tax.
CIR alleges that Yutivo is guilty of tax evasion. Sales tax must be imposed to Yutivo, not to SMI.

Capitalization
Reduction of price of the taxed object to reduce the amount of the tax

3.

Transformation
The manufacturer or producer upon whom the tax is imposed increases his
process of production, the additional income being used to shoulder the tax
absorbed.

Was there an unlawful scheme?

P100,000 is the gross income. The taxpayer is imposed with P12,000 worth of tax. The
taxpayer would increase the production so that the additional income would compensate the
tax absorbed.
Republic v. Heirs of Cesar Jalandoni

2.

Illustration:

CIR vs. Yutivo and Sons (1961)

Jalandoni died and left his estate. This was subjected to an estate tax
The CIR discovered that there were several items omitted in the inventory when it assessed the estate:
1.
Several parcels of lands were not included
2.
Value of sugar and rice land was declared in a lesser amount
3.
There was discrepancy in value of stocks declared in estate tax return
Heirs alleged the following:
1.
The omission of the three lots was because of an honest mistake
2.
The undervaluation occurred because when the heirs valued the sugar and rice lands, they have based it
on just judgment
3.
As to the discrepancy in the value of stocks, the heirs allegedly did not know the value of the stocks at
the time they filed the return. The corporation issued statement regarding the stocks 6 months after
the death of Jalandoni.

None. There was no bad faith in the part of Yutivo.

Prior to appointment of Yutivo, GM has been paying the sales tax. This was continued by Yutivo
upon withdrawal of GM as a distributor.
There was no tax evasion. SMI has been existing even prior to appointment of Yutivo as a new
distributor. Moreover, Yutivo even continued the payment of sales tax.

Another case in relation to Yutivo

Law imposed sales tax to manufacturers of cigarette packs IF there will be 20 cigarettes per
pack.
A manufacturer produced 10 cigarette sticks per pack. These packs are thus not subject to
tax. The manufacturer created a subsidiary to which the other 10 sticks would be
transferred. This subsidiary is not imposed with the sales tax since it is not a manufacturer.
Is there bad faith in the part of the manufacturer?
YES
The subsidiary was clearly made to avoid the tax. Unlike in the case of Yutivo wherein SM
as the subsidiary was already existing prior to the appointment of Yutivo as manufacturer,
the case here involves a scheme created by the manufacturer after the enactment of the law
imposing sales taxes on manufacturers of cigarettes which produce 20 cigarettes per pack. It
was done to circumvent the imposition of sales tax.
CIR v. Norton

Was there tax evasion by the heirs?

Supreme Court: There was no tax evasion

Tax evasion requires bad faith. The heirs were not in bad faith since they do not have any idea on the
value of the shares of stock, since this value fluctuates every now and then.
As to the undervaluation of the sugar and rice lands, the heirs are not in bad faith since they are not
appraisers of real property. They are allowed to commit mistakes.
Since there was no tax evasion, the heirs have no criminal liability

Prescriptive Period

Government has 3 years to assess tax. After this, the government can no longer make the assessment.

If there is a clear and convincing proof of fraud, prescriptive period is 10 years.

In this case, there was no evidence of fraud. Hence, the prescriptive period is 3 years. However, the assessment of
the government was done beyond the 3year period. The government cannot assess the estate anymore.

Norton and Jackbilt had an agreement. Norton becomes the exclusive distributor of Jackbilt while
the latter will sell Nortons products to its customers.
Everytime a customer will order from Jackbilt, the customer invoice is issued by Norton.
100% of the shares of stock of Jackbilt goes to Norton.
The operation of Jackbilt is also managed by Norton.
The compensation of the employees of Jackbilt is dictated by Norton.
The invoices received by the customers indicate that Norton and Jackbilt are intertwined.

Norton and Jackbilt are both corporate taxpaters. If their income is taken separately, it
would be subjected to lower tax.
If the income of Norton and Jackbilt is combined as to treat the two as one entity,
higher tax will be imposed.

No Result to Loss from the Government

Page

B.

Is there tax evasion?

First, the sales invoice is indicative of bad faith. If Jackbilt is the customer of Norton, then Norton should have
issued the sales invoice to Jackbilt, and the latter would issue the same to the customer. In this case, the sales
invoice is issued by Norton to the customer directly.

Philippine Acetylene
The charter and the agreement between
the Philippines and USA do not contain
provisions that any individual or entity
transacting with NPC and VOA is likewise
exempted

Second, Jackbilt is operated by Norton. This indicates that they are one and the same entity.
Hence, the separate and juridical personality of the two corporations is disregarded.

Elements of tax evasion:

1. Fraud
2. Loss on the part of the government (either by reduction of tax or no payment of tax at all).

Note: Under the present law, corporate taxpayers are subject to 30% tax based on net income. If this present law is applied, there
will be no difference if the corporations are treated separately or as one entity. Furthermore, there will be no tax evasion by
Norton since there is no reduction of tax in the part of the government.
Note also that under the present law, there is no more sales tax. All are under the category of a business tax.

Philippine Acetylene v. CIR

Philippine Acetylene sold goods to NPC and VOA

By virtue of the international agreement between the Philippine Government and the United States,
NPCs charter provides that it is exempt from direct and indirect tax. VOAs charter also provides
the same but with respect to several items only.
Philippine Acetylene says that it should not be liable for sales tax in the transaction with NPC and
VOA because these entities are exempt from taxes. Thus, Philippine Acetylene cannot shift the
burden of taxation to them.

Should Philippine Acetylene be exempt from sales tax?

NO.
What has been shifted to NPC and VOA is the burden of tax which is merely a matter of economics. The tax
liability still remains to Philippine Acetylene as the taxpayer.

Maceda vs. Macaraig

Is NPC exempt from direct and indirect taxes?
YES.
The NPC is a non-profit public corporation created for the general good and welfare wholly owned by the
government of the Republic of the Philippines. From the very beginning of its corporate existence, the NPC
enjoyed preferential tax treatment to enable the Corporation to pay the indebtedness and obligation and in
furtherance and effective implementation of the policy enunciated in Section one of "Republic Act No. 6395"
The NPC is a government instrumentality with the enormous task of undertaking development of hydroelectric
generation of power and production of electricity from other sources, as well as the transmission of electric power
on a nationwide basis, to improve the quality of life of the people pursuant to the State policy embodied in
Section E, Article II of the 1987 Constitution. It is evident from the provision of P.D. No. 938 that its
purpose is to maintain in the tax exemption of NPC from all forms of taxes including indirect taxes as provided
for under R.A. No. 6895 and P.D. No. 380 if it is to attain its goals.
NPC is thus exempt even from indirect taxes, because its charter provides for the same. It can even refuse to pay
the tax component of the purchase price of the goods it buys from other companies.
Will all companies transacting with NPC be likewise exempt from tax? NO. When NPC becomes their
customer, what is only shifted is the burden and not tax the liability, which remains to them as the statutory
taxpayers. Hence, the exemption of NPC would not redound to their benefit.

NOTE:
In the new charter of NPC, even the suppliers are now exempt from indirect taxes. The aim of this exemption is
to encourage the companies to continuously transact with NPC without the burden of indirect tax imposed to
them.

What NPC and VOA paid is not the tax itself but the part of the purchase price. Its exemption to sales tax
would not redound to the benefit of PA.
CIR vs. JOHN GOTAMCO & SONS

Under an international agreement, the WHO is exempt from direct and indirect tax
Gotamco transacts with the WHO. It alleges that it should not be liable for contractors tax, a form
of indirect tax. Since its consumer is exempt from tax, Gotamco cannot shift the burden, hence it
must also be exempt from tax.

Should Gotamco also be exempt from contractors tax?

YES.
Gotamco must be exempt from contractors tax. WHO is exempted from tax because there is a provision in the
international agreement that exempts it from such. In addition to this, the international agreement also provides
that any person or entity that contracted with WHO on the construction of WHO building shall likewise be
exempt from tax.

Gotamco
The international agreement contains
provisions that individuals and
corporations transacting with WHO in the
construction of WHO building shall
likewise be exempt from tax.

CIR vs. PLDT

Difference between direct and indirect taxes.

Direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them; they
are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in.
On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid by, one
person in the expectation and intention that he can shift the burden to someone else. Stated elsewise,
indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof
can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching
the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the
tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered.

PLDT is not exempt from indirect taxes.

The clause "in lieu of all taxes" in Section 12 of RA 7082 is immediately followed by the limiting or
qualifying clause "on this franchise or earnings thereof", suggesting that the exemption is limited to

YES

Page

taxes imposed directly on PLDT since taxes pertaining to PLDTs franchise or earnings are its direct liability.
Accordingly, indirect taxes, not being taxes on PLDTs franchise or earnings, are outside the purview of
the "in lieu" provision.

Can it claim for tax refund?

NO.
First, Contex is not a VAT-registered entity.
Second, when Contex was imposed with VAT, only the burden of tax was shifted to it and the VAT became part
of the purchase price. It is not the statutory taxpayer. Hence, it has no legal personality to claim for the refund of
VAT.

VAT is an indirect tax imposed on goods and services. It can be shifted to the
buyer to form part of the purchase price.

Both CGT and VAT can be shifted to the buyer. But CGT is a direct tax, while VAT is an
indirect tax. Where lies the difference?

