COR JESU COLLEGE OF LAW

TAXATION LAW I
Course Outline Part 3
Income Taxation Fundamental Matters

General References:
Republic Act No. 8424
Revenue Regulations No. 2-40
Revenue Regulations No. 2-98
Jurisprudence

I. INCOME TAXATION

A. Definition
B. Basis
1. Lifeblood Doctrine (Necessity Theory)
2. Symbiotic Relationship (Benefits-Protection Theory)
a. Partnership Theory
CIR vs. Lednicky; G.R. Nos. L-18169, L-18262, L-21434, 31 July 1964
The right of a government to tax income emanates from its partnership in the
production of income, by providing the protection, resources, incentives, and proper
climate for such production. (Commissioner of Internal Revenue v. Spouses Lednicky,
G.R. Nos. L-18169, L-18286, & L-21434, [July 31, 1964], 120 PHIL 586-594)

b. Protection Theory
CIR vs. BOAC; G.R. Nos. L-65773-74, 30 April 1987
The source of an income is the property, activity or service that produced the income.
For the source of income to be considered as coming from the Philippines, it is
sufficient that the income is derived from activity within the Philippines. In BOAC's
case, the sale of tickets in the Philippines is the activity that produces the income. The
tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The situs of the source of payments is the Philippines. The flow
of wealth proceeded from, and occurred within, Philippine territory, enjoying the
protection accorded by the Philippine government. In consideration of such protection,
the flow of wealth should share the burden of supporting the government.|||
(Commissioner of Internal Revenue v. British Overseas Airways Corp., G.R. Nos. L-
65773-74, [April 30, 1987], 233 PHIL 406-438)

c. Theory of Favorable Business Climate

CREBA vs. Romulo; G.R. No. 160756, 09 March 2010
 Domestic corporations owe their corporate existence and their privilege to do business
to the government. They also benefit from the efforts of the government to improve the
financial market and to ensure a favorable business climate. It is therefore fair for the
government to require them to make a reasonable contribution to the public
expenses.||| (Chamber of Real Estate and Builders' Association, Inc. v. Romulo, G.R.
No. 160756, [March 9, 2010], 628 PHIL 508-547)

C. Systems
1. Global
2. Schedular
3. Mixed (Semi-Global or Semi-Schedular)

II. INCOME TAX

A. Definition
B. Nature
C. Functions (Purposes)
Case: Madrigal vs. Rafferty; G.R. No. L-12287, 07 August 1918
The Income Tax Law of the United States in force in the Philippine Islands has selected
income as the test of faculty in taxation. The aim has been to mitigate the evils arising from
the inequalities of wealth by a progressive scheme of taxation, which places the burden on
those best able to pay. To carry out this idea, public considerations have demanded an
exemption roughly equivalent to the minimum of subsistence. With these exceptions, the
Income Tax Law is supposed to reach the earnings of the entire non-governmental property
of the country. (Madrigal v. Rafferty, G.R. No. 12287, [August 7, 1918], 38 PHIL 414-424)

D. Features (Characteristics) of Philippine Income Tax Law

1. Global or Schedular (Mixed)
2. Progressive (Proportionate)
3. Direct Tax
4. Comprehensive
5. Gross Income and Net Income Taxation
6. Self-assessing
7. Pay-As-You-File
8. American Origin
9. Moral Neutrality of Taxing Authority
Case: James vs. United Sates; 366 U.S. 213 (1961)
Moral turpitude is not a touchstone of taxability. The question, rather, is whether the taxpayer
in fact received a statutory gain, profit or benefit. That the taxpayer's motive may have been
reprehensible or the mode of receipt illegal has no bearing.
Unlawful, as well as lawful, gains are comprehended within the term gross income.