In CGT, the shifting was made by virtue of a contracted stipulation between the
parties. Without this stipulation, the burden of paying the CGT cannot be shifted.
In VAT, there could be shifting of the tax burden even without a contractual
provision. The nature of VAT as an indirect tax is sufficient to shift the burden to
the buyer.
Silkair Singapore vs. CIR

Silkair purchased petroleum products from Petron. It also paid the VAT component.
Petron remitted the VAT to the government.
Silkair realized that it should not have paid because what is involved is a zero-rate sale. It claimed for
tax refund.

Is Silkair entitled to claim for the tax refund?

NO.
Silkair is not the statutory payer, thus it is not the proper party to claim the refund. When Petron shifted to
Silkair the VAT component, it never shifted the tax liability but only the burden. Petron remains as the statutory
taxpayer. As such, Petron is the proper party to claim for a tax refund.

Is CIC guilty of tax evasion?

YES.
Tax evasion connotes the integration of three factors:
(1) The end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the
non-payment of tax when it is shown that a tax is due;
(2) An accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate
and not accidental"; and
(3) A course of action or failure of action which is unlawful.
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the
purported sale of the Cibeles property by CIC to Altonaga, CIC received P40 million from RMI, and not
from Altonaga. This would show that the real buyer of the properties was RMI, and not the intermediary
Altonaga.

Lecture Notes:

If Petron is successful in claiming for the refund, it must hold the refund in trust for Silkair.
The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom
the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. Section 130
(A) (2) of the NIRC provides that "[u]nless otherwise specifically allowed, the return shall be filed and the
excise tax paid by the manufacturer or producer before removal of domestic products from place of
production." Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund
based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP
and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair
for jet fuel is not a tax but part of the price which Silkair had to pay as a purchase price.

ESTATE OF BENIGNO TODA

CIC allegedly sold a property to Altonaga worth P100M, subject to 35% corporate tax.
Altonaga then allegedly sold it to RMI, for P200M, subject to 5% individual capital gains tax.

The end to be achieved

Payment of a lesser tax by CIC (35% of 100M instead of the entire P300M)
Accompanying state of mind

If property was indeed purchased from CIC to RMI, then there is bad faith in all the
parties by the use of Altonaga as a mere conduit.

RMI should have reflected in its books that property was brought from CIC. Instead,
RMI made it appear that Altonaga sold the property presence of bad faith
A course of action that is unlawful

Fabricated evidences

If the corporate tax of 35% will be properly imposed to the P300M purchase price, the tax that CIC should have
paid will amount to P105M.
300M x 35% = 105M
Because CIC made use of a scheme, what it paid was only P45M.
100M (sale to Atonaga) x 35%
= P35M
200 M (sale of Altonaga to RMI) x 5% = P10M
-------P45M

Contex vs. CIR

Contex bought material from suppliers
Contex is not registered under VAT.

Page

Capital Gains Tax (CGT) is a direct tax. When a taxpayer sold a property, the
gross sale price or the fair market value would be subject to CGT of 6%. However,
by stipulation of the buyer and seller, the burden of paying the CGT could be
shifted to the buyer. This stipulation is recognized because of the autonomy of
contracts, where the parties are free to stipulate terms and conditions of their
contract as long as these are not contrary to law, morals, public policy, public
order, and good customs.

Thus, there is a lesser tax paid by CIC by use of its scheme.

3.
4.

Under the present law

Note:

Only apply the rules if there is ambiguity.

If the provision is too clear to be mistaken, do not apply the rules of
construction

1.

If the provision is on imposition of tax liability

apply the strict interpretation rule
Any ambiguity in the provision of the law imposing tax shall be strictly construed
against the government.

2.

If the provision is on the exercise of the power of taxation

it must be liberally construed in favor of the government.
The power of tax is an inherent power of the state.

If the provision grants tax exemption: strictissimi juris shall be applied

Taxation is the rule and exemption is the exception
Any ambiguity in the law granting tax exemption shall be strictly construed
against the taxpayer

What must be rightfully paid

Coporate tax by CIC

-

300M (Purchase Price as CIC sold to RMI)

100M (Cost of building)
-------200 M (Net income) x 30% (tax) = 60M
*CIC should have paid P60M.

What CIC would pay if the scheme is used

3.

Corporate tax by CIC

-

100M (Purchase price as CIC sold to Altonaga)

100M (Cost of building)
-------0M (Net income) x 30% (tax) = 0M
*Corporation will have ZERO tax liability

If the law has ambiguous provisions both on imposition of tax and the grant of
exemption

Apply the strict interpretation first: determine if the act that is being
subjected to tax is indeed covered by the law imposing tax. If it is not
clearly provided by the law that a subject is taxable, construe the
ambiguity against the government and in favor of the taxpayer.
Remember that before a subject can be imposed with tax, it must clearly
be provided by a law imposing such.

If it is already determined that the subject is indeed covered by the law

as taxable, apply the strictissimi juris. Construe the ambiguity of the
grant of exemption against the taxpayer. So if the activity being taxed is
already established to be covered by a tax law, taxation now becomes the
rule and exemption is the exception. In order for exemption to be
granted, it must be proven that the exemption is clearly provided by the
law.

Individual Capital Gains Tax by Altonaga

200M (Gross Selling Price) x 6% = P12M
*Only capital gains tax of P12M will be imposed by virtue of
the sale because the scheme was used. The corporate tax is
eliminated. A lesser tax is paid, therefore there will be tax
evasion.
QUESTION: What if the property is the corporate asset of CIC?
No tax evasion. Whether the scheme is used or not, the amount of tax to be paid is the same.
If the property is a corporate asset, 6% tax is imposed based on the Gross Selling Price or fair market
value, whichever is higher.
What CIC must pay if the two transactions are considered as one
300M (Gross Selling Price) x 6% = 18M
What CIC would pay if the scheme is used
100M (Gross Selling Price, to Altonaga) x 6% = 6M
200M (Gross Selling Price to RMI) x 6%
= 12M
-----18M
Bar Exam Question: What is the liability of CIC?
Answer:
If the property sold is a capital asset of CIC, CIC will have no liability.
If the property sold is an ordinary asset, there will be tax evasion committed by the CIC, hence the following are
the liabilities:
1.
Deficiency
2.
Interest of 20% per annum

CIR vs. ATENEO

CIR alleges that IPC is liable for 3% contractors tax since it is an entity for profit. IPC does not fall
into the exempted entities and should be considered as an independent contractor.
According to petitioner, Ateneo has the burden of proof to show its exemption from the coverage of
the law.

Supreme Court
1.
IPC is not an independent contractor. It does not exist for profit and only provides public service.
2.
Ateneo is not liable for contractors tax

So if the factual milieu of this case is applied on the present time, there will still be tax evasion.

RULES OF CONSTURCTION OF TAX LAWS

Page

When a corporation sells property used in its business, a 30% tax is imposed based on the net income.
If the property sold is not used in business, 6% capital gains tax is imposed.
If an individual taxpayer sells a real property, 6% capital gains tax is also imposed based on the purchase price or
the fair market value, whichever is higher.

Surcharge of 25%
Compromise penalties

Applicability

Apply strict interpretation first

The Commissioner should have determined first if private respondent was covered by Section 205, applying the
rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to
prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the
interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does so clearly,

Binding to the courts

expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be extended by implication. Parenthetically, in
answering the question of who is subject to tax statutes, it is basic that "in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or citizens because burdens are not
to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import.
To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent
contractor be engaged in the business of selling its services. Only after such coverage is shown does the rule of
construction that tax exemptions are to be strictly construed against the taxpayer come into play.
After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold
its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic
purposes of the university.

SOURCES OF TAX LAWS

1.

Constitution
Does not impose any tax liability. It merely limits or restricts the power to tax.

2.

Statutes
Legislations by the congress
National in scope

3.

Issuances by the Secretary of Finance

Either by the Secretary of Finance or the BIR

Issuing Authority

Nature

Revenue Regulations
Secretary of Finance

Implements the law;

In the nature of a
subordinate legislations

No;
Entitled to great weight by
the courts

Legislative approval by reenactment by administrative law.

Where a statute is susceptible of the meaning placed upon it by a ruling of the government agency charged with
its enforcement and the Legislature thereafter re-enacts the provisions without substantial change, such action is
to some extent confirmatory that the ruling carries out the legislative purpose." Thus, there is tacit approval of a
prior executive construction of a statute which was re-enacted with no substantial changes.
In this case, Revenue Regulations No. 6-66 was promulgated to enforce the provisions of Title V, Chapter I
(Tax on Business) of Commonwealth Act No. 466 (National Internal Revenue Code of 1939), under which
Section 192, pertaining to the common carriers tax, can be found:

Sec. 192. Percentage tax on carriers and keepers of garages.

Keepers of garages, transportation contractors, persons who transport passenger or freight for
hire, and common carriers by land, air, or water, except owners of bancas, and owners of
animal-drawn two-wheeled vehicles, shall pay a tax equivalent to two per centum of their
monthly gross receipts. [Emphasis supplied]

This provision has, over the decades, been substantially reproduced with every amendment of the NIRC, up until
its recent reincarnation in Section 118 of the NIRC.
The legislature is presumed to have full knowledge of the existing revenue regulations interpreting the
aforequoted provision of law and, with its subsequent substantial re-enactment, there is a presumption that the
lawmakers have approved and confirmed the rules in question as carrying out the legislative purpose.25 Hence, it
can be concluded that with the continued duplication of the NIRC provision on common carriers tax, the lawmaking body was aware of the existence of Revenue Regulations No. 6-66 and impliedly endorsed its
interpretation of the NIRC and its definition of gross receipts.