Case: CIR vs. Manning; GR L-28398

The fact that the resolution authorizing the distribution of earnings is null and void is of no
moment. Under the National Internal Revenue Code, income tax is assessed on income
 received from any property, activity or service that produces income. The Tax Code stands
as an indifferent, neutral party on the matter of where the income comes from. The action
taken by the Commissioner of assessing fraud penalty and imposing interest charges
pursuant to the provisions of the Tax Code is in accordance with law.
(Commissioner of Internal Revenue v. Manning, G.R. No. L-28398, [August 6, 1975], 160
PHIL 726-741)
E. Criteria in Imposing Philippine Income Tax
1. Citizenship Principle
2. Residence Principle
3. Source Principle

III. DEFINITION OF TERMS

Sec. 22, NIRC

IV. TYPES OF INCOME TAX

A. Normal (Regular) Personal Income Tax

B. Normal (Regular) Corporate Income Tax
C. Optional Gross Income Tax
D. Minimum Corporate Income Tax
E. Improperly Accumulated Earnings Tax
F. Final (Withholding)
G. Capital Gains Tax
H. Branch Profits Remittance Tax
I. Fringe Benefits Tax
J. Special (Preferential) Income Tax

V. INCOME

A. Concept
Revenue Regulations No. 2, Sec. 36
Sec. 32(A), NIRC
a. Income vs. Capital
b. Return on Capital vs. Return of Capital
Cases:
1. Fisher vs. Trinidad; G.R. No. L-17518, 30 October 1922
An income may be defined as the amount or money coming to a person or
corporation within a specified time, whether as payment for services, interest, or
profit from investment. A mere advance in the value of the property of a person or
corporation in no sense constitutes the "income specified in the revenue law. Such
advance constitutes and can be treated merely as an increase of capital. An
income means cash received or its equivalent; it does not mean chooses in action
or unrealized increments in the value of the property. The revenue law with
reference to the income tax employs the term "income" in its natural and obvious
 sense, as importing something distinct from principal or capital.||| (Fisher v.
Trinidad, G.R. No. 17518, [October 30, 1922], 43 PHIL 973-1000)

A dividend is defined as a corporate profit set aside, declared, and ordered by the
directors to be paid to the stockholders on demand or at a fixed time. Until the
dividend is declared, the corporate profits belong to the corporation and not to the
stockholders, and are liable for the payment of the debts of the corporation.|||
(Fisher v. Trinidad, G.R. No. 17518, [October 30, 1922], 43 PHIL 973-1000)

A stock dividend, when declared, is merely a certificate of stock which evidences

the interest of the stockholder in the increased capital of the corporation. There is
a clear distinction between a cash dividend and a stock dividend. The one is a
disbursement to the stockholder of accumulated earnings, and the corporation
parts irrevocably with all interest therein; the other involves no disbursement by
the corporation; the corporation parts with nothing to its stockholder. When a cash
dividend is declared and paid to stockholders, such cash becomes the absolute
property of the stockholders and cannot be reached by the creditors of corporation
in the absence of fraud. The property represented by a stock dividend, however,
still being the property of corporation, and not of the stockholder, it may be reached
by an execution against the corporation, and sold as a part of the property of the
corporation. In such a case, if all of the property of the corporation is sold under
execution, then the stockholders certainly could not be charged with having
received an income by virtue of the issuance of the stock dividend. If the ownership
of the property represented by a stock dividend is still in the corporation and not in
the holder of such stock, certainly such stock cannot be regarded as income to the
stockholder. The stockholder has received nothing but a representation of an
interest in the property of the corporation and, as a matter of fact, he may never
receive anything, depending upon the final outcome of the business of the
corporation.
(Fisher v. Trinidad, G.R. No. 17518, [October 30, 1922], 43 PHIL 973-1000)

2. Conwi vs. CTA; G.R. No. 48532, 31 August 1992

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 a flow of the fruits of one's labor.
(Conwi v. Court of Tax Appeals, G.R. No. 48532, 48533, [August 31, 1992])

3. Eisner vs. Macomber; 252 U.S. 189 (1920)

Income may be defined as the gain derived from capital, from labor, or from both
combined, including profit gained through sale or conversion of capital.

Mere growth or increment of value in a capital investment is not income; income is

essentially a gain or profit, in itself, of exchangeable value, proceeding from capital,
severed from it, and derived or received by the taxpayer for his separate use,
benefit, and disposal.
 A stock dividend, evincing merely a transfer of an accumulated surplus to the
capital account of the corporation, takes nothing from the property of the
corporation and adds nothing to that of the shareholder; a tax on such dividends
is a tax an capital increase, and not on income, and, to be valid under the
Constitution, such taxes must be apportioned according to population in the
several states.

4. CREBA vs. Romulo; supra.

Income is distinct from capital. Income means all the wealth which flows into the
taxpayer other than a mere return on capital. Capital is a fund or property existing
at one distinct point in time while income denotes a flow of wealth during a definite
period of time. 45 Income is gain derived and severed from capital. 46 For income
to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because
capital is not income. In other words, it is income, not capital, which is subject to
income tax.
(Chamber of Real Estate and Builders' Association, Inc. v. Romulo, G.R. No.
160756, [March 9, 2010], 628 PHIL 508-547)

c. Income vs. Revenue

d. Income vs. Receipts

B. Net Worth Method

1. Perez vs. CTA; G.R. No. L-10507, 30 May 1958
The net worth technique for determining income may be expressed in the following
formula: Increase in Net Worth plus Non-Deductible Expenditures minus Non-
Taxable Receipts equals Taxable Net Income (Samuel Byer, Net Worth
Technique for Determining Income1, Proc. NYU 13th Ann. Inst. on
Federal; Taxation 1058, 1955). The net worth expenditures method is based on
the accounting formula that an increase in net worth plus non-deductible
disbursements, minus non-receipts equals taxable net income.

The Government need not prove the specific source of income (this is reasonable
on the basic assumption that most assets are derived from a taxable source and
that when this is not true the taxpayer is in a position to explain the
discrepancy, {see Holland case, supra);

That the determination of the tax deficiency by the Government has prima facie
validity and the burden rests upon the taxpayer to overcome this presumption and
to show to the satisfaction of the Tax Court that the determination was not correct.

2. Castro vs. Collector; G.R. No. L-12174, 26 April 1962

If cash on hand at the beginning of the period, plus receipts during the period,
minus disbursements during the period, equals cash on hand at the end of the
 period, the converse must necessarily be true. Such converse method is in effect
an application (in reverse) of the inventory or net worth system, and is allowed
(Castro v. Collector of Internal Revenue, G.R. No. L-12174, [April 26, 1962], 114
PHIL 1032-1050)

3. Fernandez Hermanos vs. CIR; G.R. No. L-21551, 30 September 1969

Where it is shown that the increase in the taxpayer's net worth were not the result
of the receipt by it of unreported or unexplained taxable income but were merely
the result of the correction of errors in its entries in its books relating to its
debtedness to certain creditors, which had been erroneously overstated or listed
as outstanding when they had in fact duly paid, these increase in the taxpayer's
net worth were not taxable increases in net worth.
(Fernandez Hermanos, Inc. v. Commissioner of Internal Revenue, G.R. No. L-
21551, L-21557, L-24972, L-24978, [September 30, 1969], 140 PHIL 31-53)

C. Flow of Wealth Test

CIR vs. Tours Specialist; G.R. No. L-66416, 21 March 1990
Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted
to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and
it is not necessary that there must be a law or regulation which would exempt such monies
and receipts within the meaning of gross receipts under the Tax Code. Parenthetically, the
room charges entrusted by the foreign travel agencies to the private respondent do not form
part of its gross receipts within the definition of the Tax Code. The said receipts never
belonged to the private respondent. The private respondent never benefited from their
payment to the local hotels. As stated earlier, this arrangement was only to accommodate the
foreign travel agencies. (Commissioner of Internal Revenue v. Tours Specialists, Inc., G.R.
No. 66416, [March 21, 1990], 262 PHIL 437-450)