Administrative Issuances by the BIR include:

Administrative Rulings
Commissioner
If the issuance involves a
novel issue which has
never been addressed
before by the Commissioner
Subordinates
If the issuance does not
involve an issue already
decided
Best guess of the
commissioner

Rulings
Circulars
Memorandum

Section 246 of Tax Code: Non-retroactivity of rulings

Any revocation, modification, or reversal of any of tax rules and regulations or any
of the rulings or circulars promulgated by the Commissioner shall not have any retroactive
application if the revocation, modification or reversal will be prejudicial to the taxpayer.
Exceptions: (MOBS)
1.
2.
3.

If taxpayer deliberately misstates or omits material facts

If the facts upon which the ruling is based are materially different from the facts
subsequently gathered by BIR
If taxpayer is in bad faith

General Rule: Tax laws are not penal laws.

However, a tax law may also provide for penal provisions
(e.g. NIRC of 1997)
Since tax laws are not penal laws, ex post facto laws are not applicable.

To taxpayers who
requested for the ruling

Gulf Air Co vs. CIR (September 18 2012)

NATURE OF TAX LAWS

To all taxpayers;
Has the force and effect of a
law
Yes;
Sub legislation

Page

CIR vs. CA and Fortune

A circular cannot supplant basic provisions of the law. If a circular goes beyond the law, the
circular is void.
Administrative issuance must contain provisions in line with the law it seeks to implement.

BURROUGHS

Note: the years indicated are not the actual dates in the case. 2014 and 2016 are used only as an analogy to show
the retroactive application of the laws.

Burroughs is a foreign corporation with a branch in the Philippine. The branch remits profits to the
head office, and such remittance is subject to branch profits remittance tax of 15%.
The law does not clearly mention whether the tax is based on the actual remittance or the amount
earmark for remittance.

CIR vs. San Roque

Section 246 of the Tax Code (non-retroactivity) shall apply regardless of the body or entity which
revoked or modified the ruling.
Section 246 shall only apply if
the taxpayer acted in good faith; and
the issues are complicated (issues arise because of gray areas or ambiguous provisions of
the law)

If the provisions are too clear to be mistaken and taxpayer relied upon an erroneous interpretation of the tax law,
the taxpayer cannot use the non-retroactivity of laws in order to escape tax liability.

4.

Tax Ordinances
issued by the legislative branch of the Local Government unit

5.

Tax Treaties
Bilateral agreements between states
First step: determine the existence of the tax treaty.
If the existence of the treaty is established, the taxpayer has the responsibility to
invoke the treaty.

There is difference between the two.

For example, a company earns P3M. The allotment of the profit is as to the following:
1M: money left in the Philippines to answer for expenses.
1M: remitted to the head office this year.
1M: to be remitted next year.
The actual remittance is P1M what is actually remitted this year.
The earmark remittance is P2Mthe money remitted this year and the one to be remitted next year.

In 2014: CIR Ruling: the 15 % tax is based on the actual remittance. So Burroughs paid accordingly.
In 2016: There was a new commissioner who revoked the previous ruling. The 15% tax must be
based on the earmark remittance.

Is the ruling of the new commissioner retroactive?

No. The revocation of the previous ruling was prejudicial to Burroughs. If the new ruling will be retroactively
applied to it, Burroughs will be burdened to pay additional taxes.
Burroughs acted in good faith to the CIR ruling. Moreover, the case involved a complicated issue due to the
ambiguity of the law.

PB COM vs. CIR

In 2014: CIR Ruling provides that the tax refund can be claimed within 10 years from the date of
payment, applying the prescriptive periods in the Civil Code.
PB Com claimed for refund beyond the 2 year period but within 10 years.
In 2015: a new commissioner is appointed. Also, the Supreme Court nullified the issuance of the
previous circular. The Supreme Court held that Section 2 of the Tax Code is clear that the claims for
refund must be filed within 2 years from the date of payment regardless of supervening evens.

Is the ruling of the Supreme Court subject to retroactive application?

Yes. Even though the revocation will be prejudicial to PB Com because it can no longer file for the claim for
refund, PB Com cannot acquire any vested right upon a wrong construction of law.
The provision of Tax Code is too clear to be mistaken. There is no ambiguity or any complexity in the issues
involved.

SC Johnsons

Johnsons claim for tax refund for its excess payment of the withholding tax as royalties. It alleges that
it should only pay 10% tax as provided in the RP-Us treaty.

RP-US: 10%
RP-Germany: 25%
Supreme Court: apply the 10% under the RP-US agreement
Tax Treaty
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for
the avoidance of double taxation. The purposes of these international agreements are:
1.
to reconcile the national fiscal legislations of the contracting parties; and
2.
to eliminate international double taxation:
International double taxation: the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods
2 Methods
In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the
state of residence, although in some instances it may be taken into account in determining the rate of tax
applicable to the taxpayer's remaining income or capital.
On the other hand, in the credit method, although the income or capital which is taxed in the state of source is
still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter.
The basic difference between the two methods is that in the exemption method, the focus is on the income
or capital itself, whereas the credit method focuses upon the tax.

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Hence, the ruling of the Supreme Court CAN be retroactively applied.

Improperly accumulated earnings tax

Credit method
Impose tax

Does not impose tax; grant

exemption

Also impose tax;

But grant tax credit equivalent to
the tax imposed by the state of
source

RP-US Treaty: uses the credit method.

Government a case against the improperly accumulated earning tax beyond the 10
years prescriptive period.
The improperly accumulated earnings tax is in the nature of a penalty. It is not
regularly paid, hence is not covered by a return.
The government can collect forever.
Apply the general rule: taxes are imprescriptible.

3.

PRINCIPLES IN TAX LAWS

1.

Prospective Application
General Rule: tax laws are prospective in application

Exception: if the tax law provides for retroactive application.

a.
b.

CIR vs. Acosta

c.
d.

Is there a need for a written claim for a refund?

Acosta filed a return where he showed overpayment of tax for the taxable year of 1996, so he claimed
for the excess
He did not file for a written claim for refund. This was denied by the BIR.
Court of Tax Appeals: if there is no written claim, refund must be denied.
Acosta invoked Section 24 (c) of the 1997 Tax code where a written claim is not mandatory if the

2.

These taxes covered by a tax return are prescriptible.

The government has a prescriptive period to assess tax liability. Otherwise, it
is already barred from assessing the same.
For extraordinary circumstances, the government has 10 years prescriptive
period.

Statute granting tax exemption provides for a liberal construction.

In cases of special taxes relating to special cases and affecting only
special classes of person.
Tax exemption pertains to public functions
Tax exemption granted to religious, educational and charitable
institution and properties.
Tax exemption granted to the government and political subdivisions,
and instrumentalities.

Equitable Recoupment

Claim for refund which is prevented by prescription may be allowed to be

used as payment for unsettled tax liability IF both taxes arise from the same
transactions.

PB Com: Tax refunds are in the same standing with tax exemptions. Thus,
they must be strictly construed against the tax payer.

5.

No Set-Off

Taxes are not subject to set-off

Similar to the concept of compensation

The parties are mutual creditors and debtors of each other. Their debts to
each other are already compensated.

RATIONALE: The government and the taxpayers are not mutual debtors and
creditors of each other.

Imprescriptibility
General Rule: Taxes are imprescriptible.

Exception: If their declaration is covered by a tax return.

Income tax
Donors tax
Estate tax
VAT
Percentage tax

Exemptions:

4.

Petition for Review to the Court was filed on August 4 1999.

What are covered by tax return?

e.

return shows in its face its overpayment

The 1997 Tax Code cannot be retroactively applied.

The right to refund accrued in 1996. During this time, the 1997 Tax Code was still not effective and the
applicable law provides that there is a need for a written claim of refund, without any exception. Hence, Acosta
cannot make use of the 1997 Tax Code retroactively in order to get a favorable judgement.

Strictissimi Juris

Tax exemptions are highly unfavored.

Tax exemptions are strictly construed against the taxpayer.

Philex Mining Corporation

Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are
not creditors and debtors of each other.
There is a material distinction between a tax and debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign capacity.
We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may
have against the government. A person cannot refuse to pay a tax on the ground that the government owes
him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the
results of a lawsuit against the government.

State of source: where the income

was earned
State of residence: domiciliary
state

Exemption method
Impose tax

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Note:

INCOME TAXATION

Taxes cannot be the subject of compensation because the government and taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment
as is allowed to be set-off.

Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax
liabilities can easily give rise to confusion and abuse, depriving the government of authority over the
manner by which taxpayers credit and offset their tax liabilities.

Illustration:
Debtor obtained loan from Creditor for the amount of 100k. It is to be paid within a month
including the interest, for the total amount of 100k.
The debtor pays 100k to the creditor.
Is this 110k considered an income in the part of the creditor?

100k: return of capital, but not an income

10k: return on capital: income

The creditor instead gave the 10k to the debtor instead of constituting it as an interest.
Is this 10k considered an income in the part of the debtor?

Yes. There is a flow of wealth in the part of the debtor since he gained

10k.
This income, however is not subject to income tax but to donors tax (to
be imposed to the donor-creditor)
Conwi vs. CIR

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing
Corporation. Said corporation is a subsidiary of Procter & Gamble, a foreign corporation based in
Cincinnati, Ohio, U.S.A.
During the years 1970 and 1971 petitioners were assigned, for certain periods, to other subsidiaries
of Procter & Gamble, outside of the Philippines, during which petitioners were paid U.S. dollars as
compensation for services in their foreign assignments.

Income, defined
Income may be defined as an amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or
its equivalent. Income can also be thought of as flow of the fruits of one's labor.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It
was a definite amount of money which came to them within a specified period of time of two years as payment
for their services.
The income is subject to tax
Section 21 of the National Internal Revenue Code, before its amendment by Presidential Decrees Nos. 69 and
323 which took effect on January 1, 1973 and January 1, 1974, respectively, imposed a tax upon the taxable net
income received during each taxable year from all sources by a citizen of the Philippines, whether residing here or
abroad.
Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their employment. Petitioners
being subject to Philippine income tax, their dollar earnings should be converted into Philippine pesos in
computing the income tax due therefrom.
Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US dollars
into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that they are

If any taxpayer can defer the payment of taxes by raising the defense that it still
has a pending claim for refund or credit, this would adversely affect the government revenue system. A
taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the
government or that the collection of the tax is contingent on the result of the lawsuit it filed against the
government.

Income: flow of wealth other than the return of capital

Capital: resource used to earn income; wealth itself

Page

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a
pending tax claim for refund or credit against the government which has not yet been granted. It must be
noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain.
Hence, a tax does not depend upon the consent of the taxpayer.

Madrigal vs. Rafferty

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

TESTS APPLIED IN DETERMINING THE EXISTENCE OF INCOME

1.

Severance Test/Realization Test

Income is recognized when there is separation of something which is
exchangeable in value

2.

Tax Benefit Rule

When there is seemingly an event that is non-taxable but shall be considered
as taxable because a tax benefit is given to a taxpayer
Economic Benefit
When there is increase in net worth, when there is income.
Applies to networth method: If there is increase in networth, it is presumed
that you have earned an income.

3.

4.

Claim of Right Doctrine

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.

Illustrations:
a.

Does the person have a claim of right over the 100k? Yes. He found it so he has the right to
claim it.
Is there an absence of unconditional obligation to return the money? Yes. He does not know
to whom the money shall be returned.
Hence, the money is his income.
5.

Capital
Fund
Fund of property existing at an
instant of time
Wealth

In case of community property or conjugal property which earned an income:

50% of the income must be reflected by the husband in his annual income tax return
The other 50% must be reflect in that of the wifes.

Creditor loans 100k to debtor, which the latter has to pay.

The owner left her 100k in the table accidentally. It was taken by another person
who had no idea who left the money.

Income from whatever source principle

An income shall be taxable regardless of its source, whether legal or illegal.

CIR vs. Javier

Usually, Javier receives $1,000 as remittance per month.

However, he suddenly received $10000 for the next month since the bank erred in
crediting
In his annual income tax return, he included the $1,000,000.00 as a footnote, but NOT as an
income

Is the $10000 remittance considered an income?

Yes.
There is a flow of wealth in the case of Javier since suddenly, he received 10,000.

Claim of right
Absence of a definite obligation to return

It is an income, even if it is unlawfully obtained, subject to the income from whatever source principle.
REQUISITES FOR THE TAXABILITY OF AN INCOME
1.

Existence of a gain

Subject to the tests mentioned above.

2.

Realization of gain
a. Actual realization
Taxpayer has full control over the income
b. Constructive realization
Income is not yet on the hands of taxpayer but such
income is subject to his control or disposition
c.
Presumptive realization
Gain is provided or dictated by law.

Does the debtor have a claim of right over the 100k? Yes

Illustration:

Is there an absence of the definite unconditional obligation to return the 100k? No. He has
the obligation to return the money since it was merely loaned to him.

Rodney is a salesperson in a boutique. He is paid 20k a month.

Hence, the 100k is not an income of the debtor, based on the claim of right test.

If the salary is paid on cash, it is an actual realization of gain.

10

Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange
prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for respondent
Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars, being of long standing
and not contrary to law, are valid.

b.

Page

citizens of the Philippines, and their income, within or without, and in these cases wholly without, are subject to
income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

If the salary is given through a postdated check: it is a constructive realization of gain since
he has control of the disposition of the check, but the money itself is not yet on his hands.
Presumptive realization of gains can be illustrated as to the following:
Capital Gains Tax

Sec 24 (b) of the Tax Code provides that on sales of real properties, if the property is a
capital asset of the seller (not used in the business), the capital gains tax of 6% is imposed
based on the gross selling price of fair market value of the property as prescribed by the city
or provincial assessor or by the BIR.

The business partnership is a corporate taxpayer. It has a separate personality from the
partners and stockholders. The income of 3M is not to all partners, but the income of the
partnership.
Since only 1.5M is distributed to the partners, only 500k is considered an income of the
partners.
3.

Gain must not be excluded under Section 32 (b) of the Tax Code

Maam Tin owns lot worth P3M (market value). She sold the house to Reynolds in the
amount of P2M.
There was no income in the part of Maam Tin. She even suffered a loss worth P1M.

INCOME TAXPAYERS
1.

Individuals

Types of individual taxpayers:

Income tax is based on net income, which is equivalent to gross income minus expenses. If
there is no net income, no income tax can be imposed.

a.

Resident citizens

(1)

However, in the case of Capital Gains Tax (CGT), there is a presumptive realization of
gains.
The law says that CGT is based on Gross Selling Price (GSP) or Market Value. The law
already presumes that the GSP or the Market Value is your income.
(ii)

(2)
(3)
(4)

b.

Not an income taxpayer

No personality of its own;
merely a pass-through entity

Those who are citizens of the Philippines at the time of the adoption of this
Constitution
Those whose fathers or mothers are citizens of the Philippines
Those born before January 17 1973, of Filipino mothers, who elect Philippine
citizenship upon reaching the age of majority
Those who are naturalized in accordance with law

Non-resident citizens

General Professional Partnership vs. Business Partnership

General Professional Partnership (GPP)

Purpose is not to earn profit
2 or more individuals who bind themselves
together to practice profession

One who is a resident and a citizen under Article IV of the Constitution

Four definitions under Section 23 of Tax Code:

(1)

Business Partnership (BP)

Purpose is to earn profit
2 or more persons who bind themselves to
contribute money, industry or property to
a common fund for the purpose of sharing
profits.
Income taxpayer
Has personality of its own;
Treated as corporate taxpayer

(2)
(3)

One who established to the satisfaction of the CIR the fact of his physical
presence abroad with the intention to reside therein
One who leave the Philippines during the taxable year in order to reside
abroad as an immigrant or for employment on a permanent basis.
One who works and derives income from abroad and whose employment
thereat requires him to be physically present abroad most of the time during
the taxable year.

Tax treaty between RP-US: 183 days

(4)

One who is previously considered as a non-resident and who arrives in the

Philippines anytime during the taxable year to reside thereat permanently.
However, they shall only be considered a non-resident from the start of the
taxable year up to the date of his arrival.

General Professional Partnership (GPP)

Note: (1) and (2) are applicable to overseas workers

A GPP is formed by Lariosa, Busain and Mangalubanan (LBM Partnership)

(3) is applicable to citizen who resides in the Philippines but has to

work outside the Philippines

The partnership earns P3M, but they agreed to distribute only 1.5M to the three of them.
They earned 500k individually.

Illustration:

How much of their income is taxable? The entire amount of 3M. Thus, 1M per partner.

Mr. X is an educator. He works outside the Philippine From January to June, and also from
October to December.

A GPP is not an income taxpayer. The taxpayers are the partners themselves since the
partnership is merely a pass-through entity.

Business Partnership
*Same facts

He is a non-resident citizen since his employment requires him to be out of the country most
of the time.

Why is there a need to classify residents from non-residents?

The tax implication would vary depending on the status.

11

Can income tax be imposed upon the loss? No.

Page

(i)

How much income is taxable per partner? 500k.

In the previous example, is the income of Mr. X earned outside the Philippines subject to
tax?
No. He is a non-resident citizen. Since the income was earned from his engagement outside
the Philippines, the state cannot impose tax to such income.

c.

Resident Aliens

d.

Non-Resident Aliens Engaged in Trade and Business (NRAETB)

e.

Not citizens of the Philippines but resides in the Philippines

If the alien stays for more than 1 calendar year in the Philippines, the
alien must be classified as resident aliens.

One who is neither a citizen nor resident of the Philippines BUT engages
in trade or business in the country.

Non-Resident Aliens NOT Engaged in Trade and Business (NRANETB)

The moment the final tax had been remitted to the government, it already extinguishes the
tax liability of the taxpayer. This is imposed to non-residents not engaged in business in the
Philippines because of the risk of flight.