D. Invisible Income (Indirect Receipts)

Cancellation of Debt

E. Claim of Right Doctrine

F. Doctrine of Proprietary Interest (Economic Benefit Principle)
G. Substantial Alteration of Interest
H. Control Test
1. Assignment of Income Doctrine
2. Power to Dispose
Helvering vs. Horst; 311 U.S. 112 (1960)
The tax .. upon income "derived from . . . wages or compensation for personal service,
of whatever kind and in whatever form paid . . . ; also from interest . . . " cannot fairly
be interpreted as not applying to income derived from interest or compensation when
he who is entitled to receive it makes use of his power to dispose of it in procuring
satisfactions which he would otherwise procure only by the use of the money when
received.
I. Severance Test/Theory (Macomber Test)
Eisner vs. Macomber; supra.
A stock dividend shows that the company's accumulated profits have been capitalized,
instead of distributed to the stockholders or retained as surplus available for distribution in
money or in kind should opportunity offer. The essential and controlling fact is that the
stockholder has received nothing out of the company's assets for his separate use and
benefit.

J. All-Events Test
CIR vs. Isabela Cultural Corp.; G.R. No. 172231, 12 February 2007
The accrual of income and expense is permitted when the all-events test has been met. This
test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not
demand that the amount of income or liability be known absolutely, only that a taxpayer has
at his disposal the information necessary to compute the amount with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown, but is not as much
as unknowable, within the taxable year. The amount of liability does not have to be determined
exactly; it must be determined with "reasonable accuracy." Accordingly, the term "reasonable
accuracy" implies something less than an exact or completely accurate amount.

(Commissioner of Internal Revenue v. Isabela Cultural Corp., G.R. No. 172231, [February
12, 2007], 544 PHIL 488-499)

K. Taxable vs. Non-Taxable Income

Secs. 31 & 36, NIRC

a. Characteristics of Taxable Income

1. There must be gain or profit
2. The gain must be realized or received
3. The gain must not be excluded by law or treaty

CREBA vs. Secretary Romulo; supra.

Fernandez Hermanos vs. CIR; supra.

b. Revaluation Increment (Value Appreciation)

o Fisher vs. Trinidad, supra.
 A mere advance in the value of the property of a person or corporation in no sense
constitutes the "income specified in the revenue law. Such advance constitutes and
can be treated merely as an increase of capital. An income means cash received or
its equivalent; it does not mean chooses in action or unrealized increments in the value
of the property. The revenue law with reference to the income tax employs the term
"income" in its natural and obvious sense, as importing something distinct from
principal or capital.||| (Fisher v. Trinidad, G.R. No. 17518, [October 30, 1922], 43 PHIL
973-1000)

o CIR vs. Filinvest Development Corp.; G.R. Nos. 163653 & 167689
Since "a mere advance in the value of the property of a person or corporation in no
sense constitute the 'income' specified in the revenue law," it has been held in the
early case of Fisher vs. Trinidad, 74 that it "constitutes and can be treated merely as
an increase of capital." Hence, the CIR has no factual and legal basis in assessing
income tax on the increase in the value of FDC's shareholdings in FAC until the same
is actually sold at a profit.||| (Commissioner of Internal Revenue v. Filinvest
Development Corp., G.R. No. 163653, 167689, [July 19, 2011], 669 PHIL 323-370)

c. Realization Principle
Realization vs. Recognition
Sec. 38, Revenue Regulations No. 2-40

d. Doctrine of Constructive Receipt

o CIR vs. Bank of Commerce; G.R. No. 149636, 08 June 2005
Actual receipt of interest income is not limited to physical receipt. Actual receipt may
either be physical receipt or constructive receipt. When the depository bank withholds
the final tax to pay the tax liability of the lending bank, there is prior to the withholding
a constructive receipt by the lending bank of the amount withheld. From the amount
constructively received by the lending bank, the depository bank deducts the final
withholding tax and remits it to the government for the account of the lending bank.
Thus, the interest income actually received by the lending bank, both physically and
constructively, is the net interest plus the amount withheld as final tax.|||
(Commissioner of Internal Revenue v. Bank of Commerce, G.R. No. 149636, [June 8,
2005], 498 PHIL 673-693)

o Limpan Investment vs. CIR; G.R. No. L-21570, 26 July 1966

The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is
not sufficient justification for the nondeclaration of said income in 1957, since the
deposit was resorted to due to the refusal of petitioner to accept the same, and was
not the fault of its tenants; hence, petitioner is deemed to have constructively received
such rentals in 1957. The payment by the subtenant in 1957 should have been
reported as rental income in said year, since it is income just the same regardless of
its source.||| (Limpan Investment Corp. v. Commissioner of Internal Revenue, G.R.
No. L-21570, [July 26, 1966], 124 PHIL 97-104)
VI. TYPES OF INCOME

A. Compensation
B. Business Income (Exercise of Profession)
C. Passive Income
D. Capital l

VII. GENERAL PRINCIPLES

1. Classification of Taxpayers

A. INDIVIDUAL
1. Citizen
a. Resident Citizen
b. Nonresident Citizen
2. Alien
a. Resident Alien
b. Nonresident Alien Engaged in Trade or Business within the Philippines
c. Nonresident Alien Not Engaged in Trade or Business within the Philippines

Overseas Contract Worker

Seaman
Dual Citizenship (RA 9225)

B. CORPORATION
1. Domestic Corporation
2. Foreign Corporation
a. Resident Foreign Corporation
b. Nonresident Foreign Corporation

C. PARTNERSHIP
Ordinary Partnership
General Professional Partnership
Joint Venture and Consortium
Case:
Madrigal vs. Rafferty; supra.
M and P were legally married prior to January 1, 1914. The marriage was contracted under
the provisions concerning conjugal partnerships. The claim is submitted that the income
shown on the form presented for 1914 was in fact the income of the conjugal partnership
existing between M and P, and that in computing and assessing the additional income tax,
the income declared by M should be divided into two equal parts, one-half to be considered
the income of M and the other half the income of P. Held: That P, the wife of M, has an
inchoate right in the property of her husband M during the life of the conjugal partnership, but
that P has no absolute right to one-half of the income of the conjugal partnership.||| (Madrigal
v. Rafferty, G.R. No. 12287, [August 7, 1918], 38 PHIL 414-424)
 The higher schedules of the additional tax provided by the Income Tax Law directed at the
incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil
Code dealing with the conjugal partnership. The aims and purposes of the Income Tax Law
must be given effect.||| (Madrigal v. Rafferty, G.R. No. 12287, [August 7, 1918], 38 PHIL 414-
424)

The Income Tax Law does not look on the spouses as individual partners in an ordinary
partnership.||| (Madrigal v. Rafferty, G.R. No. 12287, [August 7, 1918], 38 PHIL 414-424)