Illustration:
Selena Gomez had a concert here in the Philippines. She need not file income tax return
annually since she is a non-resident alien who is not engaged in business in the Philippines.
But the law imposes final tax on the income she earns during the concert. Once this final
tax is paid, her liability extinguishes. All she has to do is pay, without the need to file an
annual tax return declaring the proceeds of the concert as her income.
*If an alien is engaged in business in the Philippines, that alien must file an income tax return annually
through himself or appoint authorized representatives.*

2.

If a non-resident alien resides in the Philippines for more than 180 days,
such alien shall be deemed as engaged in business in the Philippines.
(Presumption)
If there is no evidence that a non-resident alien is engaged and he stays
for exactly 180 days, he is deemed as not engaged in business in the
Philippines.

a.

Domestic Corporation

Entity incorporated under the tax laws of the Philippines

Speaks of the place of incorporations, not the nationality of the stockholders.
e.g. if registered under the Security and Exchange Commission, it is a domestic
corporations

b.

Resident Foreign Corporation

A foreign corporation which is engaged in the Philippines

c.

Non-Resident Foreign Corporation

A foreign corporation not engaged in Philippines

There is a need to classify in order to determine the type of corporate tax to be imposed.

Note: the presumption only applies if the alien resides for more than 180 days.
Why is there a need to classify non-resident aliens engaged and not engaged in business or
trade in the Philippines?

The tax to be imposed also varies as between them.

Engaged in business
Can avail of allowable deductions, also
considered operating expenses.
Subject to normal tax based on scheduler
tax rate (based on net income)

NOT engaged in business

Tax is based on gross income;
cannot be allowed to reduce the gross
income through availment of allowable
deduction
Subject to final tax rate of 25%, based on
gross income

Corporate

Kinds of corporate taxpayers

One who is not a citizen, not a resident, and NOT engaged in trade or
business in the Philippines

Tax Code, 180-day rule

Why is final tax imposed to non-resident aliens not engaged in business?

If it is a domestic corporation, it is subject to tax as to the income it earned within

or outside the Philippines
If it is a resident or non-resident foreign corporation, it is subject to tax only as to
income it earned within the Philippines.

Resident Foreign Corporation

Subject to tax based on net income;
Can deduct allowable expenses
Subject to normal tax
3.

Non-resident Foreign Corporation

Subject to tax based on gross income;
Cannot deduct allowable expenses
Subject to final tax of 30%

Estate
Estate is another classification of a taxpayer only if such is under judicial
settlement
Under the Tax Code, an individual taxpayer can adopt a taxable period that starts
from the month of January and ends in the month of December (Calendar Year)

12

If resident citizens

Tax can be imposed on the income earned within and outside the
Philippines.

Worldwide income is subject to tax.

RA 8424: applies only to resident citizens. To all other taxpayers, their

income is subject to Philippine tax only if earned within Philippines.

Page

Illustration:

If Reynolds stayed at Japan for 9 months, he is considered as a nonresident citizen, thus only income earned within the Philippines could be
subject to tax. Since the income is earned because of the service
rendered in Japan, it must not be subject to tax in the Philippines.

June 1: A died. He left properties. When he was alive, he earned a monthly income of
P10,000.
From January to before June 1, the taxpayer is A, since he was still alive at that time.
From June 1 to December 31, the taxpayer would depend on the following:
If the estate was settled extra judicially, the heirs become the taxpayer. By
succession, they became the owners of the estate.
If the estate was settled judicially, the estate itself is the taxpayer.
Trust
Parties in a trust agreement:
Trustor: the person who appoints another person to manage his
property; the real owner of the property
Trustee: the person appointed to manage the property of another
Beneficiary: the person to benefit from the trust agreement
If the designation of the beneficiary is revocable: the agreement is a
revocable trust
If the designation of the beneficiary is irrevocable: the agreement is
an irrevocable trust

Illustration:

If it is an irrevocable trust, who shall be the taxpayer?

The trust itself. Since C is the beneficiary, no benefit redounds to A as the trustor.
If it is a revocable trust, who shall be the taxpayer?
A as the trustor. He is still the owner of the property. He can still revoke the
designation of C as the beneficiary. He still has the control over the property.
TAX SITUS

1.

Situs: the source of the income.

It does not refer to the place of the income but to the activity or property that had
produced the income.
Section 42 of the Tax Code: situs depends on the subject matter.
Service

Marubeni (Japan corporation), the NDC and Philphos entered into an agreement
entitled Turn-Key Contract for Leyte Industrial Estate Port Development Project
Between National Development Company and Marubeni Corporation.

The situs of the two projects is in the Philippines, and the materials provided and services rendered were all done
and completed within the territorial jurisdiction of the Philippines. Accordingly, respondents entire
receipts from the contracts, including its receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor and materials should be subjected to
contractors tax (a tax on the exercise of a privilege of selling services or labor rather than a sale on products).

Clearly, the service of design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning, coordination of the two projects involved two
taxing jurisdictions. These acts occurred in two countries Japan and the Philippines. While the construction and
installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and
supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats
and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made
and completed in Japan. They were already finished products when shipped to the Philippines. The other
construction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical
and instrumental apparatus, these were not finished products when shipped to the Philippines. They, however,
were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication,
engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and
completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are
therefore not subject to contractors tax.
CIR vs. Baier-Nickel

Tax Situs: the place where the service has been rendered

Illustration:
Reynold is an accountant in a Japanese firm. In 2015, the firm sent Reynolds to Japan to
work on the firms branch office. It is in Japan where the salary and allowances are being
earned.
Where is the situs of the income? Japan

If Reynolds is a resident citizen, regardless of the source of income, such income is

subject to Philippine tax.

Cited the case of CIR vs. British Overseas Airways Corporation

BOA has no landing rights in the Philippines. There is no passenger,

excess baggage or carriage that originates from the Philippines.
BOA, however, has lines of offices and agents selling tickets in the
Philippines for routes outside the Philippines

Is the income from the sale of the tickets subject to tax?

Yes

13

CIR vs. MARUBENI

Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines
because some of them were completed in Japan (and in fact subcontracted) in accordance with the
provisions of the contracts. All services for the design, fabrication, engineering and manufacture of the materials
and equipment under Japanese Yen Portion I were made and completed in Japan.

A trustor
B trustee
C beneficiary

If he stayed in Japan only for 6 months, it is equal to 180 days, which means that he is
considered a resident citizen of the Philippines and thus his income is subject to tax
regardless of whether such income is earned within or outside the Philippines.

Page

4.

Under the RP-Japan Treaty, if a citizen of a country resides on another country for more
than 183 days, he is considered as a non-resident citizen.

The phrase place of income refers to the activity or property that had produced the
income.

the interest payment paid by him can have no other source than within the Philippines. The interest is paid not
by the bond, note or other interest-bearing obligations, but by the obligor.

In this case, BOA is a non-resident foreign corporation that can only be subject to tax as
to those income earned within the Philippines. The activity that produced the income is
the sale of ticket that is being done in the Philippines. Hence, the income is sourced
within the Philippines, subject to income tax.

The residence of the obligor which paid the interest under consideration, petitioner herein, is Calle Pureza, Sta.
Mesa, Manila, Philippines; and as a corporation duly organized and existing under the laws of the Philippines, it
is a domestic corporation, resident of the Philippines.

3.

Mr. X borrowed money from Hongkong Bank (HKB) for principal amount of $1M. The
agreement provides that the loan is subject to 10% interest per annum. This shall be paid
after 1 year.
If $1M is paid back to HKB, is it subject to tax? NO. It is merely a return of capital. There is
no income, so it is not subject to income tax.
The interest of 10%, equal to $100,000, is subject to tax.

Status of the taxpayer (Hongkong Bank): non-resident foreign corporation

A non-resident foreign corporation is subject to tax as to income sourced from within the
Philippines.

Nature of the income: Interest income

The situs of an interest income is the residence of the debtor. The debtor is Mr. X, as
resident citizen. As a resident citizen, he is subject to tax as to the income paid from within
or outside the Philippines. Hence, the interest income is subject to tax.
NDC vs. CIR

Legend:
R: Ratio
GI: Gross income
WGI: Worldwide Gross Income

R = GI (within) (3 year)
WGI
where WGI= GI (from within) + GI (outside the Philippines )

The national Development Company entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels.

The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code,
thus:
SEC. 37.
Income from sources within the Philippines. (a) Gross income from
sources within the Philippines. The following items of gross income shall be treated as gross income from
sources within the Philippines:
(1)

Interest. Interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or otherwise

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision because all
the related activities the signing of the contract, the construction of the vessels, the payment of the stipulated
price, and their delivery to the NDC were done in Tokyo. The law, however, does not speak of activity but of
"source," which in this case is the NDC. This is a domestic and resident corporation with principal offices in
Manila.
The law specifies: 'Interest derived from sources within the Philippines, and interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the 'act or activity' of
non-resident corporations in the Philippines, or place where the contract is signed. The residence of the obligor
who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is
the determining factor of the source of interest income. Accordingly, if the obligor is a resident of the Philippines

Dividend Income
In a dividend income, the income earner is the stockholder.
The source of dividend income of the stockholder depends on the issuing
corporation
Domestic corporation: the dividend income is entirely sourced from within
Non-resident foreign: the income sourced from outside the Philippines
Resident foreign corporation: it depends on the ratio of the gross income
sourced from within during the 3-year period prior to the taxable year of
declaration of dividends that bears over the worldwide gross income

If the ratio (R) is 50% or more, the dividend income is considered sourced from
within.
If the ratio is less than 50%, we have to prorate depending on the ratio.

Illustration:
Gross income sourced from within = P1M
Gross income sourced from outside = P3M
------Worldwide Gross Income (WGI)
P4M
Ratio of the GI (within) bears over the WGI: 1M
4M

1
4

is equal to 25%
25% is less than 50%
Hence, the dividend is considered
sourced from within
75% of the dividend income is
considered sourced from outside of
Philippines.

X corporation is a resident foreign corporation. During the taxable year, it was determined
that 40% of its gross income during the 3 year period prior to the declaration of the dividend
is sourced from within

14

Interest Income
Situs: the place of the residence of the debtor.
The Tax Code says obligation of the resident

Page

2.

During the taxable year, it declared that 100k dividends in favor of its stockholders, one of
whom is Mr. A, a non-resident citizen
Who is the taxpayer? Mr. A. He received 100k.
What is the nature of the income received? Dividend income
Where is the source of the dividend income? Resident foreign corporation
In this case, the ratio is 40%. Subject to the rues mentioned above, we need to prorate since
it is less than 50%.

b.
c.
d.

Payment of compensation
Power of dismissal
Power of control

Examples:
Compensation for services
Annuities (e.g. life insurance proceeds) arising from employer-employee
relationship
Pension arising from employer-employee relationship

40% of the 100k is sourced from within, 60% is sourced from outside.
2.

What if 50% is sourced from within?

The entire amount of 100k is subject to tax. If ratio is 50% or more, the entire amount of
dividend is considered sourced from within.
4.

Sale of Real Properties

Situs: place where the property is located.

Illustration:
If the real property sold is in Japan, the sale proceeds would not be subject to Philippine
tax, unless:
The seller is a Filipino citizen; or
The seller is a Domestic Corporation
5.

Sale of Personal Properties

Situs is based on the passage of title test.
Ownership is transferred upon delivery.
If the personal property is to be shipped abroad, determine if it involves a freighton-board shipping point or a freight-on-board destination

Transfer of ownership
Risk of loss
6.

FOB Shipping Point

Ownership is transferred
at shipping point
Buyer

FOB Destination
Ownership is transferred
at point of destination
Seller

Rent or Royalties
Situs: place where rent or royalty shall be exercised

Read: RMC 44-2005 and BIR Ruling February 26 2008

GROSS INCOME

Gross Income is equivalent to Gross Sales minus Cost of Sales

32A of Tax Code: income derived from whatever source principle

1. Compensation Income

All income arising from employer-employee relationship

Recall the four-fold test of employer-employee relationship:

a. Power of selection

Compensation Income
Taxpayer is not allowed to deduct
allowable expenses
Qualifies to substituted finding subject to
requirements by law
3.

Income from Business, Trade or Profession

Allowed to deduct allowable expenses
No substituted finding

Passive Income

Earned without exertion of effort from the taxpayer

Examples:

Prizes and winnings

Income arising a business partnership

Business partnerships are corporate taxpayers. The share received by the

stockholders are considered dividends, and are therefore passive income.

4.

Capital Dealings

Income arising from sale of capital assets

What about prizes and winnings?

Prizes
With exertion of effort
If 10k or less, it is subject to normal tax
If more than 10k, it is subject to 20% final
withholding tax

Winnings
With no exertion of effort
Regardless of amount, it is subject to 20%
final withholding tax.

Exclusion from Gross Income

1.

Proceeds from Life Insurance

Paid to heirs and beneficiaries upon death of the insured taxpayer.

15

Only this portion is considered sourced from within and is subject to tax.

Income from Business, Trade or Profession

If the income does not arise from such relationship, the income is considered
from business trade or profession
Examples:
Compensation income from trade
Rents
Annuities (e.g. life insurance) not arising from employer-employee relationship
Pension not arising from employer employee relationship
Partners distributive share from net income of general professional partnership
Recall: a general professional partnership has no separate juridical personality from the
partners.

Page

40% of 100k = P40,000

In the nature of indemnification to the heirs.

This provision does not refer to the premium but to the proceeds of the
insurance.

(1)
(2)

There is a flow of wealth in the part of B since he received P1M. However, this income is not
subject to tax because under Section 32 (b) of the Tax Code, proceeds of life insurance are
exempt from income tax.

Kris took a life insurance. He paid the premium of 500k. The policy says that if he survives
within 5 years, he will get 700k. He survived and was granted the 700k.
Is this 700k considered a taxable income?

500k: not subject to tax; it is a return of premium which is in the nature

of return of capital
200k: subject to tax; a return on capital.
3.

This does not apply to premium payments.

Illustration:
Employer insured the life of the employee, since he has insurable interest
over the life of this employee. The employer paid the premium

Employer: Atty Tin.

Employee: Kris
Beneficiary designated: Atty Tin.

ABELLA vs. CIR

Is the premium paid a taxable income on the end of Kris?

No. There is no income to begin with since there is no flow of wealth. For a flow of wealth to
exist, benefit must redound to Kris. In this case, there is no flow of wealth in the part of
Kris since it is the employer who benefits from the insurance proceeds if Kris would die,
having been designated as the beneficiary.
Is this a taxable income on the end of the employer?
No. The proceeds is received by reason of the life insurance. Under Section 32 (b) of the Tax
Code, life insurance proceeds are excluded from imposition gross income. Life insurance
proceeds are in the nature of indemnity for the life of a person, in this case, a valuable
employee.
(ii)
The beneficiary designated in the insurance is the sole heir of Kris.
Is the premium payment paid by the employer a taxable income in the part of Kris?
Yes. Kris obtains benefit even though it was the employer who paid the premium.
There is a real gain in the part of Kris, and such gain is not excluded from 32B of the Tax
Code.
If Kris dies, the sole heir receives the proceeds. Such insurance proceeds is excluded from
gross income, as provided under Section 32 (b) of the Tax Code.
2.

Return of premium
The amount received by the insured as the return of premium paid by him in a life
insurance shall be excluded from gross income
An individual may receive only the cash surrender value and not the proceeds, if
he outlived the period of the insurance

Gifts, bequests and devise

Properties that are transferred gratuitously

The properties themselves are not subject to tax. However, they are subject to
the following:
Transfer of gift: donors tax
Transfer of bequests and devise: estate tax.
What is being taxed is the privilege of transferring
property to another person.

Political contributions are in the nature of gifts. Notwithstanding, they are also exempt from donors
tax.
The BIR cannot impose income tax over these political contributions received by politicians since
gifts, bequests and devises are excluded from gross income. If BIR issued a ruling imposing these
contributions with income tax, it would violate due process since tax impositions must be embodied
in a statute.
The remedy is for the Congress to amend the law.

Actual case on BIR Ruling

A G.R.O once served an old man. The old man gave her his house and lot. He paid donors
tax for the transfer of the property to the G.R.O. The old man died.
The BIR imposed an income tax to the value of the house and lot, alleging that such
property was in the form of a compensation for services of the G.R.O. to the old man.
Was the imposition of income tax proper?
No.
The consideration of the property was mere love and affection of the old man to the G.R.O.
It is in the form of a donation and not as a compensation for rendering of the service. The
donors tax was already paid accordingly.

Illustrations:
(i)

Kris borrowed P100k from Atty Tin. The loan is to be paid after 1 month.
However, Kris failed to pay. Atty Tin said that Kris does not have to pay it
anymore since shes already rich.

16

A secured life insurance from insurer for the amount of P1M. The beneficiary
is B, the sole heir of A. A died.

Who shall receive the proceeds? B.

(i)

Return of premium
Premium must be paid by the insured

Illustration:

Illustration:
(i)

Requisites:

Page

(ii)

Kris borrowed P100k from Atty. Tin. He failed to pay the same. Atty. Tin said
that all Kris had to do is to simply clean Atty Tins house. If Kris cleans the
whole house, she would cancel the obligation.

Separation Payment

The grant of separation payment is mandatory on dismissals due to authorized

causes.
If the dismissal is based on just cause: separation pay is not mandatory
unless the CBA provides for the same.

Is the amount of 100k taxable or not?

It is taxable. The cancellation of the indebtedness of Kris by Atty. Tin is an income on the
part of Kris. It was earned for the rendition of his service by cleaning the house of his
creditor. As a compensation, it is taxable.
(iii)

Mr. Gipit obtained a loan from Mr. A amounting to 100k. The loan was to
paid for four installments. Mr. Gipit already paid the first monthly
installment worth 25,000. After this payment, Mr. A cancelled the obligation
of Mr. Gipit as long as Mr. Gipit would clean the house of Mr. A.

Is this a taxable income?

Yes, but only as to the amount of the remaining P75,000 since Mr. Gipit already paid the
25,000.
This 75,000 was an income of Mr. Gipit. The cancellation of indebtedness was by virtue of
his rendering of service. This is no longer a donation that is subject to donors tax but a
remuneratory donation which is subject to income tax.
4.

Compensation for personal injury or sickness

Amounts received from accident or health insurance or under workmen
compensation act as compensation for personal injury or sickness plus the
amounts of any damages received whether by suit or agreement on account of
such personal injury or sickness

X was driving a car. He had a passenger. Y was driving a truck. The truck hit the car. The
passenger of X died.