D. ESTATE
E. TRUST
F. CO-OWNERSHIP

VII. SOURCES OF INCOME AND SITUS OF TAXATION

A. Situs
B. Sources
C. Income from Sourceswithin the Philippines
D. Income from Sources without the Philippines
E. Income from Sources Partly within and Partly without the Philippines
F. CASES:
1. CIR vs. BOAC; supra.
2. CIT vs. Japan Air Lines; G.R. No. 60714, 04 October 1991
In Commissioner of Internal Revenue vs. Air India and the Court of Tax Appeals (G.R. No.
72443, January 29, 1988, 157 SCRA 648) the Court held that the revenue derived from the
sales of airplane tickets through its agent Philippine Air Lines, Inc., here in the Philippines,
must be considered taxable income, and more recently, in the case of Commissioner of
Internal Revenue vs. American Airlines, Inc. and Court of Tax Appeals (G.R. No. 67938,
December 19, 1989, 180 SCRA 274), it was likewise declared that for the source of income
to be considered as coming from the Philippines, it is sufficient that the income is derived from
activities within this country regardless of the absence of flight operations within Philippine
territory.||| (Commissioner of Internal Revenue v. Japan Air Lines, Inc., G.R. No. 60714,
[October 4, 1991], 279 PHIL 499-515)

There being no dispute that JAL constituted PAL as local agent to sell its airline tickets, there
can be no conclusion other than that JAL is a resident foreign corporation, doing business in
the Philippines. Indeed, the sale of tickets is the very lifeblood of the airline business, the
generation of sales being the paramount objective (Commissioner of Internal Revenue vs.
British Overseas Airways Corporation, [149 SCRA 395]).||| (Commissioner of Internal
Revenue v. Japan Air Lines, Inc., G.R. No. 60714, [October 4, 1991], 279 PHIL 499-515)

The Tax Court ruled in that case that the mere sale of tickets, unaccompanied by the physical
act of carriage of transportation, does not render the taxpayer therein subject to the common
carrier's tax. The common carrier's tax is an excise tax, being a tax on the activity of
transporting, conveying or removing passengers and cargo from one place to another. It
 purports to tax the business of transportation. Being an excise tax, the same can be levied by
the State only when the acts, privileges or businesses are done or performed within the
jurisdiction of the Philippines (Commissioner of Internal Revenue v. British Overseas Airways
Corporation, 149 SCRA 395).||| (Commissioner of Internal Revenue v. Japan Air Lines, Inc.,
G.R. No. 60714, [October 4, 1991], 279 PHIL 499-515)

3. Howden vs. Collector; G.R. No. L-19392, 14 April 1965

The portions of premiums earned from insurance locally underwritten by domestic
corporations, ceded to and received by non-resident foreign reinsurance companies, through
a non-resident foreign insurance broker, pursuant to reinsurance contracts signed by the
reinsurers abroad but signed by the domestic corporation in the Philippines, are subject to
income tax locally.||| (Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, G.R.
No. L-19392, [April 14, 1965], 121 PHIL 579-589)

The reinsurance premiums remitted by local insurance companies to foreign re-insurance

companies are subject to withholding tax on income under Sections 53 and 54 of the National
Internal Revenue Code.||| (Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,
G.R. No. L-19392, [April 14, 1965], 121 PHIL 579-589)

Reinsurance premiums remitted by domestic insurance corporation to foreign reinsurance

companies are considered income of the latter derived from sources within the Philippines.|||
(Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, G.R. No. L-19392, [April 14,
1965], 121 PHIL 579-589)

4. Philippine Guaranty vs. CIR; G.R. L-22074; 30 April 1965

Reinsurance premiums on local risks ceded by domestic insurers to foreign reinsurers not
doing business in the Philippines are subject to withholding tax.||| (Phil. Guaranty Co., Inc. v.
Commissioner of Internal Revenue, G.R. No. L-22074, [April 30, 1965], 121 PHIL 755-768)

Where the reinsurance contracts show that the activities that constituted the undertaking to
reinsure a domestic insurer against losses arising from the original insurances in the
Philippines were performed in the Philippines, the reinsurance premiums are considered as
coming from sources within the Philippines and are subject to Philippine Income Tax.||| (Phil.
Guaranty Co., Inc. v. Commissioner of Internal Revenue, G.R. No. L-22074, [April 30, 1965],
121 PHIL 755-768)

Section 24 of the Tax Code does not require a foreign corporation to engage in business in
the Philippines in subjecting its income to tax. It suffices that the activity creating the income
is performed or done in the Philippines. What is controlling, therefore, is not the place of
business but the place of activity that created an income.||| (Phil. Guaranty Co., Inc. v.
Commissioner of Internal Revenue, G.R. No. L-22074, [April 30, 1965], 121 PHIL 755-768)