Hospital expenses: not taxable

Cost of repair of car: not taxable
Moral damages: not taxable
Attys fees: not taxable
Unearned salary of X: not taxable
Loss of profits of a business: TAXABLE; no personal injury involved.

Note:

The law does not require that the injury be physical. The law is clear that compensation
may be for any kind of personal injury.
Hence, even moral damages by reason of a crime of libel would be covered by the provision.
5.

Illustration:
If the employee was dismissed by reason of retrenchment: Separation pay is nontaxable
because the employee separated from employment by a reason beyond his control.
If the employee was dismissed because he always sleeps at work: Separation pay is taxable.
If the employee resigned: separation pay is taxable since he voluntarily severed his
employment.
7.

Income Exempt from a Treaty

Obligation of the taxpayer to be exempt from tax: invoke the tax treaty

Retirement Payment
Whether retirement pay was granted without a reasonable retirement benefit
plan (RPBP)

With RPBP: RA 4917 is the governing law.

Requisites for tax exemption:

(1)
(2)
(3)

Taxpayer must be atleast 50 years old

Taxpayer rendered 10 years in service
Benefit of tax exemption must have been granted only once.

Without RPBP

2 Requisites:
(1)
(2)

Illustration:

Whether or not the separation pay is exempt from tax depends on the nature of
the separation of the employee
If the separation is voluntary in nature: separation pay is taxable

If the separation is involuntary: separation pay is non taxable.

The recipient must be 60 years but not more than 65 years old
The recipient rendered 5 years of service

*These two requisites do not apply when the retirement pay was granted pursuant to a
CBA. If this is the case, the retirement pay is automatically exempt from tax.

Illustration:
(i)

DJ is working as consultant in Proctor & Gamble. The corporation has

control on the means and methods used by DJ in her employment. She
started at the age of 20. She worked there for 15 years. When she retired, she
received a retirement pay of P1M.

DJ was hired by Accenture as a consultant for 10 years. When she retired, she received a
retirement pay of P2M.
Are the retirement pays taxable? Yes.
If there is no indication, the presumption is that the retirement pay was granted with a
reasonable retirement benefit plan (RPBP).

17

Yes. Atty. Tin cancelled the obligation due to her generosity. As a gift, it is not subject to
income tax.

6.

Review on Labor Law:

Page

Is it in the nature of a gift?

As to the retirement pay she received from Proctor and Gamble, she was only 35 years old
when she retired and claimed for the pay. RA 4917 provides that the taxpayer must atleast
be 50 years old. Hence, the retirement pay is taxable.

j)

Daily meal allowance for overtime work and night/graveyard shift not
exceeding twenty -five percent (25%) of the basic minimum wage on a per
region basis;

When she received the retirement pay from Accenture, she was only 45 years old. Hence, it
is also taxable.

These are not subject to tax

In this case, the retirement pay received by DJ is nontaxable because all the requisites are
present.
(1) She was 55 years old when she retired
(2) She rendered 10 years of service
(3) She only received the benefit of tax exemption once. The first two separation pays
she received were both taxable and no tax exemption was granted before.
8.

9.
a)
b)
c)
d)
e)
f)
g)
h)
i)

13th Month Pay and Other Benefits

Mandatory benefits provided under labor laws (Labor code and other pertinent
labor laws):
13th month pay
Service Incentive Leave (minimum of 1 year of service)

But if vacation leave and sick leave are already granted,

Service Incentive Leave is no longer mandatory
Rule on Taxability

If the 13th month pay or other benefits do not exceed P82,000, it will not be
subject to tax

If it exceeds P82,000
The 82,000 will not be subject to tax.
The excess from the 82,000 will be subject to tax.
De Minimis Benefits
Monetized unused vacation leave credits of private employees not exceeding ten
(10) days during the year;
Monetized value of vacation and sick leave credits paid to government officials
and employees;
Medical cash allowance to dependents of employees, not exceeding P750 per
employee per semester or P125 per month;
Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not
more that P1,500;
Uniform and clothing allowance not exceeding P5,000 per annum; (last amended
by RR No. 8, 2012)
Actual medical assistance not exceeding P10,000 per annum;
Laundry allowance not exceeding P300 per month;
Employees achievement awards which must be in the form of a tangible personal
property other than cash or gift certificate, with an annual monetary value
not exceeding P10,000
Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;

Nutri Chippy granted rice subsidy to its employees, amounting to 1500 per
month.
This is not subject to tax since it is considered as de minimis benefit.
Nutri Chippy is not required to withhold taxes on the benefits of the employees.
(ii)
The following benefits are granted to employees:
13th month pay: 30k
14th month pay: 30k
Productivity bonus: 10k
Christmas bonus: 10k
Rice subsidy: 25k
Medical assistance: 20k
Are these benefits subject to tax?
o

First step: determine which among the benefits are considered as de minimis
benefits. All others would fall into the category of other benefits under item no. 8
which is named 13th month pay and other benefits.
De minimis

13th month pay: 30k

14th month pay: 30k
Productivity bonus: 10k
Christmas bonus: 10k
Rice subsidy: 25k
Medical Assistance: 20k

10k (item h)
5k (item i)
18k (item e)
*1,500 per month x 12 months
10k (item c)

Other benefits
30k
30k
5k (excess not
covered by de minimi
benefits)
7k (excess)
10k (excess)
TOTAL: 82k

All will be non-taxable. The de minimis benefits are automatically non-taxable.

Moreover, the benefits that fall under the category of other benefits amount to exactly 82k.
Remember that in 13th month and pay and other benefits must not exceed 82K in order for
it to be exempt. In this case, the 13th month pay and other benefits amounted to exactly 82k.
Hence the entire amount is non-taxable.
If the employer grants another benefit in the form of gift certificate amounting to 20k:

not a de minimis benefit since item h speaks of awards which must be in the form
of a tangible personal property other than cash or gift certificate

falls under other benefits but would already exceed the 82k limit provided by
law. Hence, this excess would be taxable.

18

BIR Ruling: The third requisite provides that the benefit of tax exemption must have been
granted only once. This requisite refers to the availment of the tax exemption and not to the
benefit itself of receiving the retirement pay.

(i)

Page

A third company hired DJ for 10 years. She received a retirement pay of

P2.5M.
Is the retirement pay taxable? NO.

Illustrations:

(ii)

12. Income derived by foreign government

Income derived from investments in the Philippine by

a. foreign government,
b. financial institution owned and controlled by foreign government
c.
international or regional financial institutions established by a foreign
government
Reason: international comity
13. Prizes and awards
General Rule: subject to tax

Winnings: regardless of amount, subject to 20% final withholding tax

Prize:

Amount exceeds 10k: subject to 20% final withholding tax

Amount is 10k or less: price is subject to normal tax

Exceptions:
1. Prize or award was made in recognition of religious, educational, charitable,
literary, artistic, scientific, or civic achievement;
2. Prize was received by the recipient without any action on his part to enter the
contest or proceeding; and
3. The recipient is not required to render future substantial services to receive
the prize.

Illustration:
(i)

Atty. Tin is a resident citizen. She won a prize in USA by entering the contest
The Voice. She won P10M.

Generally, is it subject to final withholding tax?

Yes. It is a prize since she exerted an effort. The amount of the prize exceeds 10k. Thus, it is
subject to final withholding tax.
Is it subject to income tax?
Yes. Atty. Tin is a resident citizen. Hence, all income derived within or outside the
Philippines can be taxable.
Can the Philippines impose final withholding tax to the prize?
No. The Philippine Government cannot constitute The Voice, USA as a withholding agent.
What Atty. Tin should do is declare it in the Income Tax Return and subject the same to
normal tax.

If a non-resident won the same, can it be imposed with an income tax by the
Philippines?
No. It is sourced outside the Philippines. Non-resident citizens can only be imposed with tax
on income earned within the Philippines.
(iii)

What if the winnings were in the form of a trophy or a crown. Can it be

subject to tax?
Yes, equivalent to the value of the crown.
But it cannot be subject to final withholding tax because the Philippines cannot constitute
the organizers of the contest in the foreign country as withholding agents.
(iv)
Tripartite agreement
X Corporation employed Y Corporation, a non-resident foreign corporation to troubleshoot
the corporations program. The service is rendered in the Philippines.
Y Corp hired non-resident alien (NRA) who was at the Philippines.
Will the amount of income received by Non-Resident Alien subject to tax? YES
Subject Matter: Service
Situs: place where the service is rendered Philippines
Ask yourself, can a non-resident alien be subject to tax sourced from within the Philippines?
Yes. Hence, his income is taxable.
14. Prize or award rendered in sports competition

Requisite: Granted to an athlete in a local or international sports competition

whether held in the Philippines or abroad and sanctioned by their respective
sports organization.

BIR Ruling: Sport organization means the Philippines Olympics Committee

TAX CODE PROVISION: Section 32 (B)(7)(f) - GSIS, SSS, Medicare and Other
Contributions - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues
of individuals.