5. NDC vs. CIR; G.R. No. L-53961, 30 June 1987

It is quite apparent, under the terms of the law, that the Government's right to levy and collect
income tax on interest received by foreign corporations not engaged in trade or business
within the Philippines is not planted upon the condition that 'the activity or labor and the
sale from which the (interest) income flowed had its situs' in the Philippines. 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.||| (National Development Co. v. Commissioner of Internal Revenue, G.R.
No. L-53961, [June 30, 1987], 235 PHIL 477-486)

6. CIR vs. JulianeBaier-Nickel; G.R. No. 153793, 29 August 2006

Non-resident aliens, whether or not engaged in trade or business, are subject to Philippine
income taxation on their income received from all sources within the Philippines. Thus, the
keyword in determining the taxability of non-resident aliens is the income's "source.|||
(Commissioner of Internal Revenue v. Baier-Nickel, G.R. No. 153793, [August 29, 2006], 531
PHIL 480-496)

The "source of income" relates to the property, activity or service that produced the income.
With respect to rendition of labor or personal service, as in the instant case, it is the place
where the labor or service was performed that determines the source of the income. There is
therefore no merit in petitioner's interpretation which equates source of income in labor or
personal service with the residence of the payor or the place of payment of the income.|||
(Commissioner of Internal Revenue v. Baier-Nickel, G.R. No. 153793, [August 29, 2006], 531
PHIL 480-496)

Sec. 42, NIRC

VIII. ACCOUNTING PERIODS AND ACCOUNTING METHODS

A. ACCOUNTING (TAXABLE) PERIODS

1. Regular Accounting Period
a. CalendarYear
b. Fiscal Year

2. Short Accounting Period

a. Commencement of Business
b. Dissolution of Business
c. Change of Accounting Period
d. Death of Taxpayer
e. Termination of Accounting Period by CIR

B. ACCOUNTING METHODS
1. General Methods
a. Accrual Basis
b. Cash Basis

2. Installment Method
3. Deferred Payment Method
4. Percentage of Completion Method
 5. Outright and Spread-Out Methods
6. Crop Year Basis
7. Hybrid Method
Consolidated Mines vs. CTA; G.R. Nos. L-18843 & L-18844
FACTUAL
Filipinas Synthetic Fiber vs. CA; G.R. Nos. 118498 & 124377, 12 October 1999
On the other hand, "under the accrual basis method of accounting, income is
reportable when all the events have occurred that fix the taxpayer's right to receive the
income, and the amount can be determined with reasonable accuracy. Thus, it is the
right to receive income, and not the actual receipt, that determines when to include the
amount in gross income." Gleanable from this notion are the following requisites of
accrual method of accounting, to wit: "(1) that the right to receive the amount must be
valid, unconditional and enforceable, i.e., not contingent upon future time; (2) the
amount must be reasonably susceptible of accurate estimate; and (3) there must be a
reasonable expectation that the amount will be paid in due course."||| (Filipinas
Synthetic Fiber Corp. v. Court of Appeals, G.R. Nos. 118498 & 124377, [October 12,
1999], 374 PHIL 835-843)

C. TRANSFER PRICING
D. ARMS LENGTH PRINCIPLE

IX. WITHHOLDING TAX SYSTEM

A. WITHHOLDING TAX AT SOURCE

SECS. 57-59, NIRC
SECS. 78-83, NIRC
SEC. 257 (A), RR 2-98
CONCEPT
THREE-FOLD PURPOSE
KINDS

1. Final Withholding Tax

2. Creditable Withholding Tax
Withholding on Compensation
Expanded Withholding Tax

B. WITHHOLDING OF VAT

C. WITHHOLDING AGENT

D. CASES
CREBA vs. Secretary, supra.
RCBC vs. CIR; G.R. No. 170257, 07 September 201
In the operation of the withholding tax system, the withholding agent is the payor, a
separate entity acting no more than an agent of the government for the collection of the
tax in order to ensure its payments; the payer is the taxpayer he is the person subject
to tax imposed by law; and the payee is the taxing authority. In other words, the withholding
agent is merely a tax collector, not a taxpayer. Under the withholding system, however,
the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and
independent from the taxpayer, because the income tax is still imposed on and due from
the latter. The agent is not liable for the tax as no wealth flowed into him he earned no
income. The Tax Code only makes the agent personally liable for the tax arising from the
breach of its legal duty to withhold as distinguished from its duty to pay tax since:

"the government's cause of action against the withholding agent is not for the collection of
income tax, but for the enforcement of the withholding provision of Section 53 of the Tax
Code, compliance with which is imposed on the withholding agent and not upon the
taxpayer." 35 (Emphases supplied)

Based on the foregoing, the liability of the withholding agent is independent from that of
the taxpayer. The former cannot be made liable for the tax due because it is the latter who
earned the income subject to withholding tax. The withholding agent is liable only insofar
as he failed to perform his duty to withhold the tax and remit the same to the government.
The liability for the tax, however, remains with the taxpayer because the gain was realized
and received by him.
||| (Rizal Commercial Banking Corp. v. Commissioner of Internal Revenue, G.R. No.
170257, [September 7, 2011], 672 PHIL 514-530)

CIR vs. Wander Philippines; G.R. No. L-68375, 15 April 1988

FACTUAL

CIR vs. Procter & Gamble; G.R. No. L-66838, 15 April 1988
The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a
withholding agent of the government and therefore cannot claim reimbursement of the
alleged over paid taxes, is completely meritorious. The real party in interest being the
mother corporation in the United States, it follows that American entity is the real party in
interest, and should have been the claimant in this case.||| (Commissioner of Internal
Revenue v. Procter & Gamble Phil. Manufacturing Corp., G.R. No. 66838, [April 15, 1988],
243 PHIL 703-712)

Filipinas Synthetic vs. CA; G.R. Nos. 118498 & 124377, 12 October 1999
The method of withholding tax at source is a procedure of collecting income tax sanctioned
by the National Internal Revenue Code. Section 53 (c) of which, provides: "Return and
Payment Every person required to deduct and withhold any tax under this section shall
make return thereof, for the payment of the tax, shall pay the amount withheld to the officer
of the Government of the Philippines authorized to receive it. Every such person is made
personally liable for such tax, and is indemnified against the claims and demands of any
person for the amount of any payments made in accordance with the provision of this
 section." In the aforecited provision of law, the withholding agent is explicitly made
personally liable for the income tax withheld under Section 54. In Phil. Guaranty Co., Inc.
vs. Commissioner of Internal Revenue, (15 SCRA 1) the Court, has ratiocinated: "The law
sets no condition for the personal liability of the withholding agent to attach. The reason is
to compel the withholding agent to withhold the tax under all circumstances. In effect, the
responsibility for the collection of the tax as well as the payment thereof is concentrated
upon the person over whom the Government has jurisdiction. Thus, the withholding agent
is constituted the agent both the government and the taxpayer. With respect to the
collection and/or withholding of the tax, he is the Government's agent. In regard to the
filing of the necessary income tax return and the payment of the tax to the Government,
he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary
government agent especially because under Section 53(c) he is held personally liable for
the tax he is duty bound to withhold; whereas, the Commissioner of Internal Revenue and
his deputies are not made liable to law."||| (Filipinas Synthetic Fiber Corp. v. Court of
Appeals, G.R. Nos. 118498 & 124377, [October 12, 1999], 374 PHIL 835-843)

D. TIMIE OF WITHHOLDING
E. RETURN AND PAYMENT