Under Revenue Memorandum Circular. 53-2011

-The amount of Gross Income excluded shall only be equivalent to the amount of mandatory
contributions
-IF the amount contributed by TP is more than the Mandatory Contributions the excess
shall not be excluded from the Gross Income
Example:
Gross Compensation Income (GCI)
SSS
Phil Health
Pag Ibig
Witholding Tax

30,000
(

100

(
(
)
(

)
)
)

RATIO of deduction:
The mandatory contributions to SSS, Phil Health, Pag-ibig are deducted from GCI because
they should be EXCLUDED AND NOT SUBJECT TO TAX.
Q: If the under the law the mandatory contribution for Pag-ibig was only 100, what if the
contribution made by the Taxpayer is 1,200/month? Will the entire amount of 1,200 pesos be
deducted from GCI?

19

11. Benefit by Reason of Social Legislation

Excluded from gross income and not subject to tax.

GSIS
Social Security Benefits
Benefits by reason of being a war or veteran
Received by any person residing in the Philippines and such
benefit has been granted by US Veterans Administration

(ii)

Page

10. Representation and Transportation Allowance (RATA)

RATA given on a monthly basis shall not be subject to tax if RATA was received
by a government officer or employee

If RATA received by private employee, it forms part of the compensation income of

the employee

Therefore the exclusion only applies to the amount equivalent mandatory contributions and
any excess shall NOT be deducted from the Gross Income.

TAX CODE PROVISION: Section 32 (B)(7)(g) Gains from the Sale of Bonds,
Debentures or other Certificate of Indebtedness -Gains realized from the same or
exchange or retirement of bonds, debentures or other certificate of indebtedness
with a maturity of more than five (5) years.

RULES:
1. It must be for MORE THAN 5 years
2. IF EXACTLY 5 years it is not exempt from income and therefore not exempt
from tax.
Section 4 (b) of RA 9994 Expanded Senior Citizens Act of 2010
Section 4 (b) exemption from the payment of individual income taxes of senior citizens who
are considered to be minimum wage earners in accordance with Republic Act No. 9504;
-Exemption is granted from Income Tax provided they are minimum wage earners and such
income arises from an Employer-Employee Relationship.
RA 9504 - Tax Exemptions for Minimum Wage Earners and Increased Tax
Exemptions
Q: Who are Minimum Wage Earners?
A: refer to a worker in the private sector paid the statutory minimum wage, or to an
employee in the public sector with compensation income of not more than the statutory
minimum wage in the non-agricultural sector where he/she is assigned

AT PRESENT - IF an employee receives 13th month pay and other benefits

IF income does not exceed 82k 82k is NOT TAXABLEE
IF income exceeds 82k 82k is NOT TAXABLE but excess of 82k is subject to tax.
Q: If A receives 82,000, is he considered as a Minimum Wage Earner?
A: Yes. Therefore his COMPENSATION INCOME inclusive of OTP, NSD, HoPay and
HaPay is not subject to tax
Q: IF A receives 13th pay and other benefits amounting to 100,000?
A: 82,000 is NOT subject to tax while the excess or 18,000 shall be TAXABLE.
THEREFORE the moment a MWE receives 13th month pay and other benefits in excess of
82,000, then entire amount of Compensation Income shall now be subject to tax.
Q: IF Minimum wage earner receives income other than income subject to final tax?
A:
Final tax amount of tax withheld from income of Tax payer
As a RULE : The act of withholding the Final withholding tax EXTINGUISHES the
Taxpayers liability.
ILLUSTRATIVE EXAMPLE
Eman is an employee and earns a salary of P 10,000/month. Eman joins a singing contest
where he received P 100,000 as consolation prize.
20% of 100,000 will be withheld. Therefore 20% of 100,000 is equivalent to 20,000 which will
be WITHHELD.
Q: After the withholding of 20,000 is the Taxpayers Liability extinguished?
A: Yes. Only 80,000 shall be included in Taxpayers Income Tax Return (ITR) and no longer
the full amount of 100,000.
Q: What is the legal implication as to Emans salary?
A: IF income is more than 10,000 it shall be subject to Final Withholding Tax.
IF income is less than 10,000 it shall be subject to Normal Tax.

Q: Would the computation include Overtime Pay (OTP), Night shift differential (NSD),
Hazard Pay (HaPay) and Holiday Pay (HoPay)?
A: Yes. Provided he is a minimum wage earner

NOTE:
Creditable Withholding Tax is in the nature of advance payment of Tax. Therefore the act of
withholding and remittance to Government does not extinguish Taxpayers liability.

EXAMPLE:
A earns P 285/day
Q: Is his OTP, NSD, HaPay and HoPay exempt from income tax?
A: Yes, provided the Income earner is a minimum wage earner.

Q: Will taxpayer still report 10,000 in AITR at end of taxable period?

A: Yes.

NOTE:
-Under RA 9504 Minimum Wage Earners are exempt from payment of income tax on their
taxable income; The Holiday pay, Overtime pay, Night shift differential pay and Hazard pay
by such minimum wage earner shall likewise be exempt from income tax.
- presupposes Employee receives minimum wage
UNDER RA 9504 which was expanded by RMC 5-2011
IF an employee receives 13th month pay and other benefits :
-IF income does not exceed 30,000 entire amount is NOT TAXABLE

DISCUSSION ON FINAL WITHHOLDING TAX

Assuming:
Salary
Annual Income Tax
10,000/month
120,000/year Amt of salary x 12 months
(500)/month
( 6,000/year) deduction from tax liability aka TAX CREDIT
GR: Passive income is subject to Final Withholding Tax (FWT)
Q: What are the types of Passive Income?
A: (DRIP) Dividends, Royalties, Interest Income, Prizes and Winnings
Tax exempt or not?

20

NOTE:
The Law makes no Qualification. The Law does not expressly state it must be equivalent to
the mandatory contribution what law merely states is that all GSIS, SSS, Pag-ibig and Phil
Health contributions shall be excluded from Gross Income without qualification.

-IF Income exceeds 30,000 30,000 is NOT TAXABLE but excess of 30,000 is TAXABLE
- shall be subject to Final Withholding Tax and normal
tax

Page

A: NO. Under RMC 53-2011 the amount to be excluded from the Gross income must only be
equivalent to the Mandatory Contributions. The excess therefore which amounts to 1,100
cannot be deducted from the Gross Compensation Income and is NOT exempt from Income
tax.

Q: If the MWE minimum wage earner received Interest income during the taxable year?
A: Not included because income is subject to Final Withholding Tax
Q: IF MWE derives income from Business (IBTP Income derived from Business, Trade or
Profession)? Is income earned from Business, Trade or Profession subject to Final
Withholding Tax?
A: No. IBTP is subject to normal tax.
Q: IF a MWE earns money from IBTP during taxable year, is the MWE subject to tax?
A: Yes. Compensation Income and IBTP is subject to tax
BUT UNDER RMC 5-2011
1) MWE earner shall not be subject FWT as to his compensation income
2) Amount of income from employer employee relations is subject to tax
EX.
Business
15,000/month

Salary
5,000/month

Q: Will the entire amount from his Business be subject to tax?

A: Yes. Because the MWE earns income from other sources, other than income subject to
final tax.

A: CIR v Arthur Henderson

Henderson was the president of a corp. He was provided a three bedroom house for the
benefit of his family. Henderson claims such is not subject to tax as he entertains guests of
the corporation and ultimately redounds to the benefit of the Corporation.
Q: Should it be treated as a taxable benefit as to Henderson?
A: SC: The reasonable value of a house used by Henderson and his wife is a taxable benefit
on part of Henderson, the excess will not be taxable as to Henderson and such will be
considered as an expense on part of the Corporation.
-not subject to tax if the nature of the job calls for such expenditure and falls within the
ambit of the Employers Convenience Rule and therefore not subject to tax.
EX. President of Corp was granted a vehicle (BMW)
-President claimed she originally asked only for a Toyota Car which would have a
reasonable value of 10,000 only but the company insisted that a BMW must be used to
uphold the image of the Company
-the reasonable value of the BMW car was at 40,000/month
-BIR assessed the same and found deficiency in taxes
Q: How much is taxable as against the President?
A:
-Only 10,000 is taxable to the President
-The 30,000 is considered as an expense on the part of the Corporation.

Q: Will 5,000 be subject to Withholding Tax?

A: No. Eman receives income of 5,000 without withholding tax but at the end of the taxable
year it will be subject to tax.
SUMMARY OF RULES:
1) IF MWE not subject to tax
2) IF MWE receives OTP, NSD, HaPay, Hopay he is still considered as a MWE
2) IF MWE receives 13th month pay and other benefits more than 82,000 he is NO
LONGER considered as MWE and Therefore his COMPENSATION will now be subject to
tax
4) IF MWE earns income subject to final withholding tax he is still considered a MWE
RATIO: Yes because it is not yet included in the computation of Annual Tax Liability
5) Q:IF MWE earns income from other sources, other than income subject to final
withholding tax. Is he still a MWE who is exempt from tax?
A: No. The entire amount if income is now subject to tax. BUT the compensation income
is still exempt from Withholding tax. But the income arising from Employer-employee
relationship shall still be subject to tax.
Employers Convenience Rule
-privileges granted to an employee which will redound to the benefit of the employer shall
not be subject to tax

Q:Mobile allowance?

Page

Q: As to Gas expenses?
A: covered by ECR provided:
1) It must be in the name of the Company/Corporation
2) It redounds to the benefit of the Company/employer

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IF BEYOND ambit of ECR

-Taxable
-NOT redound to benefit of the Employer